Proposals for Broad Regulation of Derivatives Markets Emerge in Congress

There are two separate and ostensibly competing proposals emerging from the House Financial Services Committee, chaired by Rep. Barney Frank (D-MA), and the House Agriculture Committee, chaired by Rep. Colin Peterson (D-MN), which would result in sweeping additions to the Commodity Exchange Act and the Securities Exchange Act and would create an entirely new regulatory regime for derivatives trading.  On October 15, 2009, the House Financial Services Committee approved the Over‑the‑Counter Derivatives Markets Act of 2009 (H.R. 3795) (the “Financial Services Committee Bill”)¹ and six days later, on October 21, 2009, the House Agriculture Committee approved the Derivatives Markets Transparency & Accountability Act as an amendment in the nature of a substitute to the Financial Services Committee Bill (the “Agriculture Committee Bill”).² 

Consistent with the concept paper issued on July 30, 2009 by Chairmen Frank and Peterson (the “Concept Paper”) (discussed in Goodwin Procter’s August 4, 2009 Financial Services Alert), the Financial Services Committee Bill and the Agriculture Committee Bill (collectively, the “House Bills”) by and large hew closely to the U.S. Treasury’s proposed over‑the‑counter (“OTC”) derivatives legislation issued in August 2009 (“Treasury’s Proposal”) (discussed in Goodwin Procter’s August 27, 2009 Client Alert).  Unlike the Concept Paper, which appeared to signal a coordinated approach between the two Committees led by Chairmen Frank and Peterson, the new regimes proposed by the House Bills diverge in certain important respects from each other and from the Treasury’s Proposal. 

