House Agriculture Committee on CFTC Reauthorization – End-User Views
House Agriculture Commodity Exchanges, Energy, & Credit Subcommittee
“Reauthorizing the CFTC: End-User Views”
Tuesday, March 25, 2015
Key Topics & Takeaways
- Clarify Congressional Intent: Subcommittee Chairman Austin Scott (R-Ga.) said the task of the Subcommittee will be looking to see “where our action can clarify Congressional intent, minimize regulatory burdens, and most importantly, preserve the ability for these necessary risk management markets to serve American farmers, ranchers, and businesses.”
- Continuity of Previous CEA Bill: Subcommittee Ranking Member David Scott (D-Ga.) stressed the importance of having continuity of the legislation to reauthorize the CEA from last year (H.R. 4413), noting that it contained language to ease some reporting requirements for end-users.
- Costs to End-Users: Commodity Markets Council’s Christie expressed concern that many of the CFTC’s regulations “are being proposed without consideration of the real costs on commodity producers or consumers.”
- De Minimis Threshold: Edison Electric Institute’s Campbell stated a primary end-user concern is the automatic drop in the CFTC’s de minimis threshold from $8 billion to $3 billion in 2017, without need for affirmative action or further findings by the Commission
Witnesses
- Douglas Christie, President, Cargill Cotton on behalf of the Commodity Markets Council
- Lael Campbell, Director Regulatory & Government Affairs, Constellation, an Exelon Company on behalf of the Edison Electric Institute
- Lisa Cavallari, Director of Fixed Income Derivatives, Russell Investments on behalf of the American Benefits Council
- Mark Maurer, Chief Executive Officer, INTL FCStone Markets, LLC
- Howard Peterson, Jr., President, Peterson Oil Service on behalf of the New England Fuel Institute
Opening Statements
Subcommittee Chairman Austin Scott (R-Ga.), in his opening remarks, stated that, in the past, witnesses testifying about Dodd-Frank rules have not called for a repeal, but rather have supported the goals of Title VII. However, he said that the “process of planning, drafting, and enacting the rules could be, at best, called troubling.”
He said the task of the Subcommittee will not be repealing Dodd-Frank or weakening the market-wide protections of Title VII, but rather to look to see “where our action can clarify Congressional intent, minimize regulatory burdens, and most importantly, preserve the ability for these necessary risk management markets to serve American farmers, ranchers, and businesses.”
Witness Testimony
Douglas Christie – Commodity Markets Council
In his testimony, Douglas Christie, President, Cargill Cotton on behalf of the Commodity Markets Council, expressed concerns regarding the impact of the Commodity Futures Trading Commission’s (CFTC) swap market reform efforts. Christie noted that the CFTC’s swap regulatory rule implementation process has “morphed into an effort to rewrite many long-standing futures market regulations that Congress, via Dodd-Frank, never contemplated”. He further expressed concern that many of the regulations “are being proposed without consideration of the real costs on commodity producers or consumers.” Christie highlighted several negative consequences created by the CFTC’s swap regime implementation impacting market participants and consumers across agriculture and energy supply chains, including reduced market liquidity, higher risk management costs, and imperfect risk management.
Christie went on to provide several specific examples of where CFTC rulemakings are creating issues for markets. In regard to position limits, he expressed concern that the CFTC’s narrow definition of “bona fide hedging” would prevent the ability of commercial producers, merchants, and end-users to engage in legitimate risk mitigating practices – actually serving to increase price risk. On Rule 1.35, Christie noted that market participants engaging in cash transactions are faced with burdensome recordkeeping rules requiring information on conversations that lead to derivatives transactions. He noted that the CFTC’s attempts to remedy these issues did not go far enough to provide relief.
Lael Campbell – Edison Electric Institute
Lael Campbell, Director Regulatory & Government Affairs, Constellation, an Exelon Company and appearing on behalf of the Edison Electric Institute, in his testimony, highlighted the critical role derivatives markets play in reducing pricing risk for market participants. Campbell stated that a primary end-user concern is the automatic drop in the CFTC’s de minimis threshold from $8 billion to $3 billion in 2017, without need for affirmative action or further findings by the Commission. He noted that lower de minimis thresholds will “cause companies to cease transacting in swaps with other end-users because extra costs and burdens associated with registration as a swap dealer are not sustainable,” and “in turn will lead to fewer hedging counterparties available in the market, making hedging and risk management all the more difficult and costly for end-users.”
Campbell next discussed concerns regarding bona fide hedging, saying the Commission’s proposal unduly limits legitimate hedging activity. In regards to cross-commodity hedges, Campbell stated the CFTC ignores the relationship underlying many typical transactions, such as using fuel-based derivatives to manage against electricity price risk.
