H. Rept. 113-469 - 113th Congress (2013-2014)
June 05, 2014, As Reported by the Agriculture Committee

Report text available as:

Formatting necessary for an accurate reading of this legislative text may be shown by tags (e.g., <DELETED> or <BOLD>) or may be missing from this TXT display. For complete and accurate display of this text, see the PDF.




House Report 113-469 - FUTURES CUSTOMER PROTECTION ACT




[House Report 113-469]
[From the U.S. Government Printing Office]


113th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     113-469

======================================================================



 
                    FUTURES CUSTOMER PROTECTION ACT

                                _______
                                

  June 5, 2014.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

 Mr. Lucas, from the Committee on Agriculture, submitted the following

                              R E P O R T

                        [To accompany H.R. 4413]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Agriculture, to whom was referred the bill 
(H.R. 4413) to reauthorize the Commodity Futures Trading 
Commission, to better protect futures customers, to provide end 
users with market certainty, to make basic reforms to ensure 
transparency and accountability at the Commission, to help 
farmers, ranchers, and end users manage risks to help keep 
consumer costs low, and for other purposes, having considered 
the same, report favorably thereon without amendment and 
recommend that the bill do pass.

                           Brief Explanation


                     Title I--Customer Protections

    The Customer Protection and End-User Relief Act, H.R. 4413, 
will better protect farmers and ranchers who use the futures 
markets by cementing several new regulatory customer 
protections into law. Added protections include mandates to:
    
 Require electronic confirmation of customer fund 
account balances held at depository institutions. No longer 
will the fraud that occurred at Peregrine Financial be allowed 
to occur due to forged paper documents.
    
 Require firms that move more than a certain 
percentage of customer funds from one account to another to 
follow strict reporting and permission requirements before 
doing so. No longer will a firm be able to move funds from one 
account to another, as happened during the MF Global 
bankruptcy, without regulators knowing about it.
    
 Require firms who become undercapitalized to 
immediately notify regulators so they can assess the firm's 
viability and act, if needed, to protect customer funds.
    
 Require firms to file an annual report with 
regulators from the chief compliance officer containing an 
assessment of a futures commission merchant's (FCM) internal 
compliance programs.
    
 Ensures farmers, ranchers, and other futures 
customers have an additional day to get their needed margin to 
an FCM, which mitigates the effect of pre-funding accounts.
    
 Provide legal clarity for futures customers that 
the assets of a bankrupt commodity broker would be used to help 
pay back any misappropriated or illegally transferred customer 
segregated funds.
    
 Require firms to calculate and report customer 
account balances electronically to regulators on a regular 
basis.
    
 Require the CFTC to complete a study on high 
frequency trading.

         Title II--Commodity Futures Trading Commission Reforms

    Since the enactment of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (P.L. 111-203) (the Dodd-Frank Act) 
in July of 2010, the U.S. Commodity Futures Trading Commission 
(CFTC) has finalized over 60 new rules to enforce the new law 
and has issued an unprecedented 170 ``no-action'' letters in 
that same span of time to delay, revise, or exempt application 
of these regulations upon various market participants. The 
rulemaking process has proven confusing given the lack of a 
comprehensive plan for setting a schedule for compliance. In 
addition, the prolific use of no-action letters by the 
Commission to revisit new Dodd-Frank Act regulations have been 
used in lieu of a more thorough rulemaking process. H.R. 4413 
makes basic reforms to the CFTC to help make it more effective 
and ensures that all Commissioners' voices are heard in the 
rulemaking process. These reforms include:
    
 Modifying the Commodity Exchange Act's (CEA's) 
cost-benefit analysis requirements for proposed rules, to 
closely track President Obama's Executive Order 13563 for the 
entire executive branch.
    
 Making the Commission's division directors 
answerable to the entire Commission, not just the Chairman's 
office.
    
 Creating a new Office of the Chief Economist, 
answerable to the entire Commission, to provide objective 
economic data and analysis.
    
 Enhancing the CFTC staff procedures governing the 
issuance of ``no-action'' or interpretive letters to improve 
Commission oversight of the process and to prevent staff from 
being able to issue letters at the last moment in an attempt to 
regulate or deregulate markets outside of the official CFTC 
rulemaking process without the possibility of Commission 
review.
    
 Requiring the Commission and the Office of the 
Chief Economist to develop comprehensive internal risk control 
mechanisms to safeguard and govern all market data storage, all 
market data sharing agreements, and all academic research using 
market data.
    
 Creating a judicial review process similar to that 
of the SEC's for rulemakings to ensure the two regulators 
charged with overseeing the derivatives markets have similar 
procedures in place to allow market participants to challenge 
Commission rules.
    
 Directing the Government Accountability Office 
(GAO) to conduct a study on the sufficiency of CFTC resources 
and examine prior expenditures of funds on market surveillance 
and market data collection, standardization, and harmonization.

                       Title III--End-User Relief

    Title III of the Customer Protection and End-User Relief 
Act was developed in response to the CFTC's implementation of 
the Dodd-Frank Act. Many of the CFTC's new rules have 
negatively impacted end-users, such as our farmers, ranchers, 
manufacturers, and utilities, by making it more difficult and 
costly to manage risks associated with their businesses. 
Despite America's end-users representing 94 percent of the job 
creators in the United States, they comprise only 10 percent of 
the swaps markets. Even though Congress intended to exempt end-
users from some of the most costly new regulations associated 
with using derivatives during consideration of the Dodd-Frank 
Act, the CFTC has narrowly interpreted the law. As a result, 
the ability of producers to affordably protect against risks 
associated with farming and ranching has been threatened. Title 
III addresses the following concerns:
    
 True commercial end-users should not be treated as 
financial entities. The bill amends the CEA to allow many end-
users who are legitimate ``commercial market participants'' to 
avoid being inadvertently classified as financial entities.
    
 Certain non-financial end-users should not be 
disadvantaged in the marketplace if they use contracts that 
trade infrequently. This issue has cost certain end-users 
millions of dollars in fuel hedging costs because their 
identifiable positions in thinly-traded markets are immediately 
reported to the marketplace.
    
 The bill provides relief to grain elevators, 
farmers, agriculture counterparties, and commercial market 
participants from burdensome and unnecessarily costly 
recordkeeping rules that currently require the recording of all 
forms of communication that may possibly lead to a trade. 
Instead, the bill specifies that keeping searchable written 
records of the final material economic terms of an agreement 
will be sufficient.
    
 The bill provides relief for end-users who use 
contracts that result in actual physical delivery of a 
commodity that has a stand-alone or embedded option to change 
the amount of a commodity delivered. This impacts utilities 
that use natural gas to produce electricity, in addition to 
millions of consumers who use natural gas to heat their homes.
    
 The bill corrects an illogical and unworkable 
capital requirement imposed on non-bank swap dealers that would 
result in those entities holding much more capital than their 
bank counterparts, likely making the business too expensive, 
resulting in fewer participants in the marketplace. The CFTC 
now must consult with the other regulators in formulating 
workable capital requirement formulas and recognize formulas 
already approved by other regulators.
    
 The bill amends the CEA to simply require a vote 
by the CFTC before the swap dealer de minimis level 
automatically changes from the current level of $8 billion 
established by the CFTC in regulations.
    
 The bill makes a conforming change to CFTC 
regulations to bring its rules in line with the Jumpstart Our 
Business Startups Act (JOBS Act) (P.L. 112-106). An oversight 
in the JOBS Act omitted funds that were also registered as 
Commodity Pools, and the bill allows those funds to also 
solicit certain potential new investors.
    
 The bill allows for end-users to continue to hedge 
against anticipated business risks by providing a more workable 
definition of bona fide hedging related to position limits.
    
 The bill also includes CEA portions of the 
following measures that passed the House Agriculture Committee 
and/or the U.S. House of Representatives with overwhelming 
bipartisan support:
            H.R. 634, the Business Risk Mitigation and Price 
        Stabilization Act that passed the House on June 6, 
        2013, by a vote of 441-12.
            An amended bipartisan version of H.R. 677, the 
        Inter-affiliate Swap Clarification Act, which 
        originally was passed by House Agriculture Committee on 
        March 20, 2013 by voice vote and by the Financial 
        Services Committee on May 7, 2013, by a vote of 50-10.
            H.R. 742, the Swap Date Repository and 
        Clearinghouse Indemnification Act that passed the House 
        on June 12, 2013, by a vote of 420-2.
            H.R. 1038, the Public Power Risk Management Act 
        that passed the House on June 12, 2013 by a vote of 
        423-0.
            H.R. 1256, the Swap Jurisdiction Certainty Act that 
        passed the House on June 12, 2013, by a vote of 301-
        124.

                            Purpose and Need


                     Title I--Customer Protections

    When futures commission merchant (FCM) MF Global, Inc., 
failed in November of 2011 and Peregrine Financial Group, Inc. 
(PFGBest), followed suit in July of 2012, thousands of farmers, 
ranchers, and futures customers collectively lost more than a 
billion dollars in customer funds that were thought to be 
segregated by law apart from the funds of the FCMs. The 
bankruptcy of these two firms, caused by gross mismanagement or 
outright fraud, resulted in tremendous hardship for a large 
segment of the U.S. agricultural community and created serious 
public doubts about the safety of using the futures markets to 
manage risk. After both failures, the Committee held half a 
dozen hearings and heard from numerous witnesses over the 
course of the 112th and 113th Congresses to examine why these 
failures occurred and how public confidence could be restored 
in the futures markets.
    As a result of the Committee's work, Title I of H.R. 4413 
is designed to better protect futures customers and restore 
confidence in the marketplace while also providing regulators 
with enhanced tools to supervise FCMs. Importantly, sections 
102, 103, and 104 of H.R. 4413 would codify regulatory changes 
already implemented by both the National Futures Association 
(NFA) and the U.S. Commodity Futures Trading Commission (CFTC), 
therefore the Committee does not intend for any of these 
sections to require new rulemakings by the NFA or CFTC in order 
to implement the requirements of the legislation. Section 105, 
however, contains statutory changes that are in conflict with 
existing CFTC regulations, so the Committee would expect 
expedited action from the CFTC to conform its regulations to 
the legislation when enacted into law to provide for certainty 
in the marketplace.

Sec. 102--Enhanced customer protections for customers

    After MF Global filed for bankruptcy, it was revealed that 
in the final days before the firm's failure, customer 
segregated funds (cash deposits, securities, or other property 
of customers held by the firm to margin or guarantee futures 
trading) were used to fund the company's liquidity needs 
related to aggressive and ultimately ill-advised investments in 
European sovereign debt securities. Section 102 would provide 
the NFA and CFTC with the statutory authority to help supervise 
and prevent future mismanagement involving the illegal transfer 
of customer segregated funds.
    Accordingly, Section 102 would broadly codify regulatory 
changes proposed by the NFA, and approved by the CFTC in July 
2012, (NFA Financial Requirements Section 16) requiring FCMs to 
strengthen their controls over the treatment and monitoring of 
funds held for customers trading in the U.S. (``segregated'') 
and foreign (``Part 30 secured'') futures and options markets. 
Notable changes contained in the new NFA rules that would meet 
the statutory requirements of Section 102 include: (1) FCMs 
must now hold sufficient funds in Part 30 secured accounts to 
meet their total obligations to customer trading; (2) FCMs must 
maintain written policies and procedures governing the 
maintenance of excess (i.e., proprietary or residual) funds in 
customer segregated and Part 30 secured trading accounts; (3) 
any withdrawals of more than 25% of the excess segregated or 
Part 30 secured funds that are not for the benefit of customers 
must be pre-approved in writing by the FCM's senior management; 
and (4) FCMs must file notice with the NFA of any withdrawal of 
25% or more of the excess segregated or Part 30 secured amount 
funds that are not for the benefit of customers.
    On July 25, 2012, at a hearing entitled ``Oversight of the 
Swaps and Futures Markets: Recent Events and Impending 
Regulatory Reforms,'' the following testimony was provided by 
witnesses with respect to NFA provisions incorporated in 
Section 102:

          All of these rule changes promote greater 
        transparency for both customers and regulators and 
        should help prevent a recurrence of the type of 
        problems we saw at MF Global. These rule changes, 
        however, are only the beginning. The MF Global and 
        Peregrine customer losses are a painful reminder that 
        we must continuously improve our surveillance, audit 
        and fraud detection techniques to keep pace with 
        changing technology and an ever-more-complicated 
        financial marketplace.--Mr. Daniel Roth, President, NFA

          In direct response to the MFG collapse, the ``Corzine 
        Rule'' will be implemented on September 1st. The 
        ``Corzine Rule'' requires the CEO or CFO of the FCM to 
        pre-approve in writing any disbursement of customer 
        segregated funds not made for the benefit of customers 
        and that exceeds 25% of the firm's excess segregated 
        funds. The CME (or other SROs) must be immediately 
        notified of the pre-approval.--Mr. Terrance A. Duffy, 
        Executive Chairman & President, CME Group Inc.