Summary

• Parallel Regimes for Swaps and Security-Based Swaps.  The House Bills, like Treasury’s Proposal, would grant the Securities and Exchange Commission (the “SEC”) oversight authority over “security-based swaps” and the Commodity Futures Trading Commission (the “CFTC”) oversight authority over all other instruments defined as “swaps.”  Banks that are major swap participants and major security-based swap participants (collectively, “major market participants”) and swap dealers and security-based swap dealers (collectively, “dealers”) would be overseen by bank regulators.
• Key Difference:  Under the Financial Services Committee Bill, the SEC and CFTC would make rules jointly, while CFTC and SEC rulemaking under the Agriculture Committee Bill would be independent, with mandatory consultation among the CFTC, SEC and bank regulators.
• Clearing and Exchange Trading Requirements.  Under the House Bills, there would be a presumption of mandatory clearing for any swap or security-based swap if a registered clearing agency would accept the swap or security-based swap for clearing. Such swaps would have to be cleared through a registered clearing agency, subject to some limited exceptions, and would also be required to be traded on a regulated exchange or electronic trading facility. A swap that is not accepted for clearing would be required to be reported to a newly created “swap repository” or to the CFTC or SEC, as applicable.
• Key Difference:   The House Bills move away from Treasury’s proposed requirement that all “standardized” swaps be subject to mandatory clearing. Additionally, under the Financial Services Committee Bill (in contrast to Treasury’s Proposal and the Agriculture Committee Bill), existing swaps and security-based swaps to which one party is not a swap or security-based swap dealer or major market participant will not be subject to the clearing requirement.
• New Capital and Margin Requirements; Position Limits.   Like Treasury’s Proposal, the House Bills would require bank regulators to impose capital and margin requirements on bank participants in the derivatives markets.  In an attempt to limit the appeal of trading in derivatives that are not centrally cleared, the capital requirements for participants in such transactions would have to be higher than those required for counterparties to transactions that are centrally cleared. Furthermore, the CFTC and SEC would also be authorized to promulgate rules setting aggregate position limits for “large traders.”
• Key Difference:  Unlike Treasury’s Proposal, the Financial Services Committee Bill does not specifically require the imposition of initial and variation margin requirements. It would instead require the CFTC and SEC to impose capital and margin requirements on non-bank participants “as strict as or stricter” than those set by the bank regulators.
• Key Difference:  Under the Agriculture Committee Bill, the minimum capital and minimum initial and variation margin requirements applicable to all dealers and major market participants would be established to “ensure the safety and soundness of the swap dealer or major swap participant” and as “are appropriate for the risk associated with the non-cleared swaps held as a swap dealer or major swap participant” (and, again, the CFTC and SEC would establish these requirements in consultation with bank regulators and each other, but otherwise independently).
• Key Difference:   Additionally, the Agriculture Committee would expand the authority of the CFTC to set position limits for all physically deliverable commodities other than excluded commodities (which term is to be defined by the CFTC). 
• Dealers and Major Market Participants Subject to New Registration, Capital and Reporting Requirements.   Under the House Bills as under Treasury’s Proposal, dealers and major market participants would be required to be registered, which would subject dealers and major market participants to minimum capital and margin requirements, as well as a host of new business conduct and reporting and disclosure rules. 
• Key Difference:  The Financial Services Committee Bill would maintain Treasury’s requirement that certain dealers and major market participants (including banks) be registered with both the CFTC and SEC if they dealt in swaps and security-based swaps. The Agriculture Committee Bill would not require dual registration with the two agencies.
• Key Difference:   Under the Financial Services Committee Bill, the CFTC or SEC would be able to exempt a dealer or major market participant from its regulations so long as it determined that such dealer or major market participant was subject to comparable supervision and regulation by the SEC, the CFTC, a bank regulator or “the appropriate governmental authorities in the organization’s home country.” The Agriculture Committee Bill, on the other hand, would specifically exempt banks and clearing agencies already registered with the SEC.
• Key Difference:   The House Bills introduce segregation rules for margin and collateral.  The Financial Services Committee Bill would require a dealer, at its counterparty’s request, to segregate counterparty margin and collateral in swap and security-based swap transactions that are not cleared by a clearing organization and maintain such margin and collateral in an account carried by an independent third-party custodian. The Agriculture Committee Bill would impose similar requirements, but only to security-based swap dealers and clearing agencies.
• Mandatory Reporting for Transactions.  The House Bills generally follow Treasury’s Proposal with respect to reporting.  Clearing agencies, exchanges and swap execution facilities must report transaction information to the CFTC or SEC, as applicable (in the case of clearing agencies, to be shared with the CFTC/SEC, the Federal Reserve, other governmental agencies and federal financial supervisors). Swap repositories would be subject to similar reporting requirements.
• Security-Based Swaps Specifically Incorporated into Securities Laws; Exempt from Registration.   The House Bills would explicitly make a security-based swap a “security” for purposes of federal securities laws, thereby making these instruments subject to the full panoply of regulations and rules applicable to most other securities.
• Key Difference:  Unlike Treasury’s Proposal, a Financial Services Committee amendment explicitly exempts security-based swaps from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”).
• Authority to Deter Market Manipulation, Fraud, Insider Trading and Other Abuses in the OTC Derivatives Markets.  Business conduct rules for registered dealers and major market participants addressing fraud, manipulation and other abusive practices would be within the rulemaking powers of the CFTC and SEC.

Discussion

Parallel Regimes for Swaps and Security-Based Swaps

The House Bills follow Treasury’s Proposal on the definitions of “security-based swap” and “swap,” and the bills would, like Treasury’s Proposal, create parallel regulatory regimes under the jurisdictions of the CFTC and SEC.  There is a particularly notable difference between the two proposed regimes, however.  The Financial Services Committee Bill would task the two agencies with joint rulemaking responsibility, subject to the Treasury’s authority to step in if the two commissions fail to meet aggressive (generally, 180‑day) rulemaking deadlines. The Agriculture Committee Bill would, by contrast, authorize each of the CFTC and SEC to independently issue rules subject to mandatory interagency consultation. Consistent with their current jurisdictions, under the House Bills, bank regulators would continue to oversee dealers and major market participants that are banks. In particular:

• Swaps:  Under the Commodity Exchange Act (the “CEA”), as amended by the House Bills, the CFTC would oversee swap transactions, other than security-based swaps, and related markets and market participants.
• Security-based Swaps:  Both the House Bills propose amendments to the Securities Act and the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that would bring regulation of security-based swaps, security-based swap markets and their participants under the jurisdiction of the SEC.

