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[House Report 112-482]
[From the U.S. Government Publishing Office]

112th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     112-482

======================================================================

 
     IMPROVEMENT OF CONSIDERATION BY THE COMMODITY FUTURES TRADING 
   COMMISSION OF THE COSTS AND BENEFITS OF ITS REGULATIONS AND ORDERS

                                _______
                                

  May 16, 2012.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

             Mr. Lucas, from the Committee on Agriculture, 
                        submitted the following,

                              R E P O R T

                        [To accompany H.R. 1840]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Agriculture, to whom was referred the bill 
(H.R. 1840) to improve consideration by the Commodity Futures 
Trading Commission of the costs and benefits of its regulations 
and orders, having considered the same, report favorably 
thereon without amendment and recommend that the bill do pass.

                           Brief Explanation

    The bill amends Section 15(a) of the Commodity Exchange Act 
(CEA) to increase the legal standard by which the Commodity 
Futures Trading Commission (CFTC) must conduct cost-benefit 
analysis prior to promulgating a rule or Commission order.

                            Purpose and Need

    In the 112th Congress, the Committee has held seven 
hearings, four Full Committee and three General Farm 
Commodities and Risk Management Subcommittee hearings to 
examine the implementation of Title VII of the Dodd-Frank Act 
and one Full Committee hearing to examine legislative proposals 
related thereto. The Committee took testimony from witnesses 
that represented a broad spectrum of participants in the 
derivatives markets. Across the spectrum of expertise, an 
overwhelming majority of witnesses expressed concerns that the 
CFTC was not adequately examining the costs and benefits of its 
proposed regulations, and as a result, many of the proposals 
could impose costs on market participants that would far 
outweigh the benefits. Witnesses testified that the Commission 
would frequently make no attempt to quantify the costs and 
benefits, or the estimates they would provide were 
exponentially lower than cost estimates calculated by effected 
entities--in some cases 63 times lower.
    Section 15(a) of the CEA sets forth requirements for the 
Commodity Futures Trading Commission (CFTC) to consider the 
costs and benefits of Commission actions. However, in 
boilerplate language in each proposed rule, the CFTC identifies 
the limitations of Section 15(a) in requiring cost benefit 
analysis by stating: ``By its terms, Section 15(a) does not 
require the Commission to quantify the costs and benefits of an 
order to determine whether the benefits of the order outweigh 
the costs; rather, it requires that the Commission ``consider'' 
the costs and benefits of its actions'' 
(http://www.agriculture.house.gov/pdf/reports/
CFTC_IGreport.pdf).
    Consequently, the CFTC's Inspector General, at the request 
of the Chairman, conducted an investigation into the 
Commission's cost benefit analysis. In its report issued in 
April of 2011, the Inspector General concluded: ``. . . it is 
clear that the Commission staff viewed section 15(a) compliance 
to constitute a legal issue more than an economic one, and the 
views of the Office of General Counsel therefore trumped those 
expressed by the Office of the Chief Economist . . . We do not 
believe this approach enhanced the economic analysis 
performed.''
    In early 2011, President Obama issued an Executive Order 
``Improving Regulation and Regulatory Review'' (http://www. 
white house.gov/the- press- office/2011/01/18/improving- 
regulation- and-
regulatory-review-executive-order). The Executive Order laid 
forth specific and extensive instructions for federal agencies 
in performing cost benefit analysis associated with new 
regulations. However, the CFTC as an independent federal agency 
is not subject to the President's Order, and when questioned in 
a hearing whether the CFTC would voluntarily comply, the 
Chairman of the CFTC, Gary Gensler, stated that it was 
inconsistent with the legal standard set forth in Section 
15(a).
    The Dodd-Frank Wall Street Reform and Consumer Protection 
Act drastically expanded the CFTC's authority over the 
derivatives markets. The CFTC is now the principal regulator of 
the swaps markets--markets that are used by businesses of all 
shapes and sizes in every sector of the economy. New rules 
promulgated by the CFTC will have far more wide reaching 
impacts on the economy, and it is critical that the CFTC have 
clear legal directives that require it to thoroughly examine 
the costs and benefits of each of its actions.
    H.R. 1840 raises the legal standard for cost-benefit 
analysis, incorporating the directives that were included in 
the President's Executive Order. These include directives to 
quantify the costs and benefits, incorporate the Chief 
Economist in analyses and evaluate whether the regulations are 
inconsistent with or duplicative of other federal regulations. 
In addition, one of the standards in Section 15(a) requires the 
Commission to consider ``the efficiency, competitive and 
financial integrity of futures markets.'' Because Dodd-Frank 
gave the CFTC authority over swaps, H.R. 1840 extends the 
current law directive to cover the swaps markets as well.

