Monday, May 19, 2014

Senator Chambliss Introduces Derivatives End-User Protection Bill

Senator Saxby Chambliss (R-GA) has introduced legislation designed to clarify for the CFTC how to best protect derivatives end-users that use futures markets to both purchase commodities, and use derivatives to hedge their risks. Although the Dodd-Frank Act specified that end-users should not be treated the same as banks and in many instances should not be subject to the same registration and margin requirements as other market participants, noted Senator Chambliss, the Ranking Member on the Ag Committee, the CFTC has not exempted true derivative end-users from the margin requirements applied by Dodd-Frank to many derivatives contracts. The End-User Protection Act would also fix many unintended consequences created by Dodd-Frank.

The legislation would clarify that non-financial end-users are exempt from the margin requirements applied by the Dodd-Frank Act to many derivatives contracts and also provide a new definition for a “financial entity” and further clarify the intent of Congress for how inter-affiliate trades should be treated.

The measure would also exempts persons that would not ordinarily have to maintain communications records with the CFTC and allow members of a registered entity that is not registered or required to be registered with the Commission in any capacity to maintain their own written records of each transaction in a commodity interest and any related cash or forward transactions.

The term “bona fide hedging” has multiple definitions in several rules that the CFTC has examined or is in the process of examining. The legislation would clarify the definition and make emphatic that Congress does not intend for the CFTC to move forward with an overly restrictive definition.