While banks participating in swaps and security-based swap markets would remain subject to the oversight of bank regulators, the Financial Services Committee Bill mandates harmonization across the bank regulatory, CFTC and SEC regimes. The Agriculture Committee Bill, on the other hand, does not expressly require the agencies to harmonize rules across the three regimes.

Mandatory Clearing for Certain Swap Contracts

The House Bills approach centralized clearing differently.  Unlike Treasury’s Proposal, which lists several factors for determining whether certain swaps or security-based swaps are “standardized” (and thus must be cleared through a registered clearing agency), both House Bills would establish a “presumption of clearing”: if a registered clearing agency will accept a swap or security-based swap for clearing, then that swap or security-based swap must be centrally cleared. The House Bills would require clearing agencies to obtain prior approval from the CFTC and SEC, as applicable, for each (or each class of) swap and security-based swap that the clearing agency sought to accept for clearing. The CFTC and SEC would be required to make such requests available to the public, and, if no final action was taken within 90 days, the swap or security-based swap would be deemed approved for clearing. Finally, the House Bills also would empower the CFTC and SEC to unconditionally or conditionally exempt or include certain swaps or classes of swaps within the clearing requirement.

All swaps and security-based swaps that are not accepted for clearing by a clearing agency must be reported to either a swap repository or to the CFTC/SEC if there is no swap repository that would accept the swap or security-based swap. As noted below, swap repositories would be required to register with the CFTC/SEC and to abide by much the same data collection and data maintenance standards as a registered clearing agency. If a particular swap or security-based swap is not accepted by any swap repository, both participants would be required to report detailed trade information directly to the CFTC/SEC, or, in the case of the Agriculture Committee Bill, the participants may agree to designate one participant to report the trade information. As also noted below, under Treasury’s Proposal and the Financial Services Committee Bill, participants in swap and security-based swap transactions that are not subject to the clearing requirement would be required to meet regulatory capital requirements that are higher than capital requirements applicable to centrally cleared and exchange-traded transactions.

Notably, swaps and security-based swaps outstanding prior to the enactment of the House Bills would not be subject to the clearing requirement, provided, in the case of the Financial Services Committee Bill, that one counterparty was not a dealer or major market participant.

Mandatory Exchange Trading for Certain Swap Contracts

Although the discussion draft of the Financial Services Committee Bill briefly contemplated a broader range of execution options, both of the House Bills would also impose mandatory trading for all centrally cleared swaps and security-based swaps. The Financial Services Committee Bill includes a specific exemption from mandatory trading for swaps or security-based swaps that either had not been accepted by a clearing agency or had a counterparty that was not a dealer or major market participant that also did not meet the eligibility requirements of any clearing agency. The Agriculture Committee Bill more generally provides that any swap or security-based swap that is not accepted by a clearing agency would be required to be reported to a swap repository, if available, or to the relevant agency. 

Consistent with Treasury’s Proposal, under the House Bills, the CEA, as amended, would require that centrally cleared swaps be traded on a qualified “board of trade” designated as a contract market or on a registered “swap execution facility” if both counterparties are either a swap dealer or a major swap participant. Similarly, amendments to the CEA would require that centrally cleared security-based swaps transactions be traded on an exchange or a registered (alternative) swap execution facility if both counterparties are either a security-based swap dealer or major security-based swap participant. As noted below, such registered (alternative) swap execution facilities would need to demonstrate compliance with a set of “core principles” outlined in the House Bills, including real-time trade monitoring, imposition of position limits and the prevention of manipulation and price distortion.

