Source: http://clsbluesky.law.columbia.edu/2017/02/13/skadden-discusses-a-house-bill-that-may-shake-up-cftc-rulemaking/
Timestamp: 2019-04-21 12:50:44+00:00

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Less than two weeks into the new congressional session, the U.S. House of Representatives passed by a vote of 239 to 182 the Commodity End-User Relief Act1 (the Bill or House Bill), marking the first step by the new post-election Congress to pare down elements of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act (Dodd-Frank). The Bill would reauthorize the Commodity Futures Trading Commission (CFTC or Commission) for five years, at an annual budget level that would be unchanged from last year.2 Many key provisions in the House Bill, including some added on the House floor to versions of the legislation that had passed the House in the prior Congress, would affect ongoing CFTC rulemakings.3 We discuss these provisions below. It is too soon to tell what the fate of these provisions would be in any Senate consideration of this measure. But the House Bill does illustrate that the post-election environment, including the impending resignation of CFTC Chairman Timothy Massad,4 will likely have considerable impact on significant sets of rules on the docket at the CFTC.
FCM Residual Interest Requirements. The House Bill would require that any CFTC futures commission merchant (FCM) residual interest requirements can be met as of the business day following a trade.14 Current CFTC regulations require FCMs to maintain a residual interest, or a sufficient amount of their own funds, in undermargined customer segregated accounts by a deadline of 6:00 p.m. Eastern time on the business day following the FCM’s calculations.15 The 6:00 p.m. deadline has been controversial, with concerns that the CFTC could amend the deadline to an earlier time of day.16 If enacted, the House Bill would restrict the CFTC’s ability to set a shorter deadline.
1 H.R. 238, 115th Cong. (2017).
2 The House Bill would authorize a $250 million annual budget over the next five years for the CFTC. See Consolidated Appropriations Act, 2016, Pub. L. 114-113, 129 Stat. 2242, 2271 (Dec. 18, 2015). The CFTC had asked for a budget of $330 million for Fiscal Year 2017, and President Barack Obama had sought to double the agency’s budget by 2021. See Commodity Futures Trading Commission: President’s Budget – Fiscal Year 2017 2 (Feb. 2016), http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/cftcbudget2017.pdf; see also Stewart Bishop, Obama Wants SEC, CFTC Funding Doubled by 2021, Law360 (Feb. 8, 2016, 8:00 p.m.), https://www.law360.com/articles/756718/obama-wants-sec-cftc-funding-doubled-by-2021. Republican members of the Agriculture Subcommittee of the House Committee on Appropriations criticized the agency’s request, citing a U.S. Government Accountability Office report finding that the CFTC had improperly recorded certain leasing costs. See Carmen Germaine, CFTC Chair Faces Budget Scrutiny After Accounting Errors, Law360 (Feb. 10, 2016, 9:53 p.m.), https://www.law360.com/articles/757209/cftc-chair-faces-budget-scrutiny-after-accounting-errors.
3 The proposed rulemakings addressed by this client alert were proposed or reproposed in 2016. Other CFTC proposed rulemakings in 2016 included: Capital Requirements of Swap Dealers and Major Swap Participants, 81 Fed. Reg. 91,252 (proposed Dec. 16, 2016) (to be codified at 17 C.F.R. pts. 1, 23 & 140), Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to Swap Dealers and Major Swap Participants, 81 Fed. Reg. 71,946 (proposed Oct. 18, 2016) (to be codified at 17 C.F.R. pts. 1 & 23), Whistleblower Awards Process, 81 Fed. Reg. 59,551 (proposed Aug. 30, 2016) (to be codified at 17 C.F.R. pt. 165), and Exemption From Registration for Certain Foreign Persons, 81 Fed. Reg. 51,824 (proposed Aug. 5, 2016) (to be codified at 17 C.F.R. pt. 3). For more information on the proposed rule regarding the application of certain CFTC requirements to cross-border transactions, see our Oct. 21, 2016, Skadden client alert. The CFTC most recently proposed amendments to the swap data access provisions in Part 49 and certain other provisions and separately proposed amendments to the registration provisions in Part 3 and the rules relating to review of exchange disciplinary, access denial or other adverse actions in Part 9. Both proposed amendments are available on the CFTC website. The CFTC also recently proposed amendments to the recordkeeping requirements in CFTC Rule 1.31. The proposed amendment is available on the CFTC website.
4 Although Chairman Massad’s resignation as chairman will be effective on January 20, 2017, he will remain a commissioner for several weeks afterward to handle administrative matters. Press Release, CFTC Chairman Timothy Massad Announces Resignation as Chairman, CFTC (Jan. 3, 2017), http://www.cftc.gov/PressRoom/PressReleases/pr7507-17.
