Monday, March 14, 2011

House Chairs Ask for Investigation of CFTC’s ``Vague and Minimalist’’ Cost-Benefit Analysis for Rules Implementing Dodd-Frank Derivatives Title

Recent public comments indicate that the CFTC is failing to adequately conduct cost-benefit analysis required by the Commodity Exchange Act or the principles of a recent Executive Order in adopting regulations to implement the derivative provisions of Title VII of Dodd-Frank, one of the most significant regulatory overhauls in decades, said House Agriculture Committee Chair Frank Lucas (R-OK) and Commodities Subcommittee Chair Mike Conaway (R-TX). In a letter to the CFTC’s Inspector General, the oversight chairs said that the CFTC has taken a ``vague and minimalist approach’’ to cost-benefit analysis that is directly contrary to the President’s Executive Order, which Chairman Gary Gensler said the CFTC would follow in principle, and that fails to achieve the objectives of Section 15(a) of the CEA. The Chairs asked the IG to initiate an investigation of the cost-benefit analysis that the CFTC is performing and report back to the Committee by April 15, 2011.

As a example of the ``vague and minimalist’’ cost-benefit analysis the CFTC is conducting, they pointed to the cost analysis the Commission performed on proposed rules for swap data recordkeeping and reporting requirements. The CFTC said that it believes that the proposed requirements could impose significant compliance costs on a number of entities such as derivatives clearing organizations, swap dealers, and major swap participants.

The House leaders emphasized that the CFTC must approach cost-benefit analysis thoroughly and responsibly to understand the costs and thus the economic impact of proposed regulations on both regulated entities and markets. Moreover, in order to evaluate costs and benefits as the CEA requires, the CFTC staff must, at the very least, conduct a detailed analysis that attempts to quantify the impact using an objective data-driven approach which, said the Chairs, is absent in unquantified and subjective assessments such as ``could impose significant compliance costs.’’ Similarly, without a detailed and diligent approach to cost-benefit analysis, said the Chairs, the CFTC is failing to comply with both the letter and the spirit of the Executive Order.

The cost-benefit investigation should include a review of the accuracy of the CFTC’s calculation of the cost and benefits and an assessment of whether the CFTC is abiding by CEA requirements to perform cost-benefit analysis in a meaningful manner that instructs the rulemaking process. In addition, the IG should make recommendations as needed to the CFTC on its cost-benefit analysis to ensure that the rules are consistent with the promotion of economy, efficiency and effectiveness.

In light of the volume of the Dodd-Frank rulemaking, said the oversight leaders, the IG may confine the review to the following four rulemakings: 1) proposed rules further defining swap dealers and major swap participants; 2) notice of proposed rulemaking on confirmation , portfolio reconciliation, and compression requirements for swap dealers and major swap participants; proposed rule for core principles for designated contract markets; and notice of proposed rulemaking on regulations establishing and governing the duties of swap dealers and major swap participants.

During the investigation, the IG is directed to also review a number of factors, including CFTC methodologies for evaluating costs and benefits, whether the sequence of the rule proposals is impacting the ability to adequately evaluate costs and benefits, and the extent to which the CFTC has sought outside expertise in the evaluation process The IG must also consider whether the CFTC differentiated market participants as part of the cost-benefit analysis, such as what a swap dealer designation would mean for a non-bank, and non-financial company as opposed to a global financial institution and, similarly, if special cost-benefit analysis considerations are given to small businesses.

The review must also consider the extent of the consideration the CFTC gives to the impact that preceding or subsequent rules may have on the costs or benefits of a rule under consideration when the proposed rule is highly dependent on those other rules, as is often the case with Dodd-Frank Title VII. Finally, the review must determine the impact the current Dodd-Frank deadline has on the ability to conduct meaningful cost-benefit analysis and the extent to which extending the deadline would improve the CFTC’s ability to consider the costs associated with the Title VII rules.