Thursday, July 21, 2011

House Ag Committee Chair Warns of Diverging SEC and CFTC Dodd-Frank Derivatives Regimes

There are substantial differences between the SEC and CFTC with regard to proposed regulations implementing the derivatives provisions of the Dodd-Frank Act, said House Agriculture Committee Chair Frank Lucas (R-OK). In a letter to CFTC Chair Gary Gensler, Chairman Lucas warned that divergent derivatives regulatory regimes for different products and market participants would complicate compliance and impose undue and needless costs on market participants. He noted that, despite nearly identical statutory directives, SEC and CFTC proposals regarding swap execution facilities contain significant differences that could force market participants to comply with two different regulatory regimes for products that are economically comparable.

The Ag Chair said that Congress believes that the SEC’s approach to a request for quote system requiring that the request for quote be transmitted to only one or more market participants strikes the right balance by achieving enhanced transparency while retaining the ability of a market participant to choose. The SEC approach also preserves market liquidity. Chairman Lucas urged the CFTC to follow the SEC’s interpretation and further minimize any significant differences between agency proposals before final rules are adopted.

Chairman Lucas also expressed concern that significant uncertainty remains about the territorial scope of Title VII. Noting that the territorial scope of Title VII spans multiple rulemakings, Chairman Lucas urged the CFTC to provide clarity and guidance on the territorial scope of Title VII before final rules and provide stakeholders an opportunity to comment. In doing so, the CFTC should consider the historical practices of US regulators in recognizing and deferring to foreign regulatory oversight for activities occurring outside the US, consistent with recognized principles of international law.

The Chairman said that it is imperative that the CFTC conduct thorough and thoughtful economic analysis regarding the costs and benefits of each rule. The CFTC’s current approach does not satisfy statutory cost-benefit analysis provisions, emphasized Chairman Lucas, which do not simply require the CFTC to consider the costs and benefits of its actions, as the Commission has stated in previous rulemakings. Instead, the statute goes on to direct that the costs and benefits of the proposed CFTC action must be evaluated. This term connotes more than consideration of costs and benefits, explained Chairman Lucas, it requires that they be weighed. The Chairman of the Ag Committee urged the CFTC to incorporate and elevate the Office of the Chief Economist in the cost benefit analysis performed pursuant to any final rule.

By July 29, Chairman Lucas asks Chairman Gensler to tell Congress how the CFTC will determine when a rule has changed so substantially that it will be reproposed. Similarly, Chairman Gensler is asked to relate how the CFTC will determine when changes meet the logical outgrowth standard that is the test devised by the courts when deciding if sufficient notice and comment has been provided under the APA; and, whether the CFTC views questions seeking more input as part of a Notice of Proposed Rulemaking as a basis for meeting the logical outgrowth standard.

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