Lisa Cavallari – American Benefits Council
Lisa Cavallari, Director of Fixed Income Derivatives, Russell Investments and appearing on behalf of the American Benefits Council, provided testimony focusing on issues facing pension plan clients. Cavallari noted that pension plans commonly use interest rate swaps (IRS) to hedge against potential volatile interest rate movements. Without this ability, she explained, interest rate declines could create funding shortfalls and strain employer balance sheets, increasing insolvency risk and limiting economic growth. Cavallari went on to describe some of the “explicit and implicit costs” that are impacting pension plans, including futures commission merchant (FCM) fee increases and intensive documentation exercises. Cavallari expressed that the full regulatory landscape must be taken into account, given the potential for unintended consequences posed by implementation of global rules, such as Basel III’s Supplemental Leverage Ratio, the Net Stable Funding Ratio, and the Liquidity Coverage Ratio.
Mark Maurer – INTL FCStone Markets
Mark Maurer, Chief Executive Officer, INTL FCStone Markets, LLC, testified next and described issues currently impacting non-bank swap dealers. Maurer noted that customers face increased hedging costs due to some problematic aspects of the CFTC’s rulemaking implementation. In his view, “regulatory risk” has become a key concern for market participants.
In regards to the Commission’s margin and segregation requirements, Maurer expressed concern that certain customers will be required to incur excess costs under the CFTC’s proposal, despite the fact that clients have not elected to segregate such accounts in the past. On the CFTC’s capital requirement proposal, Maurer highlighted that non-bank swap dealers would be at a competitive disadvantage compared to bank-affiliated swap dealers under current proposals. Maurer explained that while bank-affiliated swap dealers would be allowed to utilize internal models to measure market risk, which “generally provide for more sophisticated netting of commodity positions,” non-bank swap dealers would be required to use CFTC models. This poses a problem, he stated, because the CFTC model does not permit netting unless for identical offsetting positions, resulting in higher overall capital requirements.
Howard Peterson, Jr. – New England Fuel Institute
Howard Peterson, Jr., President, Peterson Oil Service and appearing on behalf of the New England Fuel Institute, in his testimony, highlighted the importance of functional, well-regulated swaps markets as a hedging and price discovery tool. Peterson stated that it was essential for the CFTC to be fully authorized in order to allow for market participants to “hedge with confidence, security and protection from manipulation.” He further supported Congress’ “requirement that the CFTC impose speculative position limits across all commodities in the futures and swaps markets.”
Peterson went on to state concerns regarding suggestions that the Commission “cede to the exchanges its authority to set speculative positions limits and issue bona fide hedge exemptions.” Peterson argued that this would be inappropriate, as “commodity exchanges are not regulatory agencies tasked with protecting the public interest” and could be motivated by profit. Peterson next stated that the Committee should not intervene in CFTC negotiations with foreign regulatory authorities regarding cross-border harmonization of derivatives regulation, given past instances of manipulation. Lastly, Peterson cautioned against imposing “expanded” cost-benefit analysis requirements on the Commission, as it is already subject to “robust” rules.
Question and Answer
Position Limits/Bona Fide Hedge
Chair Scott asked how cotton producers would be affected if the CFTC narrows the scope of allowed bona fide hedges. Christie replied that cotton is highly susceptible to weather conditions so commercial users must be able to constantly monitor and hedge based on levels of expected production. He added that the traditional hedges they use to manage this risk may be impacted by the CFTC’s actions.
Rep. Tom Emmer (R-Minn.) asked if Congress needs to be more explicit in its definition of “bona fide hedge.” Campbell said that the Commodity Exchange Act (CEA) did a “pretty good job” defining this term but worried that the CFTC will narrow Congress’s definition. He agreed that it would help if Congress made the definition more explicit.
Rep. Rodney Davis (R-Ill.) said he expressed concern about spot month conditional limits with CFTC Chair Massad five times and asked if the panel shared these concerns. Maurer said that his company does not do much business in the physical and cash markets but said he has concerns with aggregation of position limits. He explained that the current proposal requires aggregation across business lines which can force the company to have to choose which customer or business is more important. He proposed that each business line should have its own position limit.
Rep. Randy Neugebauer (R-Texas) asked about the importance of liquidity in the market and how it will be affected under the position limits rule.
Campbell said that loss of liquidity impacts the ability of end-users to hedge because it impacts transparency and makes it difficult to get price information in the physical market. Cavallari said it is important to preserve liquidity and that liquidity comes from having a diversity of market participants.