          We also recommended and supported rules adopted by 
        the Chicago Mercantile Exchange and National Futures 
        Association that subject all FCMs to enhanced 
        recordkeeping and reporting obligations, including . . 
        . requiring the chief financial officer or other 
        appropriate senior officer to authorize in writing and 
        promptly notify the FCM's DSRO whenever an FCM seeks to 
        withdraw more than 25 percent of its excess funds from 
        the customer segregated account in any day. These 
        changes have now been approved by the Commission.--Hon. 
        Walt Lukken, President & Chief Executive Officer, 
        Futures Industry Association (FIA)

    On March 14, 2013, at a hearing entitled ``Examining 
Legislative Improvements to Title VII of the Dodd-Frank Act,'' 
the Hon. Gary Gensler, Chairman, U.S. Commodity Futures Trading 
Commission, provided the following testimony with respect to 
provisions that were ultimately included in Section 102:

          The Commission also worked closely with market 
        participants on new customer protection rules adopted 
        by the self-regulatory organization (SRO), the National 
        Futures Association (NFA). These include requiring FCMs 
        to hold sufficient funds for U.S. foreign futures and 
        options customers trading on foreign contract markets 
        (in Part 30 secured accounts). Starting last year, they 
        must meet their total obligations to customers trading 
        on foreign markets under the net liquidating equity 
        method. In addition, withdrawals of 25 percent or more 
        of excess segregated funds would necessitate pre-
        approval in writing by senior management and must be 
        reported to the designated SRO and the CFTC.
    On May 21, 2013, testifying before the Committee at a 
hearing entitled ``The Future of the CFTC: Market 
Perspectives,'' Mr. Daniel Roth, President, NFA, provided the 
following testimony with respect to the provisions included in 
Section 102:

          All FCMs maintain excess segregated funds. These are 
        funds deposited by the FCM into customer segregated 
        accounts to act as a buffer in the event of customer 
        defaults. Because these funds belong to the FCM, the 
        FCM is free to withdraw the excess funds, but after MF 
        Global, NFA and the CME adopted rules to ensure notice 
        to regulators and accountability within the firm. Now 
        all FCMs must provide regulators with immediate 
        notification if they draw down their excess segregated 
        funds by 25% in any given day. Such withdrawals must be 
        approved by the CEO, CFO or a financial principal of 
        the firm and the principal must certify that the firm 
        remains in compliance with segregation requirements. 
        This rule became effective on September 1, 2012.

Sec. 103--Electronic confirmation of customer funds

    On Monday, July 9, 2012, the founder and Chairman of 
Peregrine Financial Group, Inc., Russell R. Wasendorf Sr., 
unsuccessfully attempted suicide outside of the firm's Cedar 
Falls, Iowa, headquarters. He left a note admitting to 
producing elaborate forgeries of bank documents submitted to 
regulators. In court filings the next day, the CFTC alleged 
that PFGBest and Wasendorf ``committed fraud by 
misappropriating customer funds, violated customer fund 
segregation laws, and made false statements in financial 
statements filed with the [CFTC]'' and that Wasendorf may have 
falsified certain bank records. According to press reports, Mr. 
Wasendorf's suicide attempt which led to the discovery of the 
fraud occurred only days after the NFA first required PFGBest 
to electronically confirm customer balances directly through a 
third-party electronic auditing system with PFGBest's banks. 
Prior to this requirement, self regulatory organizations such 
as the NFA and CME had relied on paper statements from an FCM's 
bank.
    Section 103 would provide broad statutory authority to 
codify regulatory changes first proposed in 2012 by a special 
committee composed of futures industry SROs (including the CME 
Group, NFA, InterContinental Exchange, the Kansas City Board of 
Trade, and the Minneapolis Grain Exchange) to require: (1) 
confirmation of the balances of customer segregated bank 
accounts for all FCMs using a web-based electronic confirmation 
process; (2) all FCMs to provide their designated-SRO with 
direct online access to confirm segregated and secured funds 
balances at the banks which hold the FCM's customer segregated 
and secured funds; and (3) any bank that fails to provide 
electronic online access will not be considered an acceptable 
depository for holding customer segregated and secured funds.
    Notably, in light of the PFGBest fraud, Section 103 would 
also provide the statutory authority for regulations that 
require FCMs to file segregation and Part 30 secured amount 
computations on a daily basis with the NFA. Additionally, FCMs 
must file with the NFA detailed information regarding the banks 
holding customer funds and the investments made with customer 
funds as of the 15th and last business day of each month.
    On July 25, 2012, at a hearing entitled ``Oversight of the 
Swaps and Futures Markets: Recent Events and Impending 
Regulatory Reforms,'' the following testimony was provided by 
witnesses with respect to provisions the Committee decided to 
include in Section 103:

          NFA intends to expand this approach, once it is 
        implemented, to receive daily reports from all 
        depositories for customer segregated accounts, 
        including clearing FCMs. We will develop a program to 
        compare these balances with those reported by the firms 
        in their daily segregation reports. While there may be 
        reconciling items due to pending additions and 
        withdrawals, the system will generate an immediate 
        alert for any material discrepancies. We have also 
        agreed with the CME to perform an immediate 
        confirmation of all customer segregated bank accounts 
        for all of our FCM Members using the e-confirmation 
        process I referred to earlier. The completion of this 
        work within the next week or so should help ensure that 
        another Peregrine is not lurking in the industry.--Mr. 
        Daniel Roth, President, NFA

          First, FIA strongly supports providing regulators 
        with the independent ability to electronically review 
        and confirm customer segregated balances across every 
        FCM at any time. Second, FIA supports the creation of 
        an automated confirmation process for segregated funds 
        that will provide regulators with timely information 
        that customer funds are secure. Technology solutions 
        can help prevent this type of event from occurring 
        again.--Hon. Walt Lukken, President and Chief Executive 
        Officer, FIA

    On October 2, 2013, testifying before the Committee at a 
hearing entitled ``The Future of the CFTC: Perspectives on 
Customer Protections,'' Mr. Daniel Roth, President, NFA, 
provided the following testimony:

          For years, NFA and other SROs confirmed FCM reports 
        regarding the customer segregated funds held by the FCM 
        through traditional paper confirmations mailed to the 
        banks holding those funds. These confirmations were 
        done as part of the annual examination process. In 
        early 2012 NFA began confirming bank balances 
        electronically through an e-confirm process. That 
        change led to the discovery of the fraud at PFG, but e-
        confirms were still done as part of the annual 
        examination. We had to find a better way and we did. We 
        partnered with the CME and developed a process by which 
        NFA and the CME confirm all balances in all customer 
        segregated bank accounts on a daily basis. FCMs file 
        daily reports with NFA and the CME, reflecting the 
        amount of customer funds the FCM is holding. Through a 
        third-party vendor, NFA and CME get daily reports from 
        banks for the over 2,000 customer segregated bank 
        accounts maintained by FCMs. We then perform an 
        automated comparison of the reports from the FCMs and 
        the reports from the banks to identify any suspicious 
        discrepancies. In short, Mr. Chairman, the process by 
        which we monitor FCMs for segregated fund compliance is 
        now far ahead of where it was just one year ago. We 
        have recently expanded this system to also obtain daily 
        confirmations from clearing firms and will expand it 
        again by the end of the year to include clearinghouses 
        as well.

Section 104--Notice and certifications providing additional customer 
        protections

    On October 22, 2012, the CFTC proposed additional rules to 
enhance several aspects of supervision in order to better 
protect customers of FCMs. Just over a year later, these new 
rules were finalized and adopted by the CFTC. In order to 
codify the CFTC's authority to increase customer protections, 
Section 104 would require that FCMs notify both the CFTC and 
the appropriate self-regulatory organization when they become 
under-capitalized or under-segregated. By legally requiring 
that an FCM notify authorities as soon as the firm is faced 
with an undercapitalization scenario, regulators will have the 
power to step in and take preventative or corrective action to 
protect customer segregated funds. This would help prevent the 
same type of harm to customers that occurred when MF Global 
illegally transferred hundreds of millions of dollars of 
customer segregated funds to cover its trading shortfalls.
    Similarly, Section 104 requires FCMs to file a report at 
the end of each fiscal year that details an assessment of an 
FCM's internal compliance programs so the Commission can 
evaluate whether the controls are adequate or need to be 
improved or modified.
    On October 2, 2013, testifying before the Committee at a 
hearing entitled ``The Future of the CFTC: Perspectives on 
Customer Protections,'' Mr. Dan Roth, President, NFA, provided 
the following testimony with respect to the CFTC's provisions 
included in Section 104:

          The Commission also proposed its own changes to 
        customer protection rules in a 107-page Federal 
        Register release last year. Certain parts of the 
        Commission's proposals have provoked strong opposition 
        both from the industry and from end-users of the 
        markets, particularly in the agricultural sector. As 
        described below, NFA shares many of the concerns raised 
        by others, but we fully support many of the 
        Commission's proposals. For example, the Commission's 
        proposed rules would:
          
 Require SROs to expand their testing of FCM 
        internal controls and develop more sophisticated 
        measures of the risks posed by each FCM;
          
 Require that FCM certified annual financial 
        reports and reports from the chief compliance officer 
        be filed within 60 days of the firm's fiscal year end;
          
 Require that an FCM that is undercapitalized 
        provide immediate notice to the Commission and its DSRO 
        . . .

Section 105--Futures Commission merchant compliance

    On October 22, 2012, the CFTC proposed additional rules to 
enhance several aspects of customer protections at FCMs. Among 
the proposals was a requirement to shorten the time period an 
FCM has to collect additional funds for a margin call from a 
customer to one business day. Another proposal would require an 
FCM to hold enough of its own capital (known as ``residual 
interest'') to cover the changing positions of all customers at 
all times of the day. As a result, many FCMs would have to use 
their own capital to satisfy these margin calls, and customers 
could also be required to hold more funds at an FCM.
    Unfortunately for many farmers and ranchers who use futures 
to hedge their operating risks, a part of the CFTC ``customer 
protection'' rule finalized in October of 2013 could result in 
significant harm to these core constituencies of the Committee. 
The new rule will require farmers and ranchers to pre-fund 
their margin accounts due to onerous new requirements that 
force FCMs to hold large amounts of cash in order to pay 
clearinghouses at the start of trading the next business day. 
The increased costs of pre-funding margin accounts will likely 
drive many small and medium-sized agricultural producers out of 
the marketplace. When the small players are forced out of the 
markets, the small and medium-sized FCMs will be forced to 
consolidate, giving customers fewer choices.
    On May 21, 2013, testifying before the Committee at a 
hearing entitled ``The Future of the CFTC: Market 
Perspectives,'' the following testimony was provided by 
witnesses with respect to problems with the CFTC's proposed 
rule:

          However, this rulemaking also seeks to fundamentally 
        change the way in which the futures marketplace 
        operates. As we explained in our comment letter, if a 
        proposed ``protective'' measure is so expensive or its 
        impact on market structure is so severe that customers 
        cannot effectively use futures markets to mitigate risk 
        or discover prices, the reason to implement that 
        measure needs to be re-examined. Among the proposed 
        rules to reevaluate is the rule that would require at 
        all times an FCM's residual interest (its own funds) in 
        segregated accounts to exceed the margin deficiencies 
        of its customers. It does not appear that any system 
        currently exists or could be construed in the near 
        future will permit FCMs to accurately calculate 
        customer margin deficiencies, continuously in real-
        time. Without access to this data, FCMs will be 
        required to maintain substantial residual interest in 
        segregated accounts or require customers to 
        significantly over-collateralize their accounts. We 
        believe this will be a significant and unnecessary 
        drain on liquidity that will make trading significantly 
        more expensive for customers to hedge. We believe this 
        rule and others could have a very significant impact on 
        certain sectors in the marketplace, particularly 
        smaller FCMs that serve the agricultural community.--
        Mr. Terrance A. Duffy, Executive Chairman and 
        President, CME Group Inc.

          In the end, this new interpretation will result in 
        FCMs requiring customers to put up more money at all 
        times, likely resulting in customers being asked to 
        pre-fund their margin. In addition to requiring 
        customer pre-funding, some have suggested that this 
        rule will likely require an FCM to double a customers' 
        overall margin requirements: in essence requiring 
        customers to fund their potential margin deficiencies. 
        As such, the customer would be required to keep margin 
        funds far in excess of exchange minimum margin 
        requirements. Our mid-sized commercial customers rely 
        upon their lending institutions, such as CoBank, a 
        member of the Farm Credit System, to fund their 
        commercial activities including their hedging 
        activities. A potentially doubling of their funding 
        needs to support their hedging activities would 
        significantly impact the profitability of such 
        customers. In addition to the negative customer impact, 
        the rule will also put significant financial pressure 
        on FCMs. If the sum of an FCM's customer margin 
        deficits is greater than the residual interest an FCM 
        typically maintains in their customer accounts, then 
        the FCM would have to increase the amount of residual 
        interest it maintains in customer segregated accounts. 
        On ``limit up'' or ``limit down'' days in the 
        agricultural exchange traded markets, our firm may be 
        required to deposit up to $400 million to satisfy 
        exchange demands for margin. In order to ensure that 
        our residual interest would be in excess of the sum of 
        all of our customers margin deficiencies in such a 
        situation, we would need to require our customer pre-
        fund their potential margin deficiencies or in effect 
        require us to pre-fund their potential margin 
        requirements by maintaining our capital in customer 
        segregated accounts. Requiring massive additional 
        injections of our own capital to support the new 
        residual interest requirements will, at some point, 
        become unsustainable for us and others, again leading 
        to the real and substantial risk of increased 
        concentration in an already shrinking market.--Mr. 
        William J. Dunaway, CFO, INTL FCSTONE, Inc.