CFTC and SEC Authorized to Set Position Limits

The CFTC and SEC would be required to set aggregate position limits for large traders under the House Bills (as under Treasury’s Proposal). Specifically, a trader would not be permitted to enter into a swap that “performs or affects a significant price discovery function” in the relevant market if the transaction would cause that trader to exceed single-day or aggregate position limits set by the CFTC/SEC, unless the trader reported the transaction to the relevant regulator and maintained detailed books and records regarding its positions (which would be open to inspection at all times by the agencies). In determining whether a transaction performs or affects a significant price discovery function, the CFTC or SEC would consider several factors including, among others:  

• Price Linkage – the extent to which a swap or security-based swap is linked to the settlement price of a security traded on a national securities exchange or regulated market.
• Arbitrage – the extent to which the price of the security-based swap or swap is linked to the price of the underlying security or commodity.
• Material Liquidity – the extent to which the volume of trades in security-based swaps or swaps affects the securities or related commodities.In addition, the CFTC or SEC could require self-regulatory organizations to adopt position limits or position accountability for each traded contract where necessary to reduce the threat of fraud or market manipulation.

The Agriculture Committee Bill, drawing from the committee’s earlier bill (H.R. 977) approved by the committee in February 2009 (the “February Proposal”), also would direct the CFTC to issue rules establishing position limits, other than bona fide hedge positions, for physically deliverable commodities. “Bona fide hedging transaction or position” would be defined by the CFTC to include transactions or positions in a physical transaction which are “economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise.”  “Bona fide hedging” transactions would also be defined as arising from owned assets or liabilities.  Additionally, under the Agriculture Committee Bill, the CFTC would be required to roll out aggregate position limits for “economically equivalent contracts” across trading venues “simultaneously” in order to avoid regulatory arbitrage.

Dealers and Major Market Participants Subject to New Registration, Capital and Reporting Requirements

Dealer and Major Market Participant Defined

Under the House Bills, the definition of major market participant could include certain investment funds and other “buy-side” market participants, while the definition of swap dealer is also broad enough to include certain end-users not currently considered (or regulated as) dealers.

Treasury’s Proposal and the Financial Services Committee Bill define “swap dealer” as including persons engaged in the business of buying and selling swaps for such person’s account. The Agriculture Committee Bill defines “swap dealers” differently as any person who, as a significant part of its business, (i) holds itself out as a dealer, (ii) “makes a market in swaps,” (iii) regularly engages in the purchase of swaps, or (iv) engages in any activity which would cause such person to be known as a dealer.

Under the House Bills (like Treasury’s Proposal), a “major swap participant” or “major security-based swap participant” refers to persons who are not dealers and who maintain a “substantial net position” in outstanding swaps or security-based swaps, excluding positions held primarily for hedging, reducing or otherwise mitigating commercial risks.  Unlike Treasury’s Proposal, however, the House Bills do not require such positions to qualify as hedging under the generally accepted accounting principles. The proposals would require the CFTC and SEC to define “substantial net position” and “substantial net counterparty exposure.”

The House Bills, however, also expand on Treasury’s definition of major market participant. Specifically, the Financial Services Committee Bill added persons who are not dealers and whose outstanding swaps “create substantial net counterparty exposure (current and potential future) that would expose counterparties to significant credit losses that could have a material adverse effect on capital of the counterparties” to the definitions of both major swap participant and major security-based swap participant. Similarly, the Agriculture Committee Bill includes within the definition of “major swap participant” any person “whose outstanding swaps create substantial net counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets.”

Registration

Dealers and major market participants (including banks) with activities in the swaps or security-based swaps markets would be required to register with the CFTC and/or SEC and to comply with minimum capital requirements and a host of new business conduct and disclosure rules. Under the House Bills, all dealers and major market participants would be required to register within one year of the effective date of the new law. An unregistered or statutory disqualified person generally would not be permitted to serve as a dealer or major market participant.