De Minimis Threshold
Chair Scott asked what the impact of lowering the swap de minimis threshold would be on end-users. Campbell replied that market participants have made the a conscious choice not to transact certain swaps in other to avoid this threshold, saying that as a result only large banks and swap dealers are left in the market to provide hedges for end-users.
Previous CEA Reauthorization Bill
Ranking Member David Scott (D-Ga.) said having continuity of the legislation to reauthorize the CEA from last year (H.R. 4413) is important, noting that contained language to ease some reporting requirements for end-users. He stressed that is it critical to relieve end-uses of burdensome practices.
Record Keeping
Ranking Member Scott asked what the record keeping practices were before the Dodd-Frank Act and how they have changed since.
Christie replied that firms have always kept records in compliance with the law. He said that, in recent years, more business is transacted via email and text messaging, rather than just through phones. He said that requiring record keeping for cash transactions that ultimately lead to a derivative transaction is burdensome and that having narrowed access to limits on transactions that would be accepted is detrimental to the markets.
Campbell noted that new systems had to be set up after the Dodd-Frank Act even after certain relief was given to end-users from some reporting requirements. He said this resulted in major costs and said he does not see the public benefit of regulating physical transactions like they are financial products.
Cross-Border
Rep. Doug LaMalfa (R-Calif.) said the CFTC’s cross-border jurisdiction proved to be “more complex than we need” and that the cost is greater than its benefits. He asked how treatment of U.S. personnel of non-U.S. entities has impacted the market.
Maurer said a significant amount of his customers do not want to go through the “rigor of paper work” of two different regulatory regimes in Europe and the U.S. He noted that his company will do trades at a loss for its customers but noted he has seen his competition taking their business and jobs outside the U.S. to avoid the requirements of Dodd-Frank.
Cavallari said that it is critically important for the CFTC to preserve the liquidity of cross-border markets.
CFTC Funding
Ranking Member Scott asked if the CFTC is adequately funded to do its job, noting that its jurisdiction has expanded greatly since the passage of Dodd-Frank. Christie said that it is difficult to set an absolute level of funding, and stressed that the CFTC should focus on collaboration with industry in order to be more cost effective. Cavallari stated that as the CFTC moves forward with implementation of its rules it is “vitally important” for the agency to be a leader.
For more information on this hearing, please click here.
To view an archived webcast, please click here.
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House Agriculture Commodity Exchanges, Energy, & Credit Subcommittee
“Reauthorizing the CFTC: End-User Views”
Tuesday, March 25, 2015
Key Topics & Takeaways
- Clarify Congressional Intent: Subcommittee Chairman Austin Scott (R-Ga.) said the task of the Subcommittee will be looking to see “where our action can clarify Congressional intent, minimize regulatory burdens, and most importantly, preserve the ability for these necessary risk management markets to serve American farmers, ranchers, and businesses.”
- Continuity of Previous CEA Bill: Subcommittee Ranking Member David Scott (D-Ga.) stressed the importance of having continuity of the legislation to reauthorize the CEA from last year (H.R. 4413), noting that it contained language to ease some reporting requirements for end-users.
- Costs to End-Users: Commodity Markets Council’s Christie expressed concern that many of the CFTC’s regulations “are being proposed without consideration of the real costs on commodity producers or consumers.”
- De Minimis Threshold: Edison Electric Institute’s Campbell stated a primary end-user concern is the automatic drop in the CFTC’s de minimis threshold from $8 billion to $3 billion in 2017, without need for affirmative action or further findings by the Commission
Witnesses
- Douglas Christie, President, Cargill Cotton on behalf of the Commodity Markets Council
- Lael Campbell, Director Regulatory & Government Affairs, Constellation, an Exelon Company on behalf of the Edison Electric Institute
- Lisa Cavallari, Director of Fixed Income Derivatives, Russell Investments on behalf of the American Benefits Council
- Mark Maurer, Chief Executive Officer, INTL FCStone Markets, LLC
- Howard Peterson, Jr., President, Peterson Oil Service on behalf of the New England Fuel Institute
Opening Statements
Subcommittee Chairman Austin Scott (R-Ga.), in his opening remarks, stated that, in the past, witnesses testifying about Dodd-Frank rules have not called for a repeal, but rather have supported the goals of Title VII. However, he said that the “process of planning, drafting, and enacting the rules could be, at best, called troubling.”
He said the task of the Subcommittee will not be repealing Dodd-Frank or weakening the market-wide protections of Title VII, but rather to look to see “where our action can clarify Congressional intent, minimize regulatory burdens, and most importantly, preserve the ability for these necessary risk management markets to serve American farmers, ranchers, and businesses.”