    On July 24, 2013, at a hearing entitled ``The Future of the 
CFTC: End-User Perspectives,'' the following witnesses also 
provided testimony with respect to problems with the CFTC's 
proposed rule:

          Regulations that would accelerate a further 
        consolidation in the FCM industry would have the 
        adverse effect of leaving commodity hedgers with fewer 
        options, while concentrating risk among fewer FCM 
        entities . . . [a]nother provision would require that 
        an FCM's residual interest in the customer-segregated 
        account must at all times be sufficient to exceed the 
        sum of the margin deficits that the FCM's customers 
        have in their accounts. This requirement is counter to 
        the historical interpretation, which requires an FCM to 
        maintain residual interest to cover customer-segregated 
        accounts with negative net liquidating balances (debit 
        equity). This gives an FCM time to collect customer 
        funds prior to the time a payment must be made to the 
        clearing house. In addition to increased costs for 
        hedgers, this proposed rule would be more burdensome to 
        firms like farmer cooperative-owned FCMs, which largely 
        deal only with hedgers. Although the risk profile of 
        the customer base is very low, customers are 
        predominantly on one side of the market and therefore 
        more susceptible to big swings in the market. To 
        require all deficits to be covered immediately would be 
        overly burdensome on these FCMs given the low-risk 
        profile of their customers as hedgers.--Mr. Scott 
        Cordes, President, CHS Hedging, Inc., on behalf of the 
        National Council of Farmer Cooperatives (NCFC)

          Specifically, CMC strongly believes that the proposed 
        requirement that FCMs maintain a residual amount 
        sufficient to cover on a constant basis the aggregate 
        of customer margin deficits could create considerable 
        liquidity issues and increase costs for FCMs, 
        producers, and end-users. Such a decrease in liquidity 
        could be substantial and limit the number and type of 
        transactions FCMs clear, the number of customers they 
        service, and the amount of financing they provide. The 
        proposal would require FCMs to fund accounts holding 
        their customers' collateral with proprietary assets in 
        excess of the aggregated margin deficiencies of all its 
        clients on a continuous basis. The proposal also 
        appears to require executing FCMs to collect collateral 
        for give-ups so that customer positions are fully 
        margined in the event a clearing FCM rejects a trade. 
        If the proposed residual interest provision were to be 
        finalized, FCMs may be forced to take steps such as 
        over-margining clients, requiring clients to pre-fund 
        their margin accounts, imposing punitive interest rate 
        charges on margin deficit balances, and introducing 
        intra-day margin calls. Such steps would dramatically 
        increase the cost of using futures markets and may 
        force many end-users to decrease or discontinue hedging 
        and risk management practices, which is the reason 
        these markets were created.--Mr. Lance Kotschwar, 
        Senior Compliance Attorney, The Gavilon Group, LLC, on 
        behalf of the Commodity Markets Council

    On October 2, 2013, testifying before the Committee at a 
hearing entitled ``The Future of the CFTC: Perspectives on 
Customer Protections,'' the following additional testimony was 
provided by witnesses with respect to their concerns about the 
CFTC's proposed rule:

          We believe that the CFTC's proposal respecting the 
        required residual interest that must be maintained by 
        FCMs in the customer segregated account will adversely 
        impact customers and fundamentally change the way in 
        which futures markets operate. If a proposed 
        ``protective'' measure is so expensive or its impact on 
        market structure is so severe that customers cannot 
        effectively use futures markets to mitigate risk or 
        discover prices, there is no justification for 
        implementing that measure. The proposal on ``residual 
        interest'' fails this test . . . [t]he residual 
        interest rule is not necessary to protect customer 
        funds. Its costs and negative consequences outweigh any 
        added protection. This over-collateralization is 
        unwarranted from a risk management standpoint. No 
        regulatory risk model assumes that all customers with 
        margin requirements will fail promptly to meet them. 
        The proposed rule will unnecessarily drain liquidity 
        and increase the cost of hedging financial and 
        commercial risk especially for farmers and ranchers 
        using our markets. Smaller and mid-sized firms that 
        serve them will suffer the greatest impact of these 
        increased costs, and may be driven out of business, 
        leaving farmers and ranchers with fewer FCMs to 
        facilitate their risk management goals. This will 
        actually increase systemic risk by concentrating risk 
        among fewer firms. Ironically, the proposal would force 
        customers to place more collateral with their FCM--when 
        they may be trying to actively avoid fellow-customer 
        risk or FCM misconduct. We understand the Commission is 
        considering phasing in the rule, possibly to mitigate 
        the consequences I just described. A phase-in does not 
        cure the problem. Instead, CME supports the FIA 
        alternative--that would permit an FCM to calculate its 
        required residual interest as of 6:00 p.m. on the first 
        business day after the trade date.--Mr. Terrance A. 
        Duffy, Executive Chairman & President, CME Group Inc.

          Other provisions of the Commission's proposals, 
        however, raise serious concerns, particularly with 
        regard to the so-called ``residual interest'' issue . . 
        . [t]he Commission has now proposed that all FCMs must 
        maintain at all times a residual interest sufficient to 
        exceed the sum of all margin deficits that the 
        customers in each account class have. Essentially, FCMs 
        would have to assume that every customer will default 
        on every margin call and maintain capital in the 
        segregated account to cover that possibility. Several 
        points need to be made on this proposal. First, it has 
        absolutely nothing to do with the problems encountered 
        at either MF Global or PFG. Neither of those cases had 
        anything to do with customers failing to meet margin 
        calls. Second, this is the first time in the 
        Commission's 39-year history that it has ever taken the 
        position that the Act requires FCMs to assume that all 
        customers will default on all margin calls. Third, the 
        underlying assumption that in this day and age no 
        customers meet margin calls by writing checks is wrong. 
        Agricultural hedgers frequently meet their margin calls 
        with checks. Fourth, the impact of this proposal could 
        be devastating for both agricultural end-users and the 
        relative handful of FCMs that service those customers. 
        Customers will have to post much more margin funds with 
        their FCMs or the FCMs will have to maintain much more 
        capital in their business. Either way, there will be 
        fewer customers using futures markets to hedge and 
        fewer FCMs handling their accounts. This proposal does 
        not just fix something that is not broken, it threatens 
        to do real harm to a longstanding system that has 
        worked well for both customers and the markets.--Mr. 
        Daniel Roth, President, NFA

          For many years, grain hedgers and the futures 
        commission merchants (FCMs) with whom they work to 
        manage their risk have relied on a consistent 
        interpretation of the Commodity Exchange Act by the 
        Commodity Futures Trading Commission (CFTC) with regard 
        to posting margin funds to their hedge accounts. 
        Unfortunately, in the name of customer protection, that 
        interpretation recently has been thrown into question 
        by a new proposal from the CFTC that we believe would 
        dramatically increase customer risk. We understand that 
        CFTC Commissioners currently are evaluating a final 
        staff draft of this rule, with the goal of voting on a 
        final rule later this month. The rule seeks to bolster 
        futures customer protections--a laudable goal that the 
        NGFA supports fully. However, two very troublesome 
        provisions would have the perverse effect of 
        significantly increasing financial risk to futures 
        customers--and in the process, dramatically changing 
        the way business has been conducted in futures markets 
        for decades . . . [t]he second provision potentially is 
        even more troublesome and more expensive to futures 
        customers. It would change the timing of FCMs' 
        calculation of residual interest for futures accounts--
        in other words, it appears the proposal would require 
        all customers to be fully margined at all times. While 
        this may sound like common sense, it is a huge 
        departure from the CFTC's interpretation for decades 
        that FCMs be allowed a certain period of time to ``top 
        up'' hedge accounts while they wait for customers to 
        make margin calls. This new proposal would lead to one 
        of two outcomes: either the FCM would have to move more 
        of its own funds (i.e., residual interest) into 
        customers' hedge accounts; or FCMs would be forced to 
        require pre-margining and, perhaps, intra-day 
        margining, to ensure that each individual customer is 
        fully margined at any moment. The practical end result 
        would be that futures customers would be required to 
        send much more money to their FCMs in advance in 
        anticipation of futures market moves that might never 
        happen. Some customers likely would exit futures 
        markets in favor of lower-cost risk management 
        alternatives. We believe this potential exodus from 
        futures markets would be most clearly seen among 
        agricultural producers who utilize futures for risk 
        management purposes and among smaller grain-hedging 
        firms. Taken to its logical conclusion, we believe 
        strongly that neither proposal accomplishes the 
        Commission's stated goal of enhancing customer 
        protection. To the contrary, customers would be sending 
        much larger amounts to their FCMs, leading to much 
        greater volume of funds at risk if another MF Global 
        situation occurs. If this rule had been in place when 
        MF Global failed, perhaps twice as much customer money 
        would have been missing and a correspondingly larger 
        amount still would not be returned to customers.--Mr. 
        Michael J. Anderson, Regional Sales Manager, The 
        Andersons Inc., on behalf of the National Grain and 
        Feed Association

          Requiring FCMs to increase risk management standards, 
        increasing the requirements for residual interest in 
        segregation, and the reduction in days to collect 
        margin calls before they become capital charges are all 
        aimed at protecting an FCM's customer from losses 
        incurred by other customers of the FCM. Most of these 
        changes have significant costs associated with them . . 
        . [t]he requirement to maintain residual interest in 
        segregated funds greater than all margin calls at all 
        times will not only be very difficult to track, but 
        force us to choose between doubling or possibly 
        tripling our capital, or greatly increasing the funds 
        we require our customers to deposit to ensure they 
        never have a margin call. For smaller customers, or 
        those who can't follow the markets on a minute to 
        minute basis, meeting margin calls on a moment's notice 
        is a difficult thing to do. This is especially true of 
        small hedge customers, who would then be faced with 
        liquidation of hedges. For Frontier Futures as a firm, 
        the option to increase our capital by that much may not 
        be possible, and increasing margins may cause many of 
        our customers to either leave us for other firms or 
        cease trading altogether. The broader consequence of 
        the residual interest rule may be to force a 
        consolidation in the number of small to mid-sized FCMs. 
        Currently, FCMs charge margins based on margin 
        requirements set by the exchanges. The new rules will 
        create a competitive imbalance favoring firms with 
        access to large amounts of capital, such as the bank 
        owned FCMs, as these firms will be able to fund margin 
        calls by their customers with this capital. Firms 
        without this access will be forced to charge much 
        higher margin rates to their customers, and may result 
        in a migration of some customers out of these firms. 
        With fewer customers available to some firms, there is 
        bound to be consolidation. This will mostly affect 
        small to mid-sized FCMs who clear small hedgers as well 
        as guarantee Introducing Brokers.--Mr. Theodore 
        Johnson, President, Frontier Futures, Inc.

    In order to address the significant concerns voiced by 
market participants, regulators, and other stakeholders, the 
Committee directs the CFTC, in carrying out the requirements of 
Section 105, to consider an FCM in compliance with any 
requirements to use its own proprietary funds, in the form of 
residual interest, to satisfy margin deficits of the FCM's 
customers if such requirements are met at the end of the first 
business day following a trade date. This would obviate the 
need for pre-funded margin accounts.

Section 106--Certainty for Futures customers and market participants

    Section 190.08(a)(1)(ii)(J) of the CFTC's regulations (17 
C.F.R. Sec. 190) defines customer property as including ``cash, 
securities or other property of the debtor's estate, including 
the debtor's trading or operating accounts and commodities of 
the debtor held in inventory, but only to the extent that the 
property enumerated is insufficient to satisfy in full all 
claims of public customers.'' The Committee's plain reading of 
this CFTC regulation is that property of the debtor FCM, even 
though not held as customer property, becomes customer property 
to the extent necessary to satisfy net equity claims of 
``public customers,'' who are defined in CFTC Regulations 
Section 190.01 as all customers other than certain control 
persons, affiliates, and related parties (i.e.: non-public 
customers). In effect, in order to protect the funds of 
customers held in segregation, CFTC Regulation 190.08 
subordinates the claims of non-public customers and non-
customer creditors, other than properly perfected liens on such 
property of the debtor, to the claims of public customers with 
respect to the property of the FCM that was not held (and not 
required to be held) as customer property.
    However, in 2000, doubts as to the validity of CFTC 
Regulation Part 190.08(a)(1)(ii)(J) arose after a federal 
bankruptcy court (In re Griffin Trading Co., 245 B.R. 291 
(Bankr. N.D. Ill. 2000)) rejected an attempt by the trustee to 
use a bankrupt commodity broker's estate to pay shortfalls in 
the customer accounts. Among the issues in the case, which was 
later settled and the court's holding vacated therefore 
resulting in no binding judicial precedent, was whether the 
CFTC's broad definition of ``customer property'' in section 
190.08 of the CFTC regulations would determine which assets 
could be used to repay customers. The court found that the CFTC 
exceeded its statutory authority in enacting section 190.08 
with a definition of customer property more expansive than that 
used in the U.S. bankruptcy code. Further, the court found 
that, ``any shortfall in the customer property as defined in 
[the bankruptcy code] must be treated as a general unsecured 
claim.'' This vacated court decision has left uncertainty about 
whether, in the event that customer assets are insufficient to 
cover all customer claims, customers can have first priority to 
an FCM's general estate assets until all customer claims are 
paid in full.
    On October 2, 2013, testifying before the Committee at a 
hearing entitled ``The Future of the CFTC: Perspectives on 
Customer Protections,'' Mr. Daniel Roth, President, NFA, 
provided the following testimony with respect to the need for 
the provisions included in Section 106:

          NFA believes, however, that Congress should consider 
        a statutory change to strengthen customer protections 
        and priorities in the event of a future FCM bankruptcy. 
        Over 30 years ago the CFTC adopted rules regarding FCM 
        bankruptcies. Among other things, those rules provided 
        that if there was a shortfall in customer segregated 
        funds, the term ``customer funds'' would include all 
        assets of the FCM until customers had been made whole. 
        Several years ago, a district court decision cast doubt 
        on the validity of the CFTC's rule. That decision was 
        subsequently vacated but a cloud of doubt lingers. 
        Congress can and should remove that doubt about the 
        priority customers should received if there is a 
        shortfall in segregated funds and can do so by amending 
        Section 20 of the Act. Section 20 gives the CFTC 
        authority to adopt regulations regarding commodity 
        brokers that are debtors under Chapter 7 of Title 11 of 
        the United States Code. We would suggest an amendment 
        to clarify the CFTC's authority to adopt the rule that 
        it did.