5 H.R. 238, 115th Cong. § 321 (2017).
6 H.R. 238, 115th Cong. § 311 (2017), see also supra note 5.
7 H.R. 238, 115th Cong. § 311 (2017), see also supra note 5.
8 H.R. 238, 115th Cong. § 307 (2017).
9 Forward Contracts With Embedded Volumetric Optionality, 80 Fed. Reg. 28,239, 28,241 (May 18, 2015). For more information on the final interpretation, see Skadden’s May 15, 2015, client alert.
10 H.R. 238, 115th Cong. § 304 (2017) (excluding from the definition of “financial entity” an entity that (1) does not meet any of the categories under the “financial entity” definition, (2) is not regulated by a Prudential Regulator, and (3) is either a commercial market participant (defined by the House Bill as “any producer, processor, merchant or commercial user of an exempt or agricultural commodity, or the products or byproducts of such a commodity”) or an entity that enters into swaps, contracts for future delivery, or other derivatives on behalf of, or to hedge or mitigate the commercial risk of, affiliates).
11 See Regulation Automated Trading, 81 Fed. Reg. 85,334 (proposed Nov. 25, 2016) (to be codified at 17 C.F.R. pts. 1, 38, 40 & 170); see also id. at 85,393 (Proposed CFTC Rule 1.84(b)). For more information on the Supplemental Notice of Proposed Rulemaking for Regulation AT and the proposals that would affect firms’ intellectual property rights, see Skadden’s November 2016 client alert.
12 See Regulation Automated Trading, 81 Fed. Reg. at 85,397 (dissent of Commissioner J. Christopher Giancarlo).
13 H.R. 238, 115th Cong. § 318 (2017).
15 17 C.F.R. § 1.22 (2016).
16 See Residual Interest Deadline for Futures Commission Merchants, 80 Fed. Reg. 15,507 (Mar. 24, 2015). In 2015, the CFTC set the residual interest deadline at 6:00 p.m. See Residual Interest Deadline for Futures Commission Merchants, 80 Fed. Reg. 15,507 (Mar. 24, 2015). However, the rule also directed CFTC staff to publish a report on whether the CFTC should change the deadline, and the CFTC hosted a roundtable in March 2016 to hear comments on the report’s findings. Press Release, CFTC Staff to Host a Public Roundtable March 3 Regarding the Residual Interest Deadline, CFTC, http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff030316.
17 H.R. 238, 115th Cong. § 415 (2017). See also 17 C.F.R. §§ 15.01, 15.02, 15.04 (2016).
18 H.R. 238, 115th Cong. § 320 (2017).
19 For more information about the variation margin rules with respect to interaffiliate transactions, see Skadden’s Nov. 2, 2015, client alert here.
20 H.R. 238, 115th Cong. § 308 (2017). The current swap dealer de minimis threshold is $8 billion, which will automatically descend to $3 billion after Dec. 31, 2018. See Order Establishing De Minimis Threshold Phase-In Termination Date, 81 Fed. Reg. 71,605 (Oct. 18, 2016).
21 17 C.F.R. § 1.3(ggg)(4) (2016).
22 Many of these changes are among a number of “Commodity Futures Trading Commission Reforms” provisions of the most recent iteration of the proposed Financial CHOICE Act that were incorporated into the House Bill. Compare H.R. 238 §§ 203, 205-210, and 312 (2017), with Financial CHOICE Act, H.R. 5983, 114th Cong. §§ 461-468 (as reported by H. Fin. Serv. Comm., Dec. 20, 2016), available at https://www.congress.gov/114/bills/hr5983/BILLS-114hr5983rh.pdf (hereinafter “CHOICE Act”).
23 H.R. 238, 115th Cong. § 203 (2017).
26 See id. § 202.
28 See id. Both the proposed Financial CHOICE Act and the proposed Regulatory Accountability Act (H.R. 5) also would implement changes to the CFTC’s cost-benefit analysis processes and procedures. See, e.g., CHOICE Act § 612 (proposing to require new cost-benefit analysis processes and procedures for eight federal financial regulators, including the CFTC); H.R. 5, 115th Cong. § 103 (2017) (proposing to amend 5 U.S.C. § 553 and impose new rulemaking consideration requirements for federal agencies).
29 See H.R. 238, 115th Cong. § 210 (2017). This provision also appears in the proposed Financial CHOICE Act. See also CHOICE Act § 467.
30 H.R. 238, 115th Cong. § 312 (2017). These provisions are also incorporated from the most recent version of the proposed Financial CHOICE Act. See also CHOICE Act § 468.
31 H.R. 238, 115th Cong. § 312 (2017).
This post comes to us from Skadden, Arps, Slate, Meagher & Flom LLP. It is based on the firm’s client update, “House Bill to Shake Up CFTC Rulemakings,” dated January 19, 2017, and available here.

References: § 321
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