Witness Testimony
Douglas Christie – Commodity Markets Council
In his testimony, Douglas Christie, President, Cargill Cotton on behalf of the Commodity Markets Council, expressed concerns regarding the impact of the Commodity Futures Trading Commission’s (CFTC) swap market reform efforts. Christie noted that the CFTC’s swap regulatory rule implementation process has “morphed into an effort to rewrite many long-standing futures market regulations that Congress, via Dodd-Frank, never contemplated”. He further expressed concern that many of the regulations “are being proposed without consideration of the real costs on commodity producers or consumers.” Christie highlighted several negative consequences created by the CFTC’s swap regime implementation impacting market participants and consumers across agriculture and energy supply chains, including reduced market liquidity, higher risk management costs, and imperfect risk management.
Christie went on to provide several specific examples of where CFTC rulemakings are creating issues for markets. In regard to position limits, he expressed concern that the CFTC’s narrow definition of “bona fide hedging” would prevent the ability of commercial producers, merchants, and end-users to engage in legitimate risk mitigating practices – actually serving to increase price risk. On Rule 1.35, Christie noted that market participants engaging in cash transactions are faced with burdensome recordkeeping rules requiring information on conversations that lead to derivatives transactions. He noted that the CFTC’s attempts to remedy these issues did not go far enough to provide relief.
Lael Campbell – Edison Electric Institute
Lael Campbell, Director Regulatory & Government Affairs, Constellation, an Exelon Company and appearing on behalf of the Edison Electric Institute, in his testimony, highlighted the critical role derivatives markets play in reducing pricing risk for market participants. Campbell stated that a primary end-user concern is the automatic drop in the CFTC’s de minimis threshold from $8 billion to $3 billion in 2017, without need for affirmative action or further findings by the Commission. He noted that lower de minimis thresholds will “cause companies to cease transacting in swaps with other end-users because extra costs and burdens associated with registration as a swap dealer are not sustainable,” and “in turn will lead to fewer hedging counterparties available in the market, making hedging and risk management all the more difficult and costly for end-users.”
Campbell next discussed concerns regarding bona fide hedging, saying the Commission’s proposal unduly limits legitimate hedging activity. In regards to cross-commodity hedges, Campbell stated the CFTC ignores the relationship underlying many typical transactions, such as using fuel-based derivatives to manage against electricity price risk.
Lisa Cavallari – American Benefits Council
Lisa Cavallari, Director of Fixed Income Derivatives, Russell Investments and appearing on behalf of the American Benefits Council, provided testimony focusing on issues facing pension plan clients. Cavallari noted that pension plans commonly use interest rate swaps (IRS) to hedge against potential volatile interest rate movements. Without this ability, she explained, interest rate declines could create funding shortfalls and strain employer balance sheets, increasing insolvency risk and limiting economic growth. Cavallari went on to describe some of the “explicit and implicit costs” that are impacting pension plans, including futures commission merchant (FCM) fee increases and intensive documentation exercises. Cavallari expressed that the full regulatory landscape must be taken into account, given the potential for unintended consequences posed by implementation of global rules, such as Basel III’s Supplemental Leverage Ratio, the Net Stable Funding Ratio, and the Liquidity Coverage Ratio.
Mark Maurer – INTL FCStone Markets
Mark Maurer, Chief Executive Officer, INTL FCStone Markets, LLC, testified next and described issues currently impacting non-bank swap dealers. Maurer noted that customers face increased hedging costs due to some problematic aspects of the CFTC’s rulemaking implementation. In his view, “regulatory risk” has become a key concern for market participants.
In regards to the Commission’s margin and segregation requirements, Maurer expressed concern that certain customers will be required to incur excess costs under the CFTC’s proposal, despite the fact that clients have not elected to segregate such accounts in the past. On the CFTC’s capital requirement proposal, Maurer highlighted that non-bank swap dealers would be at a competitive disadvantage compared to bank-affiliated swap dealers under current proposals. Maurer explained that while bank-affiliated swap dealers would be allowed to utilize internal models to measure market risk, which “generally provide for more sophisticated netting of commodity positions,” non-bank swap dealers would be required to use CFTC models. This poses a problem, he stated, because the CFTC model does not permit netting unless for identical offsetting positions, resulting in higher overall capital requirements.
Howard Peterson, Jr. – New England Fuel Institute
Howard Peterson, Jr., President, Peterson Oil Service and appearing on behalf of the New England Fuel Institute, in his testimony, highlighted the importance of functional, well-regulated swaps markets as a hedging and price discovery tool. Peterson stated that it was essential for the CFTC to be fully authorized in order to allow for market participants to “hedge with confidence, security and protection from manipulation.” He further supported Congress’ “requirement that the CFTC impose speculative position limits across all commodities in the futures and swaps markets.”