    In order to provide clarity for the marketplace and make 
clear that the CFTC did not exceed its authority to promulgate 
Rule 190.08 under Section 20(a) of the Commodity Exchange Act, 
the Committee intends for Section 106 to provide for the broad 
use of the assets of a commodity broker's estate, other than 
secured property (such as property held at a clearinghouse, 
including offset or netting rights of creditors with respect to 
such type of property), to satisfy shortfalls in customer 
property beyond what was held in customer segregated accounts 
at the time of a firm's failure.

Section 107--Study on high frequency trading

    The Committee recognizes growing public concern and 
multiple questions arising from the practice in derivative 
markets commonly known as ``automated'' or ``high frequency'' 
trading. During hearings in the 112th and 113th Congresses, one 
CFTC Commissioner and two end-user groups testified as to their 
apprehension about this practice and its implications for 
derivative markets. Before taking any action, it is prudent for 
the Committee to learn more about high frequency trading. To 
that end, the Commission is charged with providing the 
Committee with a report examining the impact this practice has 
upon markets under its jurisdiction. It should be noted that 
the Committee recognizes that on September 9, 2013, the CFTC 
approved a ``concept release'' on ``Risk Controls and System 
Safeguards for Automated Trading Environments'' that examines 
marketplace conditions and explores possible regulatory changes 
with respect to high frequency trading. To speed compilation of 
the results, the Committee would view that the Commission has 
completed the requirements of Section 107 if the study results 
are incorporated as part of further action on its concept 
release.

         Title 2--Commodity Futures Trading Commission Reforms


Section 202--Extension of operations

    The most recent reauthorization for CFTC budgetary 
appropriations was approved in 2008 as a part of the Food, 
Conservation and Energy Act (P.L. 110-246), prior to the 
financial crisis of 2008 and the enactment of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (P.L. 111-203) 
(The Dodd-Frank Act). That statutory authorization expired 
September 30, 2013. Although the CFTC relied on unauthorized 
appropriations between 2005 and 2008, successful legislative 
reauthorizations occurred in 1978, 1983, 1986, 1992, 1995, and 
2000. These have ranged from basic legislative 
reauthorizations, such as the CFTC Reauthorization Act of 1995, 
to significant changes in the law, such as the Commodity 
Futures Modernization Act of 2000. Section 202 would 
reauthorize the Commission to receive budgetary appropriations 
through 2018.

Section 203--Consideration by the Commodity Futures Trading Commission 
        of the costs and benefits of its regulations and orders

    Section 15(a) of the Commodity Exchange Act sets forth 
requirements for the CFTC to consider the costs and benefits of 
the Commission's actions. In each proposed rule, however, the 
CFTC identifies the limitations of Section 15(a) in requiring 
cost-benefit analysis, stating ``[b]y its terms, Section 15(a) 
does not require the Commission to quantify the costs and 
benefits of an order to determine whether the benefits of the 
order outweigh its costs; rather, it requires that the 
Commission `consider' the costs and benefits of its actions.''
    Consequently, the CFTC's Office of Inspector General (OIG) 
issued an investigative report in April of 2011 that examined 
the cost-benefit analysis performed by the Commission in 
connection with Dodd-Frank rulemakings. In that report, the OIG 
stated ``. . . it is clear that the Commission staff viewed 
section 15(a) compliance to constitute a legal issue more than 
an economic one, and the views of the Office of General Counsel 
therefore trumped those expressed by the Office of the Chief 
Economist . . . [w]e do not believe this approach enhanced the 
economic analysis performed. . . .''
    On January 18, 2011, President Obama issued Executive Order 
No. 13563, which requires non-independent executive branch 
agencies to conduct cost-benefit analyses to ensure that both 
the quantitative and qualitative costs and benefits of proposed 
rulemakings are taken into account. The Executive Order also 
requires that regulations be accessible, consistent, written in 
plain language, and easy to understand. Because the CFTC is an 
independent agency, it was not required to abide by the order 
for any of its Dodd-Frank Act rulemakings.
    As the CFTC continues to advance new rules that govern a 
large sector of the derivatives marketplace for the first time, 
this section raises the legal standard for cost-benefit 
analysis and evaluation. Further, the legislation is intended 
to operate consistently with Executive Order 13563. However, so 
as to not disrupt the regulatory process, this legislation is 
not retroactive in nature and would not impact previously 
proposed or finalized rules promulgated by the CFTC.
    On March, 14, 2013, at a hearing entitled ``Examining 
Legislative Improvements to Title VII of the Dodd-Frank Act,'' 
the following testimony was provided with respect to provisions 
included in Section 203:

          . . . SIFMA has encouraged regulators to conduct 
        comprehensive cost-benefit analysis for all Dodd-Frank 
        Rules. This is consistent with the Obama 
        Administration's efforts to promote better cost benefit 
        analysis for Federal agencies through Executive Order 
        13563, which requires all agencies proposing or 
        adopting regulations to include cost-benefit analyses 
        in an attempt to minimize burdens, maximize net 
        benefits and specify performance objectives. The 
        President also stated that regulations should be 
        subject to meaningful public comment, be harmonized 
        across agencies, ensure objectivity and be subject to 
        periodic review. In 2012, in testimony before the House 
        Committee on Government Reform, SEC Chairman Schapiro 
        stated ``I continue to be committed to ensuring that 
        the Commission engages in sound, robust economic 
        analysis in its rulemaking, in furtherance of the 
        Commission's statutory mission, and will continue to 
        work to enhance both the process and substance of that 
        analysis.'' Congressman Conaway has introduced 
        legislation (H.R. 1003) that would require the CFTC's 
        cost-benefit analysis to be both quantitative and 
        qualitative and specifies in greater detail the costs 
        and benefits that the CFTC must take into account as 
        part of their cost-benefit analyses.--Hon. Kenneth E. 
        Bentsen, Acting President and CEO, the Securities 
        Industry and Financial Markets Association (SIFMA)

          Finally, because of our experience with the $25 
        million sub-threshold, we are intrigued by another 
        bipartisan bill recently introduced in the House. The 
        legislation, H.R. 1003, would require the CFTC to 
        quantify the costs and benefits of future regulations 
        and orders. Sadly, the legislation is prospective, but 
        we believe that had such an analysis been made, it 
        could have prevented the turmoil currently being caused 
        by the $25 million special entity sub-threshold.--Mr. 
        Terrance P. Naulty, General Manager and CEO, Owensboro 
        Municipal Utilities (Owensboro, KY)

    On May 21, 2013, at a hearing entitled ``The Future of the 
CFTC: Market Perspectives,'' Mr. Stephen O'Connor, Chairman, 
International Swaps and Derivatives Association, Inc. (ISDA), 
provided the following testimony with respect to provisions 
included in Section 203:

          An appropriate cost-benefit analysis was both 
        required and desirable prior to finalization of rules; 
        however in a number of instances the CFTC's analysis 
        did not comply with the regulatory standard. As the 
        Jun. 2012 report by the CFTC Inspector General stated: 
        ``. . . Generally speaking, it appears CFTC employees 
        did not consider quantifying costs when conducting 
        cost-benefit analyses for the definitions rule. As 
        indicated in the rule's preamble, the costs and 
        benefits associated with coverage under the various 
        definitions (in light of the various regulatory burdens 
        that could eventually be associated with coverage) were 
        not addressed . . .'' The lack of an appropriate cost-
        benefit analysis makes it especially important that the 
        application and implementation of the final rules be 
        phased in a flexible manner. Doing so would help ensure 
        that rules achieve the purposes for which they are 
        intended and do not impose burdensome costs on the 
        financial system. It would also help regulators to 
        identify and avoid unintended consequences of their 
        actions. And it would encourage regulators to properly 
        allocate limited resources.

Section 204--Division Directors

    In order to ensure Division Directors are responsive to the 
entire Commission, this section requires that the heads of each 
of the units of the Commission serve at the pleasure of the 
Commission, perform functions as the Commission may prescribe 
and report directly to the Commission. Given this language is 
modeled after identical language currently in the CEA 
applicable to the General Counsel and Executive Director, the 
Committee expects this section to be implemented in a similar 
manner to those two positions.

Section 205--Office of the Chief Economist

    In order to enhance the legitimacy of economic analysis of 
rules promulgated by the Commission, this section establishes 
an Office of the Chief Economist (OCE) with structure and power 
mirroring that of the Office of the General Counsel. Again, to 
prevent the Chief Economist from serving solely at the pleasure 
of the Chairman, this section establishes that the Chief 
Economist will be appointed by the Commission, report directly 
to the Commission, and perform functions at the request of the 
Commission in a manner similar with the General Counsel and 
Executive Director.

Section 206--Procedures governing actions taken without a commission 
        vote

    With respect to Title VII of the Dodd-Frank Act alone, the 
Commission has finalized 43 rules, with 15 additional rules 
proposed, while CFTC staff has issued over 170 non-binding 
staff ``no-action relief'' letters since July 2012 alone. At 
least 24 of these no-action letters are self-described as 
permanent. At times, ``no-action'' letters provide market 
participants with guidance on how the Enforcement Division 
staff of the CFTC would act in the event of market emergencies 
or would interpret recently proposed rules, at least in the 
short term. However, it appears that over the past year, staff 
``no-action'' letters have become commonplace to revise the 
implementation of key regulations of Dodd-Frank, and as such do 
not require a vote of the Commission. Additionally, regardless 
of a designation as permanent, ``no-action'' letters are still 
non-binding in the legal sense that CFTC staff could decide to 
withdraw the letter at anytime or the Commission could take a 
different position and overrule the letter.
    On July 23, 2013, at a hearing entitled ``The Future of the 
CFTC: Commission Perspectives,'' CFTC Commissioner Scott 
O'Malia provided the following testimony with respect to 
problems with this approach:

          . . . [i]nstead of undertaking Commission action to 
        amend problematic rules, CFTC staff has issued an 
        unprecedented number of no-action letters, some of 
        which are indefinite and have no expiration. So far, 
        CTFC staff has issued over 100 no-action letters 
        granting relief from its new regulations under Dodd-
        Frank, and I won't be surprised if this number 
        continues to grow. No-action letters are not voted on 
        by the Commission and are not published in the Federal 
        Register. They do not include comment periods and many 
        impose conditions on affected parties. This process is 
        at odds with basic principles of the APA, like public 
        participation and the opportunity to be heard. It also 
        goes against President Obama's Executive Orders Nos. 
        13563 and 13579, mandating that administrative agencies 
        ``create an unprecedented level of openness in 
        Government'' and ``establish a system of transparency, 
        public participation, and collaboration.''

    In order to bring policy making back to a more open and 
transparent manner, Section 206 requires that the Commission be 
provided 7 days notice before any division or office of the 
Commission issues a response to a formal, written petition for 
an exemptive, no-action or interpretive letter. The Committee 
would view any attempt to needlessly delay providing notice to 
the Commission until a regulatory deadline or need for no-
action relief is imminent (so as to avoid the statutorily 
required 7 day review period) as a violation of the 
requirements contained in Section 206.
    After receiving notice, any member of the Commission may 
request a meeting of the Commission to further consider the 
staff-proposed action, and if the Commission decides to hold 
the meeting by majority vote, the matter may not be issued 
until the meeting has concluded. The 7 day notice requirement 
can be waived by a majority vote of the Commission, but only if 
the Commission determines that requiring such notice would be 
impracticable, unnecessary, or contrary to the public interest.

Section 207--Strategic technology plan

    On July 23, 2013, at a hearing entitled ``The Future of the 
CFTC: Commission Perspectives,'' Commissioner Scott O'Malia 
provided the following testimony with respect to the need for 
provisions the Committee included in Section 207:

          A critically important component to any solution for 
        the Commission's approach to its greatly expanded 
        mission is the use of technology in order to accept, 
        sort, aggregate, and analyze the new sources of market 
        information provided for under the Dodd-Frank Act. I'd 
        like to highlight two major challenges in data and 
        technology: (1) problems faced by market participants 
        in the swap data reporting rules and (2) problems faced 
        by the Commission in understanding the massive data 
        flows as a result of our enhanced oversight of the 
        swaps and futures markets . . . [g]iven the 
        Commission's expanded regulatory responsibilities, it 
        is imperative for the Commission to develop a 
        technology plan that can assist the Commission with 
        meeting its regulatory objective. I believe the 
        Commission must develop a five-year strategic plan that 
        is focused on technology, with annual milestones and 
        budgets. To keep up to speed with the challenges of 
        enhanced regulatory oversight, this technology plan 
        would require each CFTC division to develop a 
        technology budget that reflects the regulatory needs 
        and responsibilities of that particular division.