                           Section-by-Section

    Section 1 amends the Commodity Exchange Act to require the 
CFTC, through the office of the Chief Economist, to assess the 
cost and benefits of a regulation or order before it's 
promulgated. In performing the assessment the Chief Economist 
shall consider protection of the market participants and the 
public; the efficiency, competitiveness and financial integrity 
of futures and swap markets; the impact on the futures and 
swap's market liquidity; price discovery; risk management 
practices; available alternatives to direct regulation; the 
degree and nature of the risks posed by various activities 
within the scope of the Commission's jurisdiction; whether the 
regulation or rule is tailored to impose the least burden on 
society; whether it is inconsistent or duplicative of other 
federal regulations; whether the approach taken maximizes net 
benefits and other public interest considerations.

                        Committee Consideration

                              I. HEARINGS

    In the 112th Congress, the Committee has held seven 
hearings, four Full Committee and three General Farm 
Commodities and Risk Management Subcommittee hearings to 
examine the implementation of Title VII of the Dodd-Frank Act 
and one Full Committee hearing to examine legislative proposals 
related thereto, including H.R. 1840. The Committee took 
testimony from witnesses that represented a broad spectrum of 
participants in the derivatives markets.
          Public hearing to review implementation of title VII 
        of the Dodd-Frank Wall Street Reform and Consumer 
        Protection Act: February 10, 2011
          Public hearing to review implementation of title VII 
        of the Dodd-Frank Wall Street Reform and Consumer 
        Protection Act, Part II: February 15, 2011
          Defining the Market: Entity and Product 
        Classifications Under Title VII of the Dodd-Frank Wall 
        Street Reform and Consumer Protection Act: March 31, 
        2011
          Implementing Dodd-Frank: A Review of the CFTC's 
        Rulemaking Process: Apr 13, 2011
          Harmonizing Global Derivatives Reform: Impact on U.S. 
        Competitiveness and Market Stability: May 25, 2011
          Derivatives Reform: The View from Main Street: July 
        21, 2011
          To review legislative proposals amending Title VII of 
        the Dodd-Frank Wall Street Reform and Consumer 
        Protection Act: October 12, 2011
          Public hearing to review the Commodity Futures 
        Trading Commission 2012 Agenda: February 29, 2012 
    In each hearing, witnesses discussed concerns regarding 
inadequate or altogether absent cost-benefit analysis or 
proposed rules by the CFTC.
    For example, on October 12, 2011, Ms. Brenda Boultwood of 
Constellation Energy, representing the Coalition for 
Derivatives End-Users, testified:

          ``We firmly believe that rigorous cost-benefit 
        analysis creates better rules. By first analyzing how a 
        regulation will affect individuals, companies, other 
        stakeholders, and the integrity of the overall market, 
        a regulatory agency can avoid making the mistake of 
        putting a rule in place that has adverse and unintended 
        effects. The CFTC is subject to a cost-benefit analysis 
        requirement, but it does not require the regulator to 
        consider such key factors as available alternatives to 
        regulation, whether the regulation is tailored to 
        impose the least burden possible while achieving its 
        goals, and whether the regulation maximizes net 
        benefits. These and other factors would be required to 
        be considered under the Conaway-Quigley bill.''

    On April 13, 2011 Mr. James Overdahl, of the National 
Economic Research Associates testified:

          ``The CFTC does not have a formal requirement for 
        including economic analysis in the rulemaking process, 
        aside from the requirements of the Regulatory 
        Flexibility Act and the cost benefit requirements of 
        the Paperwork Reduction Act (PRA). However, the 
        analysis required in the PRA applies only to a rule's 
        paperwork burden, and does not include an analysis of 
        broader economic effects of a rule.''

    On April 13, 2011 Mr. Terrence Duffy, of the CME Group 
testified:

          ``The explicit cost-benefit analysis included in the 
        more than thirty rulemakings to date and the 
        Commission's testimony in a number of congressional 
        hearings indicate that those responsible for drafting 
        the rule proposals are operating under the mistaken 
        interpretation that Section 15(a) of the CEA excuses 
        the Commission from performing any analysis of the 
        direct, financial costs and benefits of the proposed 
        regulation. Instead, the Commission contends that 
        Congress permitted it to justify its rule making based 
        entirely on speculation about unquantifiable benefits 
        to some segment of the market. The drafters of the 
        proposed rules have consistently ignored the 
        Commission's obligation to fully analyze the costs 
        imposed on third parties and on the agency by its 
        regulations.''