Peterson went on to state concerns regarding suggestions that the Commission “cede to the exchanges its authority to set speculative positions limits and issue bona fide hedge exemptions.” Peterson argued that this would be inappropriate, as “commodity exchanges are not regulatory agencies tasked with protecting the public interest” and could be motivated by profit. Peterson next stated that the Committee should not intervene in CFTC negotiations with foreign regulatory authorities regarding cross-border harmonization of derivatives regulation, given past instances of manipulation. Lastly, Peterson cautioned against imposing “expanded” cost-benefit analysis requirements on the Commission, as it is already subject to “robust” rules.
Question and Answer
Position Limits/Bona Fide Hedge
Chair Scott asked how cotton producers would be affected if the CFTC narrows the scope of allowed bona fide hedges. Christie replied that cotton is highly susceptible to weather conditions so commercial users must be able to constantly monitor and hedge based on levels of expected production. He added that the traditional hedges they use to manage this risk may be impacted by the CFTC’s actions.
Rep. Tom Emmer (R-Minn.) asked if Congress needs to be more explicit in its definition of “bona fide hedge.” Campbell said that the Commodity Exchange Act (CEA) did a “pretty good job” defining this term but worried that the CFTC will narrow Congress’s definition. He agreed that it would help if Congress made the definition more explicit.
Rep. Rodney Davis (R-Ill.) said he expressed concern about spot month conditional limits with CFTC Chair Massad five times and asked if the panel shared these concerns. Maurer said that his company does not do much business in the physical and cash markets but said he has concerns with aggregation of position limits. He explained that the current proposal requires aggregation across business lines which can force the company to have to choose which customer or business is more important. He proposed that each business line should have its own position limit.
Rep. Randy Neugebauer (R-Texas) asked about the importance of liquidity in the market and how it will be affected under the position limits rule.
Campbell said that loss of liquidity impacts the ability of end-users to hedge because it impacts transparency and makes it difficult to get price information in the physical market. Cavallari said it is important to preserve liquidity and that liquidity comes from having a diversity of market participants.
De Minimis Threshold
Chair Scott asked what the impact of lowering the swap de minimis threshold would be on end-users. Campbell replied that market participants have made the a conscious choice not to transact certain swaps in other to avoid this threshold, saying that as a result only large banks and swap dealers are left in the market to provide hedges for end-users.
Previous CEA Reauthorization Bill
Ranking Member David Scott (D-Ga.) said having continuity of the legislation to reauthorize the CEA from last year (H.R. 4413) is important, noting that contained language to ease some reporting requirements for end-users. He stressed that is it critical to relieve end-uses of burdensome practices.
Record Keeping
Ranking Member Scott asked what the record keeping practices were before the Dodd-Frank Act and how they have changed since.
Christie replied that firms have always kept records in compliance with the law. He said that, in recent years, more business is transacted via email and text messaging, rather than just through phones. He said that requiring record keeping for cash transactions that ultimately lead to a derivative transaction is burdensome and that having narrowed access to limits on transactions that would be accepted is detrimental to the markets.
Campbell noted that new systems had to be set up after the Dodd-Frank Act even after certain relief was given to end-users from some reporting requirements. He said this resulted in major costs and said he does not see the public benefit of regulating physical transactions like they are financial products.
Cross-Border
Rep. Doug LaMalfa (R-Calif.) said the CFTC’s cross-border jurisdiction proved to be “more complex than we need” and that the cost is greater than its benefits. He asked how treatment of U.S. personnel of non-U.S. entities has impacted the market.
Maurer said a significant amount of his customers do not want to go through the “rigor of paper work” of two different regulatory regimes in Europe and the U.S. He noted that his company will do trades at a loss for its customers but noted he has seen his competition taking their business and jobs outside the U.S. to avoid the requirements of Dodd-Frank.
Cavallari said that it is critically important for the CFTC to preserve the liquidity of cross-border markets.
CFTC Funding
Ranking Member Scott asked if the CFTC is adequately funded to do its job, noting that its jurisdiction has expanded greatly since the passage of Dodd-Frank. Christie said that it is difficult to set an absolute level of funding, and stressed that the CFTC should focus on collaboration with industry in order to be more cost effective. Cavallari stated that as the CFTC moves forward with implementation of its rules it is “vitally important” for the agency to be a leader.
For more information on this hearing, please click here.
To view an archived webcast, please click here.