    In order to solve the problems enumerated by Commissioner 
O'Malia, Section 207 requires the Commission to develop and 
file a strategic technology plan every 5 years with the House 
and Senate Agriculture Committees. The plan shall include a 
detailed technology strategy focused on market surveillance and 
risk detection, market data collection, aggregation, 
interpretation, normalization, standardization, harmonization, 
streamlining, and internal management and protection of data 
collected by the Commission. The report must also include a 
detailed accounting of how appropriated funds provided for 
technology will be used, and set annual goals to be 
accomplished along with the annual budgets necessary to 
accomplish those goals.

Section 208--Internal risk controls

    On December 14, 2012, it was widely reported that the CME 
Group, Inc., wrote a letter to the CFTC expressing concern that 
confidential and sensitive market data had been shared with 
non-CFTC employees who then used the data to write academic 
papers. CME attorneys claimed that the use of the data for the 
preparation of non-Commission sponsored publications was a 
violation of federal law meant to protect trade secrets. At 
least two academic papers written on the subject of high-
frequency trading were either co-written or advised by Andrei 
Kirilenko during his time as the CFTC Chief Economist. Upon 
leaving the CFTC in late 2012, Kirilenko took a position at 
MIT. As a result of the CME letter and corresponding internal 
investigation, the CFTC halted the research program which 
allowed outside academic researchers and economists almost 
unlimited access to proprietary trading information across 
various markets and the CFTC OIG launched an internal 
investigation.
    On July 23, 2013, at a hearing entitled ``The Future of the 
CFTC: Commission Perspectives,'' Commissioner Scott O'Malia 
provided the following testimony:

          Currently the Commission's Inspector General is 
        investigating whether or not market data was properly 
        controlled by the Office of the Chief Economist when 
        visiting scholars/contractors were assisting the Office 
        of the Chief Economist in research efforts. While I 
        support collaborative study programs that bring in new 
        and innovative thinking, it is vital that the 
        Commission has policies and procedures in place to 
        protect against the illegal release of market data.

    On March 21, 2014, a heavily redacted version of the CFTC's 
OIG report was released to the public. In this report, the OIG 
found that:

          The administrative review revealed that there had 
        been poor recordkeeping with regard to the so-called 
        ``on-boarding'' process for OCE economists. The 
        deficiencies included inadequate documentation of 
        security clearances, issues regarding nondisclosure 
        agreements, and non-submission of employment data to 
        the National Finance Center, as well as incomplete 
        personnel forms, one contract lacking the contractor's 
        signature, and other administrative errors. There were 
        no indications of fraud by OCE economists, or that OCE 
        economists were not actually appointed by the Chief 
        Economist, just a number of administrative errors 
        pertaining to the Agency's so-called on-boarding 
        process. The review also uncovered information security 
        concerns. Specifically, personally owned external hard 
        drives and thumb drives were found in close vicinity to 
        the computers that served the OCE economists. In 
        addition, badges for former CFTC OCE economists were 
        located in the Chief Economist's desk.

    With respect to the potentially harmful data breaches that 
occurred at the CFTC and the need to correct them to ensure 
integrity of the marketplace, the OIG's report concluded that:

          We agree that the physical and information technology 
        concerns exist; however, they are Agency-wide, and are 
        currently being addressed at least in part in 
        connection with an OIG audit of CFTC's Fiscal Year 2013 
        implementation of the Federal Information Security 
        Management Act. The absence of controls is significant: 
        lacking a reliable way to determine whether 
        confidential information was improperly taken from the 
        CFTC, we will not jump to the conclusion that 
        misconduct did or did not occur based on contradictory 
        opinions of Agency employees. We can make no finding.

    To guard against these sorts of leaks, this section 
requires the Commission, led by the Chief Economist, to develop 
internal risk control mechanisms to safeguard the storage and 
privacy of market data by the Commission. Special attention 
should be given to market data sharing agreements and academic 
research performed at the Commission using market data. The 
Commission shall report to the authorizing congressional 
committees on progress made in implementing the internal risk 
controls 60 days after enactment, and again 120 days after 
enactment of the Act.

Section 209--Subpoena duration and renewal

    On July 23, 2013, at a hearing entitled ``The Future of the 
CFTC: Commission Perspectives,'' Commissioner Scott O'Malia 
provided the following testimony with respect to his concerns 
on the operation of the Commission's subpoena power:

          CFTC regulations ensure that the Commission is made 
        accountable for all enforcement matters by requiring a 
        Commission order to initiate investigations by the 
        Division of Enforcement. Just recently, I dissented on 
        an enforcement matter that involved a radical 
        procedural shift in the authorization of investigations 
        for potential violations of the CEA. What I found 
        troubling is that the Division of Enforcement sought to 
        circumvent the powers of the Commission by proposing to 
        bring investigations on a summary basis through the use 
        of an ``absent objection'' process. I was surprised to 
        be advised by the Commission's Office of General 
        Counsel that the Commission cannot block a staff-
        initiated absent objection circulation because this 
        process is not a Commission ``vote.'' To ensure 
        fairness in terms of true separation of functions, 
        Congress gave power to the members of the Commission to 
        reconsider CFTC staff recommendations by independently 
        assessing facts and legal justifications for initiating 
        various actions. In other words, Congress intended that 
        any decision to bring an investigation by the CFTC is 
        reflective of a shared opinion of the majority of the 
        Commissioners, rather than a unilateral assessment by 
        the Division of Enforcement's staff. The new absent 
        objection process described by the Office of General 
        Counsel is a clear abrogation of the Commission's 
        powers and a violation of Commission rules relating to 
        investigations.

    In order to ensure continuing investigations by the 
Commission's Division of Enforcement are warranted and properly 
reviewed by the Commission, Section 209 would ensure that the 
Commission complies with controlling Supreme Court precedent on 
the issuance and duration of subpoenas. As such, a subpoena 
authorized to be issued by the Commission shall state in good 
faith the purpose of the investigation, shall require only 
information reasonably relevant to the purpose of the 
investigation and shall be for a finite period. Renewal of a 
subpoena may only occur by Commission vote.

Section 210--Implementation plan for commission rulemakings

    In order to increase market certainty through the 
rulemaking process, Section 210 would require that all proposed 
rules include a plan for when and how long a comment period 
will be open, and when compliance with the final rule will be 
required. As Commissioner O'Malia stated when he testified 
before the Committee on July 23, 2013, ``it is virtually 
impossible to achieve good policy outcomes without establishing 
a sound process for reaching those outcomes. Unfortunately, the 
Commission has failed to do so in our implementation of the 
Dodd-Frank Act.'' The Committee does not intend for these 
requirements to become duplicative of requirements already 
demanded under the Administrative Procedure Act (APA).

Section 211--Applicability of notice and comment requirements of the 
        Administrative Procedure Act to guidance voted on by the 
        Commission

    As the Committee learned from numerous witnesses through 
testimony and saw firsthand through press reports and letters 
from foreign financial regulators, the Commission voted on 
guidance to interpret key provisions of the cross-border 
provisions of the Dodd-Frank Act instead of conducting 
rulemaking under the APA, which requires notice and comment. 
The Commission now has a set of guidelines to govern the cross-
border application of the Dodd-Frank Act, setting up probable 
legal conflicts between the CFTC's guidance and the SEC's 
proposed cross border rule that followed all requirements of 
the law and allowed for extensive public comment. Concerns 
about ``guidance'' that has the practical effect of an official 
rulemaking was described in testimony before the Committee on 
March 14, 2013, by the Hon. Kenneth E. Bentsen, Acting 
President and CEO, SIFMA, when he stated that:

          [E]qually significant, the CFTC has issued its 
        proposed cross-border release as ``guidance'' rather 
        than as formal rulemaking process subject to the 
        Administrative Procedure Act. By doing so, the CFTC 
        avoids the need to conduct a cost-benefit analysis, 
        which is critical for ensuring that the CFTC 
        appropriately weighs any costs imposed on market 
        participants as a result of implementing an overly 
        broad and complex U.S. person definition against 
        perceived benefits.

    On July 23, 2013, at a hearing entitled ``The Future of the 
CFTC: Commission Perspectives,'' Commissioner Scott O'Malia 
voiced additional concerns in testimony about the approach 
taken by the Commission:

          I believe that putting the label of ``guidance'' on 
        this document did not change its content or 
        consequences. The courts have held that when agency 
        action has the practical effect of binding parties 
        within its scope, it has the force and effect of law, 
        regardless of the name it is given. Legally binding 
        regulations that impose new obligations on affected 
        parties--``legislative rules''--must conform to the 
        APA. As a threshold matter, the cross-border swaps 
        guidance rests on thin statutory authority, because 
        Congress limited the extraterritorial application of 
        U.S. swap regulations, and therefore the CFTC's 
        jurisdiction, to foreign activities that have a 
        ``direct and significant'' impact on the U.S. economy. 
        Despite the statutory limitation, the cross-border 
        swaps guidance sets out standards that it applies to 
        virtually all cross-border activities in the swaps 
        markets, in a broad manner similar to the application 
        of the swap dealer definition to market participants. 
        For practical reasons, market participants cannot 
        afford to ignore detailed regulations imposed upon 
        their activities that may result in enforcement or 
        other penalizing action. Accordingly, I believe that 
        the cross-border swaps guidance has a practical binding 
        effect on market participants and it should have been 
        promulgated as a legislative rule under the APA. 
        Similarly, I cannot support any future interpretive 
        guidance that would be more properly issued as a 
        notice-and-comment rulemaking.

    In an attempt to address concerns highlighted above, 
Section 211 applies the notice and comment provisions of the 
APA to any future guidance voted on and issued by the 
Commission. Importantly, to ensure responsiveness to the 
regulated marketplace, the Committee intends that Section 211 
only apply to guidance voted on by the CFTC Commissioners (and 
therefore officially issued by the CFTC) but not to any 
guidance provided by the Commission staff in response to 
inquiries from the public.

Section 212--Judicial review of Commission rules

    In order to address concerns from stakeholders to fairly 
and efficiently challenge CFTC final rules in court, Section 
212 aligns the CFTC judicial review process with that of the 
U.S. Securities and Exchange Commission (SEC) set forth in 
section 25(b) of the Securities Exchange Act of 1934. As such, 
the Committee intends for Section 212 to allow review of a CFTC 
final rule may be obtained directly with the United States 
Court of Appeals for the District of Columbia Circuit or the 
U.S. Court of Appeals for the circuit where the adversely 
affected party resides or situates its principal place of 
business.
    On July 24, 2013, at a hearing entitled ``The Future of the 
CFTC: End-User Perspectives,'' Mr. Andrew Soto, Senior Managing 
Counsel, Regulatory Affairs, American Gas Association (AGA), 
provided the following testimony with respect to the need for 
provisions included in Section 212:

          First, AGA recommends that Congress amend the 
        Commodity Exchange Act (CEA) to provide clear and 
        defined procedures for challenging CFTC rules and 
        orders in court. Although the CEA currently contains 
        provisions allowing for judicial review by a U.S. Court 
        of Appeals of certain agency actions, the provisions 
        are very limited and provide no defined avenue for 
        challenging CFTC rules and orders generally. A broad 
        judicial review provision allowing for the direct 
        challenge of CFTC rules and orders would have both a 
        rehabilitative effect on the current process and a 
        prophylactic effect on future agency action. Specific 
        judicial review provisions would allow interested 
        parties to challenge particular agency actions that are 
        unreasonable and hold the CFTC accountable for its 
        decisions. In addition, judicial review would have an 
        important prophylactic effect by requiring the agency 
        to think through its decisions before they are made to 
        ensure that they are sustainable in court, thus 
        enabling the agency to be a more conscientious and 
        prudent regulator. In the absence of specific judicial 
        review provisions, the general review provisions of the 
        Administrative Procedure Act (APA) would apply, 
        requiring parties seeking to challenge CFTC rules to 
        file a claim before a U.S. District Court, move for 
        summary judgment (as a hearing would likely be 
        unnecessary), obtain a ruling and then, if necessary, 
        seek further judicial review before a U.S. Court of 
        Appeals. In the recent litigation over the CFTC's 
        position limits rule, which followed the review 
        provisions of the APA, the CFTC's General Counsel 
        acknowledged the efficiency and desirability of direct 
        review by the U.S. Court of Appeals of agency rules, 
        and stated that the agency would have no objection to 
        such direct review assuming Congress were to authorize 
        it. Accordingly, provisions allowing for direct review 
        by a U.S. Court of Appeals of rules and orders of the 
        CFTC would enable both the industry and the agency to 
        benefit from the administrative economy, procedural 
        efficiency and certainty of having a dedicated forum in 
        which agency decisions are reviewed.

