Thursday, March 31, 2011

House Ag Chair Says CFTC Interpretations of Dodd-Frank Derivatives Exemptions Are Too Narrow

In implementing Title VII of Dodd-Frank, the CFTC has proposed regulations with very broad and far-reaching definitions, but very narrow interpretations of the derivatives exemptions Congress authorized. This was the message delivered by House Agriculture Committee Chair Frank Lucas (R-OK) ahead of hearings on the derivatives title of Dodd-Frank. Chairman Lucas also said that, under the current timeframe, the CFTC cannot possibly comprehend the cumulative impact over 40 proposed regulations will have on the markets and the economy, or adequately evaluate and weigh the costs and the benefits for each rule.

While Congress gave the CFTC broad discretion in defining key terms, acknowledged Chairman Lucas, it also directed the Commission to provide exemptions where appropriate to avoid imposing unjustified and unnecessary costs on market participants. The result of this approach will be a spectrum of market participants subject to a new and sweeping regulatory regime that far exceeds the risks those entities pose to the financial system or their counterparties.

The Chair noted that Dodd-Frank requires several new regulatory designations that will define the market, and very importantly shape the ability for end-users across the country to affordably hedge their risks. One of Congress’ principal objectives in Title VII was to mitigate risks to the financial system and to prevent another financial crisis. Yet under the regulatory proposals entities that do not come close to threatening financial stability, and who had no role in the financial crisis, may be regulated in the same way as those that do. That simply doesn’t make sense, emphasized the Chair, and is not what Congress intended.

Chairman Lucas urged caution with the derivatives regulations. The derivatives markets serve an important risk mitigation role across the economy, he noted, and the regulations cannot be allowed to create significant economic disincentives to using these markets, especially for end-users and smaller entities that can least afford the costs of new regulation. Congress will ensure that the regulations do not eliminate these tools for commercial hedgers, which he believes would shift more of the trading volume to the largest financial players or send activity to our competitors overseas

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