Thursday, February 17, 2011

House Agriculture Committee Leaders Question CFTC Rulemaking Implementing Dodd-Frank Derivatives Title

In a letter to CFTC Chair Gary Gensler, House Agriculture Chairman Chair Frank Lucas (R-OK) urged the CFTC to follow President Obama’s recent executive order on regulations, especially when adopting the regulations under Title VII of Dodd-Frank. The letter, also signed by Commodities Subcommittee Chair Mike Conaway (R-TX), emphasized that Title VII potentially impacts every segment of the economy, from financial firms to manufacturing companies because of the widespread use of derivatives for hedging and other purposes.

Chairman Lucas cautioned that the speed with which the CFTC is issuing derivatives rules raises concerns about the capacity of the Commission and its stakeholders to adequately analyze the costs and benefits of the rules and assess their implications. For example, in a recent comment letter filed with the CFTC, the Working Group of Commercial Energy Firms highlighted the substantial under estimation of costs by the Commission when performing cost-benefit analysis. The Working Group’s calculation of the man-hours necessary to comply with the CFTC’s rule on the duties of swap dealers and major swap participants was 63 times greater than that of the Commission.

By prioritizing speed over deliberation in writing the Title VII rules, noted the House leaders, the CFTC has created an irrational sequence of rule proposals that prevents stakeholders and the public from providing meaningful comments. Because so many of the rule proposals hinge on components of other rules, the House Ag leaders question how the Commission could have the information necessary to understand the impact of the rules currently being written when all of the rules are implemented comprehensively.

For example, in November the CFTC proposed rules on business conduct standards for major swap participants and swap dealers, but the rule providing clarification of the types of entities that would be swap dealers or major swap participants was not issued until late December. Chairman Lucas asks the CFTC to explain how staff responsible for drafting the proposed rules for business conduct standards were able to perform an adequate cost-benefit analysis without a clear understanding of the universe of entities to which the rules would apply. More broadly, the CFTC was asked if the period of time provided for Title VII rulemaking is sufficient time to conduct careful and accurate cost benefit analyses and propose rules in a sequence that supports useful public comments.