Section 213--GAO study on adequacy of CFTC resources

    In each of the five full and subcommittee hearings held 
this Congress related to the CFTC, some witnesses have spoken 
out for additional resources for the Commission. Whether it is 
from the Commission itself, end-user groups, or regulated 
market participants, varying levels of concern have been voiced 
that the CFTC lacks sufficient funds to do the job that 
Congress has asked. To obtain an impartial view on whether more 
resources are necessary, the Committee charges the Government 
Accountability Office (GAO) to conduct a study to look into 
this question.
    The Committee would expect the GAO, as part of its study, 
to also closely examine and report on whether the CFTC has 
efficiently used its resources related to hiring and firing 
practices within the Commission, especially related to 
positions that are duplicative, outdated in their purpose, or 
underutilized. The efficient expenditure of funds related to 
computer programs, technology upgrades, consultants, and other 
noteworthy usages of Commission funds should also be closely 
examined.

                        Title 3--End-User Relief


        SUBTITLE A--END-USER EXEMPTION FROM MARGIN REQUIREMENTS

Section 311--End-user margin requirements

    Section 311 amends Section 4s(e) of the Commodity Exchange 
Act (CEA) as added by Section 731 of the Dodd-Frank Act to 
provide an explicit exemption from margin requirements for swap 
transactions involving end-users that qualify for the clearing 
exception under 2(h)(7)(A).
    ``End-users'' are thousands of companies across the United 
States who utilize derivatives to hedge risks associated with 
their day-to-day operations, such as fluctuations in the prices 
of raw materials. Because these businesses do not pose systemic 
risk, Congress intended that the Dodd-Frank Act provide certain 
exemptions for end-users to ensure they were not unduly 
burdened by new margin and capital requirements associated with 
their derivatives trades that would hamper their ability to 
expand and create jobs.
    Indeed, Title VII of the Dodd-Frank Act includes an 
exemption for non-financial end-users from centrally clearing 
their derivatives trades. This exemption permits end-users to 
continue trading directly with a counterparty, (also known as 
trading ``bilaterally,'' or over-the-counter (OTC)) which means 
their swaps are negotiated privately between two parties and 
they are not executed and cleared using an exchange or 
clearinghouse. Generally, it is common for non-financial end-
users, such as manufacturers, to avoid posting cash margin for 
their OTC derivative trades. End-users generally will not post 
margin because they are able to negotiate such terms with their 
counterparties due to the strength of their own balance sheet 
or by posting non-cash collateral, such as physical property. 
End-users typically seek to preserve their cash and liquid 
assets for reinvestment in their businesses. In recognition of 
this common practice, the Dodd-Frank Act included an exemption 
from margin requirements for end-users for OTC trades.
    Section 731 of the Dodd-Frank Act (and Section 764 with 
respect to security-based swaps) requires margin requirements 
be applied to swap dealers and major swap participants for 
swaps that are not centrally cleared. For swap dealers and 
major swap participants that are banks, the prudential banking 
regulators (such as the Federal Reserve or Federal Deposit 
Insurance Corporation) are required to set the margin 
requirements. For swap dealers and major swap participants that 
are not banks, the CFTC is required to set the margin 
requirements. Both the CFTC and the banking regulators have 
issued their own rule proposals establishing margin 
requirements pursuant to Section 731.
    Following the enactment of the Dodd-Frank Act in July of 
2010, uncertainty arose regarding whether this provision 
permitted the regulators to impose margin requirements on swap 
dealers when they trade with end-users, which could then result 
in either a direct or indirect margin requirement on end-users. 
Subsequently, Senators Blanche Lincoln and Chris Dodd sent a 
letter to then-Chairmen Barney Frank and Collin Peterson on 
June 30, 2010, to set forth and clarify congressional intent, 
stating:

          The legislation does not authorize the regulators to 
        impose margin on end-users, those exempt entities that 
        use swaps to hedge or mitigate commercial risk. If 
        regulators raise the costs of end-user transactions, 
        they may create more risk. It is imperative that the 
        regulators do not unnecessarily divert working capital 
        from our economy into margin accounts, in a way that 
        would discourage hedging by end-users or impair 
        economic growth.

    In addition, statements in the legislative history of 
section 731 (and Section 764) suggests that Congress did not 
intend, in enacting this section, to impose margin requirements 
on nonfinancial end-users engaged in hedging activities, even 
in cases where they entered into swaps with swap entities.
    In the CFTC's proposed rule on margin, it does not require 
margin for un-cleared swaps when non-bank swap dealers transact 
with non-financial end-users. However, the prudential banking 
regulators proposed rules would require margin be posted by 
non-financial end-users above certain established thresholds 
when they trade with swap dealers that are banks. Many of end-
users' transactions occur with swap dealers that are banks, so 
the banking regulators' proposed rule is most relevant, and 
therefore of most concern, to end-users.
    By the prudential banking regulators' own terms, their 
proposal to require margin stems directly from what they view 
to be a legal obligation under Title VII. The plain language of 
section 731 provides that the Agencies adopt rules for covered 
swap entities imposing margin requirements on all non-cleared 
swaps. Despite clear congressional intent, those sections do 
not, by their terms, exclude a swap with a counterparty that is 
a commercial end-user. By providing an explicit exemption under 
Title VII through enactment of this provision, the prudential 
regulators will no longer have a perceived legal obligation, 
and the congressional intent they acknowledge in their proposed 
rule will be implemented.
    The Committee notes that in September of 2013, the 
International Organization of Securities Commissions (IOSCO) 
and the Bank of International Settlements published their final 
recommendations for margin requirements for uncleared 
derivatives. Representatives from a number of U.S. regulators, 
including the CFTC and the Board of Governors of the Federal 
Reserve participated in the development of those margin 
requirements, which are intended to set baseline international 
standards for margin requirements. It is the intent of the 
Committee that any margin requirements promulgated under the 
authority provided in Section 4s of the Commodity Exchange Act 
should be generally consistent with the international margin 
standards established by IOSCO.
    On March 14, 2013, at a hearing entitled ``Examining 
Legislative Improvements to Title VII of the Dodd-Frank Act,'' 
the following testimony was provided to the Committee with 
respect to provisions included in Section 311:

          In approving the Dodd-Frank Act, Congress made clear 
        that end-users were not to be subject to margin 
        requirements. Nonetheless, regulations proposed by the 
        Prudential Banking Regulators could require end-users 
        to post margin. This stems directly from what they view 
        to be a legal obligation under Title VII. While the 
        regulations proposed by the CFTC are preferable, they 
        do not provide end-users with the certainty that 
        legislation offers. According to a Coalition for 
        Derivatives End-Users survey, a 3% initial margin 
        requirement could reduce capital spending by as much as 
        $5.1 to $6.7 billion among S&P 500 companies alone and 
        cost 100,000 to 130,000 jobs. To shed some light on 
        Honeywell's potential exposure to margin requirements, 
        we had approximately $2 billion of hedging contracts 
        outstanding at year-end that would be defined as a swap 
        under Dodd-Frank. Applying 3% initial margin and 10% 
        variation margin implies a potential margin requirement 
        of $260 million. Cash deposited in a margin account 
        cannot be productively deployed in our businesses and 
        therefore detracts from Honeywell's financial 
        performance and ability to promote economic growth and 
        protect American jobs.--Mr. James E. Colby, Assistant 
        Treasurer, Honeywell International Inc.

    On May 21, 2013, at a hearing entitled ``The Future of the 
CFTC: Market Perspectives,'' Mr. Stephen O'Connor, Chairman, 
ISDA, provided the following testimony with respect to 
provisions included in Section 311:

          Perhaps most importantly, we do not believe that 
        initial margin will contribute to the shared goal of 
        reducing systemic risk and increasing systemic 
        resilience. When robust variation margin practices are 
        employed, the additional step of imposing initial 
        margin imposes an extremely high cost on both market 
        participants and on systemic resilience with very 
        little countervailing benefit. The Lehman and AIG 
        situations highlight the importance of variation 
        margin. AIG did not follow sound variation margin 
        practices, which resulted in dangerous levels of credit 
        risk building up, ultimately leading to its bailout. 
        Lehman, on the other hand, posted daily variation 
        margin, and while its failure caused shocks in many 
        markets, the variation margin prevented outsized losses 
        in the OTC derivatives markets. While industry and 
        regulators agree on a robust variation margin regime 
        including all appropriate products and counterparties, 
        the further step of moving to mandatory IM [initial 
        margin] does not stand up to any rigorous cost-benefit 
        analysis.

    Based on the extensive background that accompanies the 
statutory change provided explicitly in Section 311, the 
Committee intends that initial and variation margin 
requirements cannot be imposed on uncleared swaps entered into 
by cooperative entities if they similarly qualify for the 
CFTC's cooperative exemption with respect to cleared swaps. 
Cooperative entities did not cause the financial crisis and 
should not be required to incur substantial new costs 
associated with posting initial and variation margin to 
counterparties. In the end, these costs will be borne by their 
members in the form of higher prices and more limited access to 
credit, especially in underserved markets, such as in rural 
America. Therefore, the Committee's clear intent when drafting 
Section 311 was to prohibit the CFTC and prudential regulators, 
including the Farm Credit Administration, from imposing margin 
requirements on cooperative entities.

                   SUBTITLE B--INTER-AFFILIATE SWAPS

Sec. 321--Treatment of affiliate transactions

    ``Inter-affiliate'' swaps are contracts executed between 
entities under common corporate ownership. Section 321 would 
amend the Commodity Exchange Act to provide an exemption for 
inter-affiliate swaps from the clearing and execution 
requirements of the Dodd-Frank Act so long as the swap 
transaction hedges or mitigates the commercial risk of an 
entity that is not a financial entity. The section also 
requires that an ``appropriate credit support measure or other 
mechanism'' be utilized between the entity seeking to hedge 
against commercial risk if it transacts with a swap dealer or 
major swap participant, but this credit support measure 
requirement is effective prospectively from the date H.R. 4413 
is enacted into law.
    Importantly, with respect to Section 321's use of the 
phrase ``credit support measure or other mechanism,'' the 
Committee unequivocally does not intend for the CFTC to 
interpret this statutory language as a mandate to require 
initial or variation margin for swap transactions. The 
Committee intends for the CFTC to recognize that credit support 
measures and other mechanisms have been in use between 
counterparties and affiliates engaged in swap transactions for 
many years in different formats, and therefore, there is no 
need to engage in a rulemaking to define such broad 
terminology.
    Section 321 originated from the need to provide relief for 
a parent company that has multiple affiliates within a single 
corporate group. Individually, these affiliates may seek to 
offset their business risks through swaps. However, rather than 
having each affiliate separately go to the market to engage in 
a swap with a dealer counterparty, many companies will employ a 
business model in which only a single or limited number of 
entities, such as a treasury hedging center, face swap dealers. 
These designated external facing entities will then allocate 
the transaction and its risk mitigating benefits to the 
affiliate seeking to mitigate its underlying risk.
    Companies that use this business model argue that it 
reduces the overall credit risk a corporate group poses to the 
market because they can net their positions across affiliates, 
reducing the number of external facing transactions overall. In 
addition, it permits a company to enhance its efficiency by 
centralizing its risk management expertise in a single or 
limited number of affiliates.
    Should these inter-affiliate transactions be treated as all 
other swaps, they could be subject to clearing, execution and 
margin requirements. Companies that use inter-affiliate swaps 
are concerned that this could substantially increase their 
costs, without any real reduction in risk in light of the fact 
that these swaps are purely for internal use. For example, 
these swaps could be ``double-margined''--when the centralized 
entity faces an external swap dealer, and then again when the 
same transaction is allocated internally to the affiliate that 
sought to hedge the risk.
    The uncertainty that exists regarding the treatment of 
inter-affiliate swaps spans multiple rulemakings that have been 
proposed or that will be proposed pursuant to the Dodd-Frank 
Act. Section 321 provides certainty and clarity as to what 
inter-affiliate transactions are and how they are not to be 
regulated as swaps when the parties to the transaction are 
under common control.
    On March, 14, 2013, at a hearing entitled ``Examining 
Legislative Improvements to Title VII of the Dodd-Frank Act,'' 
the following testimony was provided with respect to efforts to 
address the problem with inter-affiliate swaps:

          [I]nter-affiliate swaps provide important benefits to 
        corporate groups by enabling centralized management of 
        market, liquidity, capital and other risks inherent in 
        their businesses and allowing these groups to realize 
        hedging efficiencies. Since the swaps are between 
        affiliates, rather than with external counterparties, 
        they pose no systemic risk and therefore there are no 
        significant gains to be achieved by requiring them to 
        be cleared or subjecting them to margin posting 
        requirements. In addition, these swaps are not market 
        transactions and, as a result, requiring market 
        participants to report them or trade them on an 
        exchange or swap execution facility provides no 
        transparency benefits to the market--if anything, it 
        would introduce useless noise that would make Dodd-
        Frank's transparency rules less helpful.--Hon. Kenneth 
        E. Bentsen, Acting President and CEO, SIFMA