Under the Financial Services Committee Bill, the CFTC or SEC, as applicable, would be authorized to unconditionally exempt a dealer or major market participant from its prudential requirements so long as the CFTC or SEC, as applicable, found that such dealer or major market participant was subject to comparable comprehensive supervision and regulation on a consolidated basis by the SEC, the CFTC, a bank regulator or “the appropriate governmental authorities in the organization’s home country.”

The Agriculture Committee Bill, on the other hand, specifically exempts banks and clearing agencies already registered with the SEC, thus avoiding the need for dual registration with both the CFTC and SEC. Furthermore, the Agriculture Committee Bill would grandfather in certain banks and clearing agencies for purposes of registration with the CFTC or SEC if those banks and clearing agencies cleared swaps prior to the enactment of the proposed legislation.

Under the Financial Services Committee Bill, the CFTC or SEC, as applicable, would be permitted to exempt, conditionally or unconditionally, any person, derivative or transaction, or any class or classes of persons, derivatives or transactions, from any provision of the Financial Services Committee Bill. Similarly, under the Agriculture Committee Bill, the CFTC would be permitted to exempt certain dealers and major swap participants from regulation (other than the capital and margin requirements).

Capital and Margin Requirements    

Once registered, dealers and major market participants would be subject to specific capital and margin requirements. However, the House Bills diverge from Treasury’s Proposal and from each other in their approaches to setting minimum capital and margin requirements. 

Both the House Bills set out that the capital requirements must “help ensure the safety and soundness of the swap dealer or major swap participant,” but the Agriculture Committee Bill would also require that the capital requirements be appropriate for the risk associated with the non-cleared swaps held by a swap dealer or major swap participant. Under the House Bills, the CFTC and SEC, in turn, would be charged with setting capital and margin requirements for non-bank dealers and major market participants, while the bank regulators would be required to establish such requirements for banks and, under the Financial Services Committee Bill, whether or not the banks were dealers or major market participants. Under the Financial Services Committee Bill, the requirements applicable to non-bank dealers and major market participants would be at least as strict as the requirements established by the bank regulators.

The Agriculture Committee Bill would authorize the imposition of margin requirements, including for both initial and variation margin, in order to protect the financial integrity of the derivatives clearing organizations and to accomplish transactional risk management. The Financial Services Committee Bill would require the imposition of minimum margin requirements, but would not mandate minimums (specifically for both initial and variation margin). That bill (unlike the Agriculture Committee Bill or Treasury’s Proposal) would permit the use of non-cash assets as collateral in satisfaction of these requirements. Capital and margin requirements for swaps that are not cleared by a registered derivatives clearing organization would also be required to be higher than those set for swaps that are centrally cleared.

Segregation of Assets

One of the principal differences in the House Bills from Treasury’s Proposal is the segregation of counterparty margin and collateral.  These types of protections were recommended as an addition to Treasury’s Proposal in a letter from CFTC Chairman Gary Gensler, dated August 17, 2009, to the chairman and ranking member of the Senate Committee on Agriculture, Nutrition and Forestry, in which Chairman Gensler advocated the imposition of mandatory set-aside rules with respect to collateral received by swap dealers.

The Financial Services Committee Bill would provide for the segregation of certain assets in connection with certain swaps and security-based swaps. Specifically, a counterparty who provided funds or other property to a dealer as variation or initial margin, or as collateral, for a swap or security-based swap that is not cleared would be able to request that the dealer segregate the margin and maintain the collateral in a separate account carried by an independent custodian. If the dealer did not segregate funds at the request of the counterparty, the dealer would be obligated to deliver quarterly reports to the counterparty certifying that the dealer’s back office procedures for margin and collateral requirements are in compliance with the swap or security-based swap agreement. The segregation requirements outlined in the Agriculture Committee Bill are substantially similar to those of the Financial Services Committee Bill, but they apply only to security-based swap dealers and clearing agencies.