                           II. FULL COMMITTEE

    The Committee on Agriculture met, pursuant to notice, with 
a quorum present, on January 25, 2012, to consider H.R. 1840, 
to improve consideration by the Commodity Futures Trading 
Commission of the costs and benefits of its regulations and 
order, and other pending business. Chairman Lucas offered an 
opening statement, as did Ranking Member Peterson, Mr. Conaway 
and Mr. Boswell.
    By unanimous consent, the Subcommittee on General Farm 
Commodities and Risk Management was discharged from further 
consideration and the bill, H.R. 1840 was placed before the 
Committee for consideration and without objection a first 
reading of the bill was waived and it was opened for amendment 
at any point.
    There being no amendments, the Peterson motion to report 
the bill favorably to the House with the recommendation that it 
do pass was adopted by a voice vote.
    The Committee then moved on to the other pending business, 
where at the conclusion of the meeting, Chairman Lucas advised 
Members that pursuant to the rules of the House of 
Representatives that Members have 2 calendar days to file such 
views with the Committee.
    Without objection, staff was given permission to make any 
necessary clerical, technical or conforming changes to reflect 
the intent of the Committee.
    Chairman Lucas thanked all the Members and adjourned the 
meeting.

                   Reporting the Bill--Rollcall Votes

    In compliance with clause 3(b) of rule XIII of the House of 
Representatives, H.R. 1840 was reported by voice vote with a 
majority quorum present. There was no request for a recorded 
vote.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee on Agriculture's 
oversight findings and recommendations are reflected in the 
body of this report.

           Budget Act Compliance (Sections 308, 402, and 423)

    The provisions of clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives and section 308(a)(1) of the 
Congressional Budget Act of 1974 (relating to estimates of new 
budget authority, new spending authority, new credit authority, 
or increased or decreased revenues or tax expenditures) are not 
considered applicable. The estimate and comparison required to 
be prepared by the Director of the Congressional Budget Office 
under clause 3(c)(3) of rule XIII of the Rules of the House of 
Representatives and sections 402 and 423 of the Congressional 
Budget Act of 1974 submitted to the Committee prior to the 
filing of this report are as follows:

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, April 9, 2012.
Hon. Frank D. Lucas,
Chairman, Committee on Agriculture,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 1840, a bill to 
improve consideration by the Commodity Futures Trading 
Commission of the costs and benefits of its regulations and 
orders.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                      Douglas W. Elmendorf,
                                                          Director.
    Enclosure.

H.R. 1840--A bill to improve consideration by the Commodity Futures 
        Trading Commission of the costs and benefits of its regulations 
        and orders

    Summary: H.R. 1840 would direct the Commodity Futures 
Trading Commission (CFTC) to assess both costs and benefits of 
a proposed regulation, adopting such regulation only if the 
agency determines that the estimated benefits justify the 
estimated costs. The bill also would broaden the items to 
consider in developing costs and benefits including, among 
other things, alternatives to direct regulation.
    Based on information from the CFTC, CBO estimates that 
implementing H.R. 1840 would cost $27 million over the 2013-
2017 period, assuming appropriation of the necessary amounts. 
Enacting H.R. 1840 would not affect direct spending or 
revenues; therefore, pay-as-you-go procedures do not apply.
    H.R. 1840 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would not affect the budgets of state, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 1840 is shown in the following table. 
The costs of this legislation fall within budget function 370 
(commerce and housing credit).

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                                                                 By fiscal year, in millions of dollars--
                                                         -------------------------------------------------------
                                                            2013     2014     2015     2016     2017   2013-2017
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                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATION
 
Estimated Authorization Level...........................        3        6        6        6        7        28
Estimated Outlays.......................................        3        6        6        6        6        27
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    Basis of estimate: For this estimate, CBO assumes that the 
bill will be enacted before the end of 2012, the necessary 
amounts will be appropriated each year, and spending will 
follow historical trends for the affected activities.
    H.R. 1840 would expand the analysis that the CFTC must 
perform in developing new regulations or issuing orders. Under 
current law, the agency undertakes an analysis of the estimated 
costs and benefits that would result from a proposed 
regulation; H.R. 1840 would require the agency to consider 
additional factors in this analysis and restrict the agency to 
adopting regulations only when the analysis determines that the 
benefits justify the costs.
    Based on information from the CFTC, CBO estimates that the 
agency would need an additional 25 positions to handle the 
increased workload under the bill. CBO estimates that 
implementing H.R. 1840 would cost $27 million over the 2013-
2017 period, assuming appropriation of the necessary amounts.
    Pay-As-You-Go Considerations: None.
    Intergovernmental and private-sector impact: H.R. 1840 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would not affect the budgets of state, 
local, or tribal governments.
    Estimate prepared by: Federal Costs: Susan Willie; Impact 
on State, Local, and Tribal Governments: Elizabeth Cove 
Delisle; Impact on the Private Sector: Paige Piper/Bach.
    Estimate approved by: Peter H. Fontaine, Assistant Director 
for Budget Analysis.

