Bills
| 3.23.22

Should a Reauthorization for the Commodity Futures Trading Commission Come With Reforms Attached? (H.R. 238)

Do you support or oppose this bill?

What is H.R. 238?

(Updated May 25, 2018)

This bill would reauthorize the Commodity Futures Trading Commission (CFTC) through 2021, after its last authorization expired in September 2013. For those of you who don't dabble much in futures trading, the CFTC's big goals are to: 

"foster open, transparent, competitive, and financially sound markets, to avoid systemic risk, and to protect the market users and their funds, consumers, and the public from fraud, manipulation, and abusive practices related to derivatives and other products that are subject to the Commodity Exchange Act."

The CFTC regulates derivative contracts used by business owners to hedge risks and protect their companies, customers, and shareholders from unexpected economic changes. Derivatives are things like commodity futures, options, and swaps. Stock options are perhaps the most well known of these financial instruments, and they allow people purchasing the option to buy or sell stock at a specified price within a certain timeframe. This is beneficial for the individual, who might purchase shares of stock in a company but will protect themselves by hedging against a drop in the stock’s price by also purchasing options.

Several existing regulatory protections that apply to firms involved in futures markets would be made into law. The following consumer protection regulations would be made into law by this bill:

  • A requirement for regulators to electronically confirm customer account balances rather than using paper documents that can lead to forgeries;

  • Firms that move more than a specified percentage of customer funds between accounts must comply with permission and reporting requirements;

  • Undercapitalized firms (i.e. businesses that don't have the money they need to operate) have to notify regulators of their financial situation so that customer funds can be protected. Those firms also have to file an annual report with regulators;

  • Farmers, ranchers, and other futures customers would have a full business day to send their margin payments (a deposit of assets to cover some of the credit risk the other party is taking) to a futures commission merchant (FCM), reducing the cost of over-funding accounts.

The CFTC’s administration would be shaken up by making its division directors answerable to the entire Commission. A new Office of the Chief Economist would be established to report economic data and analysis to the entire Commission. “No-Action” letters that the CFTC issues would be subject to additional scrutiny, as they had been outside of the traditional oversight process. Proposed new rules would also be subject to a cost-benefit analysis before their implementation.

This legislation seeks to provide relief to end-users -- such as agricultural producers, manufacturers, electric and gas utilities, and pension plans -- by reducing barriers that have inhibited their participation in the futures markets.

Commercial end-users would no longer be treated like banks in terms of their reporting requirements, and all non-financial end-users would not be disadvantaged through public-reporting if they trade infrequently. There would also be additional time between the completion of a transaction and its reporting to protect these traders’ positions.

Farmers, grain elevators, agricultural entities, and commercial market participants would no longer be subject to record-keeping requirements that had mandated that they preserve all communications that may lead to a trade. Now, they would only have to record the final economic terms of their transactions.

Argument in favor

Letting the CFTC ease into the new regulations by passing legislation telling them what to do is the best way to ensure that these reforms actually happen helping U.S. farmers, ranchers, and other participants in the derivatives markets.

Argument opposed

The CFTC is trying to prevent derivatives from unravelling the financial markets again and causing another crash, it shouldn’t be told how to do its business by Congress.

Impact

Cost of H.R. 238

The CBO estimated during the 114th Congress that implementing this legislation would cost $1.1 billion over the 2016-2020 period, or about $220 million per year.

Additional Info

Of Note: Believe it or not, the underlying plot of the 1980’s film  starring Eddie Murphy and Dan Aykroyd was focused on the commodities portion of the derivatives market (). In it, two of the film’s characters (the Duke brothers) try to corner the derivatives market for frozen concentrated orange juice, which leads to the Dukes ensnaring Murphy’s and Aykroyd’s characters in their nefarious plot.


In-Depth: This bill passed the House Agriculture Committee by voice vote, and the Committee’s Chairman Rep. K. Michael Conaway (R-TX) praised the bipartisan legislation, saying: 

“It codifies new practices instituted by the CFTC and other market regulators to protect customer margin, it includes a strong cost-benefit analysis measure to produce better rules, and it provides relief for end-users from burdensome requirements currently in place.”

During the last Congress, the Obama administration responded to this bill’s passage through committee by blasting it for failing to increase the CFTC’s funding, and issuing a veto threat. Further, the Administration — through the Office of Management and Budget (OMB) — said it would “undercut efforts taken by the CFTC over the last year to address end-user concerns,” which could threaten financial stability by encouraging “risky, irresponsible behavior.”


Media:

Summary by Eric Revell
(Photo Credit: consumerist.com)