          This legislation would ensure that inter-affiliate 
        derivatives trades, which take place between affiliated 
        entities within a corporate group, do not face the same 
        demanding regulatory requirements as market-facing 
        swaps. The legislation would also ensure that end-users 
        are not penalized for using central hedging centers to 
        manage their commercial risk. There are two serious 
        problems facing end-users that need addressing. First, 
        under the CFTC's proposed inter-affiliate swap rule, 
        financial end-users would have to clear purely internal 
        trades between affiliates unless they posted variation 
        margin between the affiliates or met specific 
        requirements for an exception [i]f these end-users have 
        to post variation margin, there is little point to 
        exempting inter-affiliate trades from clearing 
        requirements, as the costs could be similar. And let's 
        not forget the larger point--internal end-user trades 
        do not create systemic risk and, hence, should not be 
        regulated the same as those trades that do. Second, 
        many end-users--approximately one-quarter of those we 
        surveyed--execute swaps through an affiliate. This of 
        course makes sense, as many companies find it more 
        efficient to manage their risk centrally, to have one 
        affiliate trading in the open market, instead of dozens 
        or hundreds of affiliates making trades in an 
        uncoordinated fashion. Using this type of hedging unit 
        centralizes expertise, allows companies to reduce the 
        number of trades with the street and improves pricing. 
        These advantages led me to centralize the treasury 
        function at Westinghouse while I was there. However, 
        the regulators' interpretation of the Dodd-Frank Act 
        confronts nonfinancial end-users with a choice: either 
        dismantle their central hedging centers and find a new 
        way to manage risk, or clear all of their trades. 
        Stated another way, this problem threatens to deny the 
        end-user clearing exception to those end-users who have 
        chosen to hedge their risk in an efficient, highly-
        effective and risk-reducing way. It is difficult to 
        believe that this is the result Congress hoped to 
        achieve.--Ms. Marie N. Hollein, C.T.P., President and 
        CEO, Financial Executives International, on behalf of 
        the Coalition for Derivatives End-Users

     SUBTITLE C--INDEMNIFICATION REQUIREMENTS RELATED TO SWAP DATA 
                              REPOSITORIES

Section 331--Indemnification requirements

    Section 331 strikes the indemnification requirements found 
in Sections 725 and 728 of the Dodd-Frank Act related to swap 
data gathered by swap data repositories (SDRs) and derivatives 
clearing organizations (DCOs). The section does maintain, 
however, that before an SDR, DCO, or the CFTC shares 
information with domestic or international regulators, they 
have to receive a written agreement stating that the regulator 
will abide by certain confidentiality agreements.
    Swap data repositories serve as electronic warehouses for 
data and information regarding swap transactions. Historically, 
SDRs have regularly shared information with foreign regulators 
as a means to cooperate, exchange views and share information 
related to OTC derivatives CCPs and trade repositories. Prior 
to Dodd-Frank, international guidelines required regulators to 
maintain the confidentiality of information obtained from SDRs, 
which facilitated global information sharing that is critical 
to international regulators' ability to monitor for systemic 
risk.
    Under Sections 725 and 728 of the Dodd-Frank Act, when a 
foreign regulator requests information from a U.S registered 
SDR or DCO, the SDR or DCO is required to receive a written 
agreement from the foreign regulator stating that it will abide 
by certain confidentiality requirements and will ``indemnify'' 
the Commissions for any expenses arising from litigation 
relating to the request for information. In short, the concept 
of ``indemnification''--requiring a party to contractually 
agree to pay for another party's possible litigation expenses--
is only well established in U.S. tort law, and does not exist 
in practice or in legal concept in foreign jurisdictions.
    These indemnification provisions--which were not included 
in the financial reform bill passed by the House of 
Representatives in December 2009--threaten to make data sharing 
arrangements with foreign regulators unworkable. Foreign 
regulators will most likely refuse to indemnify U.S. regulators 
for litigation expenses in exchange for access to data. As a 
result, foreign regulators may establish their own data 
repositories and clearing organizations to ensure they have 
access to data they need to perform their supervisory duties. 
This would lead to the creation of multiple databases, 
needlessly duplicative data collection efforts, and the 
possibility of inconsistent or incomplete data being collected 
and maintained across multiple jurisdictions.
    In testimony before the House Committee on Financial 
Services in March of 2012, the then-Director of International 
Affairs for the SEC, Mr. Ethiopis Tafara, endorsed a 
legislative solution to the problem, stating that:

          The SEC recommends that Congress consider removing 
        the indemnification requirement added by the Dodd-Frank 
        Act . . . the indemnification requirement interferes 
        with access to essential information, including 
        information about the cross-border OTC derivatives 
        markets. In removing the indemnification requirement, 
        Congress would assist the SEC, as well as other U.S. 
        regulators, in securing the access it needs to data 
        held in global trade repositories. Removing the 
        indemnification requirement would address a significant 
        issue of contention with our foreign counterparts . . .

    At the same hearing, the then-General Counsel for the CFTC, 
Mr. Dan Berkovitz, acknowledged that they too have received 
growing concerns from foreign regulators, but that they intend 
to issue interpretive guidance, stating that ``access to swap 
data reported to a trade repository that is registered with the 
CFTC will not be subject to the indemnification provisions of 
the Commodity Exchange Act if such trade repository is 
regulated pursuant to foreign law and the applicable requested 
data is reported to the trade repository pursuant to foreign 
law.''
    To provide clarity to the marketplace and remove any legal 
barriers to swap data being easily shared with various domestic 
and foreign regulatory agencies, this section would remove the 
indemnification requirements found in Sections 725 and 728 of 
the Dodd-Frank Act related to swap data gathered by SDRs and 
DCOs.
    On March, 14, 2013, at a hearing entitled ``Examining 
Legislative Improvements to Title VII of the Dodd-Frank Act,'' 
Mr. Larry Thompson, Managing Director and General Counsel, the 
Depository Trust and Clearing Corporation, provided the 
following testimony with respect to provisions of H.R. 742, 
which were included in Section 331:

          The Swap Data Repository and Clearinghouse 
        Indemnification Correction Act of 2013 would make U.S. 
        law consistent with existing international standards by 
        removing the indemnification provisions from sections 
        728 and 763 of Dodd-Frank. DTCC strongly supports this 
        legislation, which we believe represents the only 
        viable solution to the unintended consequences of 
        indemnification. H.R. 742 is necessary because the 
        statutory language in Dodd-Frank leaves little room for 
        regulators to act without U.S. Congressional 
        intervention. This point was reinforced in the CFTC/SEC 
        January 2012 Joint Report on International Swap 
        Regulation, which noted that the Commissions ``are 
        working to develop solutions that provide access to 
        foreign regulators in a manner consistent with the DFA 
        and to ensure access to foreign-based information.'' It 
        indicates legislation is needed, saying that ``Congress 
        may determine that a legislative amendment to the 
        indemnification provision is appropriate.'' H.R. 742 
        would send a clear message to the international 
        community that the United States is strongly committed 
        to global data sharing and determined to avoid 
        fragmenting the current global data set for over-the-
        counter (OTC) derivatives. By amending and passing this 
        legislation to ensure that technical corrections to 
        indemnification are addressed, Congress will help 
        create the proper environment for the development of a 
        global trade repository system to support systemic risk 
        management and oversight.

               SUBTITLE D--RELIEF FOR MUNICIPAL UTILITIES

Sections 341, 342, 343--Transactions with the utility special entities; 
        utility special entity defined; utility operations-related swap

    Sections 341, 342, and 343 of H.R. 4413 would preserve the 
ability of government-owned utilities, classified in the bill 
as ``utility special entities,'' to have uninterrupted and 
cost-effective access to the customized, non-financial 
commodity swaps that utility special entities have used for 
years. In effect, the counterparties of utility special 
entities would now be subject to the much higher $8 billion de 
minimis swap dealer registration threshold. Importantly, the 
legislation does not include an exemption for interest rate, 
credit, equities, currency asset classes, or agriculture 
commodities, other than commodities used for electric energy or 
natural gas production or generation. Instead, H.R. 4413 
creates a new category of swap known as the ``utility 
operations-related swap'' and provides relief to counterparties 
of utility special entities only when those specific types of 
swaps are used. To ensure transparency, the bill still requires 
all special entity swap transactions to be reported to the 
CFTC.
    On May 23, 2012, the CFTC published a rule further defining 
who is considered a ``swap dealer'' under the Dodd-Frank Act, 
which directly impacted many swap counterparties of government-
owned non-profit utilities. The rule became effective on July 
23, 2012, with registration as a swap dealer not being required 
until on or after October 12, 2012. The CFTC's swap dealer rule 
includes an exception for entities from having to register as a 
swap dealer if their outstanding annual gross notional swap 
positions do not exceed either of the two following thresholds:
          1. $3 billion (subject to an initial three year 
        phase-in level of $8 billion), referred to as the 
        ``general de minimis threshold''; and
          2. $25 million with regard to swaps where an entity's 
        counterparty is a ``special entity'' as defined in 
        Section 731 of the Dodd-Frank Act, referred to as the 
        ``special entity de minimis threshold.''
    On October 12, 2012, after several public power groups 
petitioned the CFTC to relieve their counterparties from 
compliance with the much lower registration threshold, CFTC 
staff issued a non-binding ``no-action relief'' letter instead, 
which increased the ``special entity sub-threshold'' to $800 
million from $25 million.
    As mentioned above, a ``special entity'' is broadly defined 
in Section 731 of the Dodd-Frank Act to include any government-
owned enterprise, such as public school boards, state 
governments, and any publicly-owned producer or supplier of 
electricity or natural gas. Casting such a broad net in 
defining ``special entity'' was a policy decision made by the 
drafters of the Dodd-Frank Act which sought to protect 
taxpayers from the use of complex financial swaps by their 
municipality. For example, the use of fixed-for-floating 
interest rate swaps tied to municipal bonds issued by Jefferson 
County, Alabama, contributed to the county's multi-billion 
dollar debt that rapidly expanded during the 2008 financial 
crisis, later resulting in what was at the time the largest 
municipal bankruptcy filing in U.S. history.
    Prior to enactment of the Dodd-Frank Act, however, many 
publicly-owned utilities relied on their non-financial 
counterparties, such as natural gas producers, independent 
power generators, and investor-owned utility companies to enter 
into swaps in order to hedge against operational risks. Many of 
these utilities have heard from numerous counterparties who are 
evaluating their future business plans in light of the final 
CFTC rules. These counterparties are strictly limiting their 
business, or completely cutting all ties with utility special 
entities given the special entity sub-threshold and uncertainty 
surrounding the new regulatory regime for the swaps 
marketplace.
    Unless counterparties can determine with certainty that 
their swap activities with special entities will not result in 
them being classified as a ``swap dealer'' under the Dodd-Frank 
Act, it appears that numerous counterparties may avoid doing 
business with them altogether. This ultimately limits 
competition and forces special entities to do business with 
financial institutions or large swap dealers, which 
concentrates risk and may raise costs for many utility special 
entities eventually leading to increased costs for ratepayers. 
The Committee recognizes that on March 21, 2014, the Commission 
staff provided a ``no-action letter'' to utility special 
entities so they are not subjected to the $25 million de 
minimis threshold. However, permanent statutory relief that 
would be provided in Sections 341, 342, and 343 is still needed 
due to the questionable legal certainty contained in this--and 
all--CFTC no-action letters, which state that ``[a]s with all 
no-action letters, the Division retains the authority, in its 
discretion, to further condition, modify, suspend, terminate or 
otherwise restrict the terms of the no-action relief provided 
herein.''
    On May 22, 2014, the CFTC released a proposed rulemaking to 
permanently correct the missteps that would be corrected by 
Sections 341, 342, and 343. While a regulatory change is 
welcomed by the Committee, statutory certainty can provide 
millions of consumers across the country with greater certainty 
that their utility rates will not increase due to the Dodd-
Frank Act.
    On March, 14, 2013, at a hearing entitled ``Examining 
Legislative Improvements to Title VII of the Dodd-Frank Act,'' 
Mr. Terrance P. Naulty, General Manager and CEO, Owensboro 
Municipal Utilities, provided the following testimony with 
respect to the provisions included in Sections 341, 342, and 
343:

          Government-owned utilities depend on nonfinancial 
        commodity transactions, trade options, and ``swaps,'' 
        as well as the futures markets, to hedge commercial 
        risks that arise from their utility facilities, 
        operations, and public service obligations. Together, 
        nonfinancial commodity markets play a central role in 
        the ability of government-owned utilities to secure 
        electric energy, fuel for generation, and natural gas 
        supplies for delivery to consumers at reasonable and 
        stable prices . . . [t]he CFTC has said that it 
        retained the $25 million threshold in light of the 
        special protections that the Dodd-Frank Act affords to 
        special entities. However, the statute does not 
        require--even mention--special protections for special 
        entities in regard to the swap dealer definition. As 
        noted above, the law imposes requirements on swap 
        dealers and major swap participants advising or 
        entering into swaps with special entities. Nowhere does 
        the law mention deeming a participant to be a swap 
        dealer solely based on its volume of swaps with 
        government-owned entities. Government-owned utilities 
        understand the operations-related swap transactions 
        they use to manage their commercial risks and do not 
        need the special protections provided by the $25 
        million sub-threshold. In fact, and ironically, these 
        ``protections'' are likely to limit the ability of 
        these utilities to hedge operational and price risks 
        rather than to protect these utilities and their 
        customers from risk. On July 12, 2012, APPA, the Large 
        Public Power Council (LPPC), the American Public Gas 
        Association (APGA), the Transmission Access Policy 
        Study Group (TAPS), and the Bonneville Power 
        Administration (BPA), filed with the CFTC a ``Petition 
        for Rulemaking to Amend CFTC Regulation 1.3(ggg)(4).'' 
        . . . [t]he legislation [H.R. 1038] largely mirrors the 
        intent and effect of the NFP EEU petition to the CFTC, 
        providing narrowly targeted relief for operations-
        related swaps for government-owned utilities. 
        Specifically, the legislation would provide that the 
        CFTC, in making a determination to exempt a swap dealer 
        under the de minimis exception, shall treat a utility 
        operations-related swap with a utility special entity 
        the same as a utility operations-related swaps with any 
        entity that is not a special entity. . . . [t]he 
        legislation carefully defines which entities would 
        qualify as a ``utility special entity.'' It also 
        specifically defines the types of swaps that could and 
        could not be considered a ``utility operations-related 
        swap.'' For example, the legislation specifically 
        prohibits interest, credit, equity, and currency swaps 
        from being considered as a utility operations-related 
        swap. Likewise, except in relation to their use as a 
        fuel, commodity swaps in metal, agricultural, crude 
        oil, or gasoline would not qualify either. Finally, the 
        legislation also confirms that utility operations-
        related swaps are fully subject to swap reporting 
        requirements. When implemented, this legislation should 
        provide the certainty to nonfinancial entities that 
        they can enter into swap transactions with government-
        owned utilities without fear of being deemed a swap 
        dealer. It truly levels the playing field. And, it does 
        nothing to otherwise alter the CFTC's implementation of 
        the Dodd-Frank Act.