Reporting and Recordkeeping

The Financial Services Committee Bill would require the CFTC and SEC, in consultation with the appropriate federal banking agencies, to jointly adopt rules governing reporting and recordkeeping for dealers and major market participants. The Agriculture Committee Bill imposes a similar requirement that the CFTC and SEC independently issue reporting and recordkeeping rules. Specifically, under both House Bills, dealers and major market participants would be required to maintain daily trade records, by transaction type and by customer, as well as a complete audit trail, for all swap and security-based swap transactions.

Rules of Business Conduct

The House Bills would also require the CFTC and SEC, in consultation with the appropriate federal banking agencies, to adopt rules governing business conduct standards for dealers and major market participants. These standards would include establishing a standard of care for a dealer or major market participant to verify that a prospective counterparty meets applicable eligibility standards and that the dealer or major market participant adequately discloses information about the material risks and characteristics of the transaction and any material incentives or conflicts of interest it may have in connection with the transaction. Unlike Treasury’s Proposal, however, the House Bills would not require a dealer or major market participant to disclose the source and amount of any fees or other material incentives it may have in connection with the transaction.

Note on Banks

Banks would not be excluded from the registration, reporting and other regulations applicable to dealers and other major market participants under either House Bill. Accordingly, banks that are dealers and major market participants would also be required to register with, and report to, the SEC and/or the CFTC, as more fully described above. Nevertheless, the appropriate federal banking agencies would continue to supervise any bank dealer or major market participant.

• The Federal Reserve Board would be tasked with oversight of any dealer and major market participant that is either a state-chartered bank that is a member of the Federal Reserve System or a state-chartered branch or agency of a foreign bank.
• The Office of the Comptroller of the Currency (“OCC”) would, consistent with its current jurisdiction, regulate any dealers and major market participants that are national banks or federally chartered branches or agencies of foreign banks.
• Any dealers and major market participants that are state banks, and non-members of the Federal Reserve System, would be regulated by the FDIC.

The House Bills generally provide that the CFTC and SEC would promulgate rules applicable to banks in consultation with these banking agencies prior to rulemaking.

Clearing Agencies, Execution Facilities and Swap Repositories

As noted above, clearing agencies and swap repositories would be required to register with the CFTC and/or the SEC under both House Bills, which would subject them to substantial obligations in the areas of compliance, risk management, record-keeping, reporting and disclosure. Qualification as a clearing agency would require appointment of a compliance officer and annual reporting. In line with Treasury’s Proposal, the Agriculture Committee Bill sets out core principles applicable to clearing agencies such as adequate financial and operational resources, appropriate admission and eligibility standards, and default rules and procedures. Notably, and unlike Treasury’s Proposal, the Financial Services Committee Bill states that clearing agencies must abide by the standards that the CFTC and SEC establish by rule.  Further, that bill would generally give clearing agencies “reasonable discretion in establishing the manner in which it complies with any such standards.”  It also would impose additional conflict of interest rules. Clearing organizations would be required to establish rules prohibiting any dealer, major market participant or person associated with a dealer or major market participant (each a “restricted owner”) from directly or indirectly acquiring beneficial ownership in the clearing organization or in persons with a controlling interest in the swap execution facility to the extent that such an acquisition would result in the restricted owner controlling more than 20% of votes entitled to be cast by holders of ownership interests.

Mandatory Reporting for Transactions 

In line with the Treasury Proposal, the House Bills would require clearing agencies, exchanges and swap execution facilities to report transaction information to the CFTC and/or the SEC (in the case of clearing agencies, to be shared with the CFTC and/or the SEC, the Federal Reserve, other governmental agencies and federal financial supervisors). The CFTC and SEC, in turn, would be required to arrange for aggregate data on security-based swap trading volumes and positions to be made publicly available in a manner that does not disclose the business transactions and market positions of any person.  As noted above, counterparties to swap transactions not subject to the clearing requirement would have to report the transaction to a swap repository, or, if no swap repository accepts the transaction, directly to the CFTC or SEC, as applicable.