                    Performance Goals and Objectives

    With respect to the requirement of clause 3(c)(4) of rule 
XIII of the Rules of the House of Representatives, the 
performance goals and objectives of this legislation are to 
improve consideration by the Commodity Futures Trading 
Commission of the costs and benefits of its regulations and 
others.

                   Constitutional Authority Statement

    The Committee finds the Constitutional authority for this 
legislation in Article I, section 8, clause 18, that grants 
Congress the power to make all laws necessary and proper for 
carrying out the powers vested by Congress in the Constitution 
of the United States or in any department or officer thereof.

                        Committee Cost Estimate

    Pursuant to clause 3(d)(2) of rule XIII of the Rules of the 
House of Representatives, the Committee report incorporates the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to sections 402 and 423 of the 
Congressional Budget Act of 1974.

                      Advisory Committee Statement

    No advisory committee within the meaning of section 5(b) of 
the Federal Advisory Committee Act was created by this 
legislation.

                Applicability to the Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act (Public Law 
104-1).

                       Federal Mandates Statement

    The Committee adopted as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act (Public Law 104-4).

  Earmark Statement Required by Clause 9 of Rule XXI of the Rules of 
                        House of Representatives

    H.R. 1840 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9(e), 9(f), or 9(g) of rule XXI of the Rules of the 
House Representatives.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

COMMODITY EXCHANGE ACT

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SEC. 15. CONSIDERATION OF COSTS AND BENEFITS AND ANTITRUST LAWS.

  (a) Costs and Benefits.--
          [(1) In general.--Before promulgating a regulation 
        under this Act or issuing an order (except as provided 
        in paragraph (3)), the Commission shall consider the 
        costs and benefits of the action of the Commission.
          [(2) Considerations.--The costs and benefits of the 
        proposed Commission action shall be evaluated in light 
        of--
                  [(A) considerations of protection of market 
                participants and the public;
                  [(B) considerations of the efficiency, 
                competitiveness, and financial integrity of 
                futures markets;
                  [(C) considerations of price discovery;
                  [(D) considerations of sound risk management 
                practices; and
                  [(E) other public interest considerations.]
          (1) In general.--Before promulgating a regulation 
        under this Act or issuing an order (except as provided 
        in paragraph (3)), the Commission, through the Office 
        of the Chief Economist, shall assess the costs and 
        benefits, both qualitative and quantitative, of the 
        intended regulation and propose or adopt a regulation 
        only on a reasoned determination that the benefits of 
        the intended regulation justify the costs of the 
        intended regulation (recognizing that some benefits and 
        costs are difficult to quantify). It must measure, and 
        seek to improve, the actual results of regulatory 
        requirements.
          (2) Considerations.--In making a reasoned 
        determination of the costs and the benefits, the 
        Commission shall evaluate--
                  (A) considerations of protection of market 
                participants and the public;
                  (B) considerations of the efficiency, 
                competitiveness, and financial integrity of 
                futures and swaps markets;
                  (C) considerations of the impact on market 
                liquidity in the futures and swaps markets;
                  (D) considerations of price discovery;
                  (E) considerations of sound risk management 
                practices;
                  (F) available alternatives to direct 
                regulation;
                  (G) the degree and nature of the risks posed 
                by various activities within the scope of its 
                jurisdiction;
                  (H) whether, consistent with obtaining 
                regulatory objectives, the regulation is 
                tailored to impose the least burden on society, 
                including market participants, individuals, 
                businesses of differing sizes, and other 
                entities (including small communities and 
                governmental entities), taking into account, to 
                the extent practicable, the cumulative costs of 
                regulations;
                  (I) whether the regulation is inconsistent, 
                incompatible, or duplicative of other Federal 
                regulations;
                  (J) whether, in choosing among alternative 
                regulatory approaches, those approaches 
                maximize net benefits (including potential 
                economic, environmental, and other benefits, 
                distributive impacts, and equity); and
                  (K) other public interest considerations.

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