Changes to the Federal Securities Laws  

Under the House Bills (as under Treasury’s Proposal), a security-based swap would be a “security” as defined in Section 2(a) of the Securities Act and Section 3(a) of the Exchange Act, thereby making these instruments subject to the full panoply of regulations and rules applicable to most other securities.  Also hewing to Treasury’s Proposal, the House Bills would amend Section 6 of the Exchange Act to flatly prohibit effecting a trade in a security-based swap with or for any person that is not an eligible contract participant unless effected on a registered securities exchange, and both bills would amend the definition of eligible contract participant as proposed by the Treasury.  The House Bills also include conforming amendments to many provisions of the Securities Act and Exchange Act, which have the effect of bringing the regulation of security-based swaps squarely within the ambit of the SEC and retain the SEC’s anti-fraud and anti-manipulation oversight of all swap agreements. Notably, unlike Treasury’s Proposal and the Agriculture Committee Bill, which include security-based swap transactions within the scope of the corporate insider provisions of Section 16 of the Exchange Act, the Financial Services Committee Bill would direct the SEC (after consultation with bank regulators and the Treasury) to adopt rules regarding whether a person acquires beneficial ownership of an equity security based on the person’s purchase or sale of a security-based swap or other derivative.

Foreign Cooperation

The House Bills include provisions aimed at discouraging arbitrage with non-U.S. markets.  For example, under the Financial Services Committee Bill, if the CFTC or SEC determines that regulation of swaps or security-based swap markets in a foreign country undermines the stability of the U.S. financial system, either commission, in consultation with the Secretary of the Treasury, may prohibit an entity domiciled in that country from participating in any swap or security‑based swap activities in the United States.

The Financial Services Committee Bill contains a requirement that foreign boards of trade register with the CFTC, a requirement that is not present in the Agriculture Committee Bill.  The Agriculture Committee Bill, retaining a provision from the February Proposal, would authorize the CFTC to impose position limits “that are comparable to the contract traded on the U.S. exchange, taking into consideration the relative sizes of the respective markets” and would further impose certain reporting requirements on foreign boards of trade, including the disclosure of daily trading information. 

Rule-Making; Jurisdiction; Information Sharing

Consistent with Treasury’s Proposal, the Financial Services Committee Bill would assign joint rule-making authority to the CFTC and SEC, and the CFTC and SEC would be expected to jointly adopt rules and regulations no later than 180 days after the effective date of the Financial Services Committee Bill. No interpretation or guidance regarding the provisions of the Financial Services Committee Bill would be effective unless jointly adopted by the CFTC and SEC. In the event that the CFTC and SEC failed to promulgate uniform rules within the prescribed deadlines, the Secretary of the Treasury would prescribe the regulatory framework in consultation with the CFTC and SEC. Those rules would remain in effect until rescinded by the Secretary or the CFTC and SEC acted jointly.

The Agriculture Committee Bill, on the other hand, would authorize the CFTC and SEC to independently issue rules applicable to the two parallel regimes but would mandate interagency consultation. The Agriculture Committee Bill would also introduce a dispute resolution mechanism that would allow each agency to petition the Court of Appeals for the District of Columbia Circuit for review of any rule or regulation which the agency deems conflicting with the proposed legislation.

Under both House Bills, regulators would be required to share information on derivatives markets and participants. Specifically, the proposals would require the CFTC and SEC to share reported information from swap and security-based swap clearing agencies with the Federal Reserve, the appropriate federal banking agencies, the Financial Services Oversight Council, the Department of Justice, or with other persons the CFTC or SEC deem “appropriate,” including foreign financial supervisors, foreign central banks and foreign ministries.

Prohibition against Government Assistance

The Agriculture Committee Bill would prohibit federal assistance to derivative clearing organizations or clearing agencies, including the assumption or guaranty of the obligations of any derivatives clearing organization or a clearing agency, unless specifically authorized by an Act of Congress. Similarly, a Financial Services Committee amendment stated that the Financial Services Committee Bill would not be construed to authorize federal assistance to support the clearing operations or liquidation of a derivatives clearing organization.