                 SUBTITLE E--END-USER REGULATORY RELIEF

Section 351--End-users not treated as financial entities

    Section 351 is intended to remove non-financial end-users 
that were unintentionally captured in the definition of 
``financial entity'' in Section 2(h)(7)(C) of the Commodity 
Exchange Act due to a cross-reference to Section 4(k) of the 
Bank Holding Company Act of 1956. By defining ``commercial 
market participants'' using longstanding CFTC terminology found 
in the Joint CFTC-SEC Rule Defining Swap (CFTC Reference: 77 FR 
48207) and current CFTC Regulations governing Trade Options 
(CFTC Regulations Part 32.3(a)(1)(ii)), the Committee seeks to 
provide narrow relief to these entities who are not traditional 
financial institutions that may incidentally be swept in to the 
Dodd-Frank regime simply because they engage in futures 
contracts, forward contracts, or commodity options which call 
for physical delivery of a commodity.
    On July 24, 2013, at a hearing entitled ``The Future of the 
CFTC: End-User Perspectives,'' Mr. Richard F. McMahon, Jr., 
Vice President, Edison Electric Institute (EEI), provided the 
following testimony with respect to the need for the provisions 
included in Section 351:

          The Dodd-Frank Act defines the term ``financial 
        entity'', in part, as an entity that is ``predominantly 
        engaged in activities that are in the business of 
        banking, or in activities that are financial in nature, 
        as defined in section 4(k) of the Bank Holding Company 
        Act of 1956.'' Incorporating banking concepts into a 
        definition that also applies to commercial commodity 
        market participants has had unintended consequences. 
        Unlike our members, banks and bank holding companies 
        generally cannot take or make delivery of physical 
        commodities. However, banks and bank holding companies 
        can invest and trade in certain commodity derivatives. 
        As a result, the definition of ``financial in nature'' 
        includes investing and trading in futures and swaps as 
        well as other physical transactions that are settled by 
        instantaneous transfer of title of the physical 
        commodity. An entity that falls under the definition of 
        a ``financial entity'' is generally not entitled to the 
        end-user exemption--an exemption that Congress included 
        to benefit commercial commodity market participants--
        and can therefore be subject to many of the 
        requirements placed upon swap dealers and major swap 
        participants. In addition, the CFTC has used financial 
        entity as a material term in numerous rules, no-action 
        relief, and guidance, including, most recently, its 
        cross-border guidance. The Dodd-Frank Act allows 
        affiliates or subsidiaries of an end-user to rely on 
        the end-user exception when entering into the swap on 
        behalf of the end-user. However, swaps entered into by 
        end-user hedging affiliates who fall under the 
        definition of ``financial entity'' cannot take 
        advantage of the end-user exemption, despite the fact 
        that the transactions are entered into on behalf of the 
        end-user. Many energy companies structure their 
        businesses so that a single legal entity within the 
        corporate family acts as a central hedging, trading and 
        marketing entity--allowing companies to centralize 
        functions such as credit and risk management. However, 
        when the banking law definitions are applied in this 
        context, these types of central entities may be viewed 
        as engaging in activity that is ``financial in 
        nature,'' even with respect to physical transactions. 
        Hence, some energy companies may be precluded from 
        electing the end-user clearing exception for swaps used 
        to hedge their commercial risks and be subject to 
        additional regulations applicable to financial 
        entities. Importantly, two similar energy companies may 
        be treated differently if, for example, one entity uses 
        a central affiliate to conduct these activities and 
        another conducts the same activity in an entity that 
        also owns physical assets or that has subsidiaries that 
        own physical assets. Accordingly, Congress should amend 
        the definition of ``financial entity'' to ensure that 
        commercial end-users are not inadvertently regulated as 
        ``financial entities.''

Section 352--Reporting of illiquid swaps so as not to disadvantage 
        certain non-financial end-users

    Real-time public reporting of swap transactions as required 
by the CFTC may ultimately lead to more efficient prices for 
commercial end-users. However, based on the fact that liquidity 
diminishes for longer-dated contracts further out in time, 
there is a point where the benefits derived from public 
reporting do not outweigh the detriment to those who are 
trading in illiquid markets. While transparency is helpful in 
establishing a price between buyers and sellers, if market 
participants become easier to identify in certain sparsely 
traded swaps, other market participants will be able to take 
advantage of their positions and increase their cost of doing 
business for future trades. These sparsely traded swaps are 
used by a handful of companies with excellent credit ratings to 
provide long-term protection against price fluctuations for 
commodities such as oil and jet fuel.
    While the goal of increasing market transparency was well 
intended, the CFTC's final rule on reporting requirements does 
not differentiate between the appropriate times needed for 
reporting between different types of swaps contracts. Instead, 
this rule has led to a change in market behavior that affects 
long-established business models which traditionally allowed 
companies to protect against commodity price increases. 
Effective risk management helped these companies keep prices 
low for consumers. Southwest Airlines offers a prime example of 
how this new CFTC regulation has impacted its business and its 
customers. Because their exact market positions became known by 
competitors due to near instantaneous reporting of market 
positions, Southwest Airlines has been forced to pay more in 
order to protect against the rising cost of fuel.
    There is precedent in CFTC policy in recognizing the 
sensitivity around transaction counterparty identities in 
public data reporting. The Commission has for years issued 
publicly a weekly ``Commitment of Traders Report'' (COT). In 
describing the issuance of this report, the Commission states: 
``The [COT] reports provide a breakdown of each Tuesday's open 
interest for markets in which 20 or more traders hold positions 
equal to or above the reporting levels established by the 
CFTC.'' In other words, when the number of market participants 
in a reportable contract drops below a certain level, the 
Commission has recognized there can be damage to counterparty 
anonymity when there are a limited number of participants in a 
given market, and therefore does not issue a report for that 
contract. Because the Committee believes that the number of 
participants and transactions in a given market diminishes for 
longer-dated contracts, the Commission shall create a standard 
for reporting all swap asset classes based off of when 
liquidity in a contract lowers to the level of being able to 
easily identify market participants.
    As such, Section 352 would correct the unintended 
consequences of the new CFTC reporting regime while still 
maintaining the goal of increasing market transparency. This 
section preserves the real-time reporting of these sparsely 
traded swaps directly to the CFTC to ensure that government 
regulators have the information they need to police the 
markets. By simply making a technical change to the timeframe 
in which end-users are required to release their trading 
information to the general public, Section 352 achieves market 
transparency in a manner that does not harm long-standing 
business models and that helps keep costs low for millions of 
Americans.
    On July 24, 2013, at a hearing entitled ``The Future of the 
CFTC: End-User Perspectives,'' Mr. Chris Monroe, Treasurer, 
Southwest Airlines, Co., provided the following testimony with 
respect to the need for provisions included in Section 352:

          One key to our unparalleled success has been our 
        ability to hedge fuel through legitimate end-user 
        derivatives purchased in the futures markets. Hedging 
        at Southwest is enterprise risk management--essential 
        in our view given our $6 billion annual fuel bill. To 
        hedge, we commonly enter into transactions many months 
        or years in advance of needing the physical product. 
        Trading in these illiquid markets allows us to manage 
        our fuel costs, which in turn helps us to keep fares 
        low and maintain large jet (Boeing 737) flights in the 
        communities we serve. I am here today to highlight a 
        few issues that have begun to impact these important 
        markets that companies such as Southwest relay on to 
        manage risk. One area where we are seeing a negative 
        commercial impact is the Commodity Futures Trading 
        Commission's (``CFTC's'') Real-Time Public Reporting of 
        Swap Transaction Data Rule (``Real-Time Reporting 
        Rule'') . . . [i]mportantly, trades between a 
        legitimate commercial end-user and a dealer must be 
        reported within the dealer's shorter time limit. Given 
        that the vast majority of bilateral trades entered into 
        by commercial end-users are transacted with a dealer, 
        this means nearly all commercial end-user trades are 
        reported on the accelerated time limit. The dealer time 
        delays may be sufficient for liquid markets, but the 
        timeframes are not sufficient for illiquid markets, 
        which, as I said before, is where Southwest commonly 
        trades. Only a few market participants trade that far 
        out the curve, which makes the contracts highly 
        illiquid, even in contracts that may be liquid in the 
        front months such as crude oil. Additionally, Southwest 
        has a particularly identifiable trading strategy, a 
        hedging ``DNA'' if you will, which makes us quite 
        visible in a market with few participants. This is 
        particularly harmful. When a dealer has to report 
        illiquid trades to the market quickly, the dealer is 
        less likely to be able to lay off the risk of that 
        trade in the prescribed time. If the dealer is still 
        holding a large amount of the risk when the trade is 
        shown to the public, the dealer can be front-run and, 
        as a result, take a loss on the trade. That increased 
        risk to the dealer will either curtail trades or 
        materially increase the costs of the trade to the end-
        users.) If an end-user like Southwest can no longer 
        access the markets to hedge fuel it would be contrary 
        to the purposes of the legislation and in our view 
        hostile to Congressional intent.

Section 353--Relief for grain elevator operators, farmers, agricultural 
        counterparties, and commercial market participants

    As a service to their customers, farmer-owned cooperative 
FCMs have a network of branch operations embedded in locations 
such as grain elevators, whose primary business is handling the 
cash grain volume of their farmer customers. As a branch office 
of a cooperatively-owned FCM, these commercial grain elevators 
have chosen to provide brokerage services as a means of 
providing access to risk management tools for their farmer 
customers who want to hedge their production volume through 
futures and/or options.
    In response to the Dodd-Frank Act, the CFTC greatly 
expanded record keeping requirements by making it necessary for 
brokers to retain all forms of written and oral communication 
that might ``lead to the execution of a transaction in a 
commodity interest''. Given the infrequent and low volume of 
futures/options transactions handled by ``branches'' associated 
with those FCMs, complying with the recording requirements 
under this vague regulation would not be economically feasible. 
The necessary investment to put in place and maintain a system 
to record every form of communication that might ``lead to the 
execution of a transaction'' would exceed not only any profits, 
but in many cases the total revenues of those FCM branches. 
Local branches could no longer provide brokerage services 
resulting in reduced risk management options, and their use, by 
farmers and ranchers.
    Section 353 does not eliminate a grain elevator's record 
keeping responsibilities, but merely relieves them from 
purchasing and maintaining costly technology to record and save 
all incoming communication that may lead to a transaction in a 
commodity interest. Grain elevators and other end-users will 
still be required to maintain a written record of such 
transactions that include all of the transactions' material 
economic terms. Without Section 353, the vague, sweeping 
language of the CFTC's current regulation will result in 
significant time and financial costs to commercial grain 
elevators attempting to comply with the rule. Rather than 
facilitating the collection of useful transaction records, the 
rule is likely to result in grain elevators' no longer 
providing useful brokerage services to their customers. As a 
result, countless farmers and ranchers will lose access to 
valuable risk management tools that allow them to hedge their 
production volume.
    On July 24, 2013, at a hearing entitled ``The Future of the 
CFTC: End-User Perspectives,'' the following witnesses provided 
testimony with respect to provisions included in Section 353:

          A significant and concerning expansion of current 
        data requirements beyond the scope of Dodd-Frank is 
        related to record-keeping requirements in Part 1 of 
        Commission regulations. In accordance with Dodd-Frank, 
        the CFTC expanded the futures record-keeping 
        requirements that existed for certain markets 
        participants to swaps. However, they also significantly 
        expanded the written requirements, as well as created a 
        new requirement to record oral conversations. 
        Compliance costs have already been incredibly 
        substantial now that compliance with the written 
        requirements is mandatory and will only increase once 
        compliance with the oral recording requirement comes 
        into effect later this year. Again, the market is 
        searching for a reason for and measurable benefit of 
        all of this new information that must be maintained and 
        archived in a particular way. In addition, the rule is 
        vague as to which communications must be retained, so 
        in an abundance of caution, market participants are 
        effectively saving every e-mail, news article, or any 
        other piece of information that might ``lead to the 
        execution of a transaction'' and soon will have to 
        begin recording every phone call that might ``lead to 
        the execution of a transaction.'' This vague ``lead to 
        . . .'' language appears nowhere in any prior iteration 
        of Rule 1.35 or in any prior CFTC Advisory relating to 
        the rule, and operates to expand substantially the 
        scope and burdens of the rule. Also, the application of 
        the requirements to members of an exchange seems to 
        have no regulatory rationale and only serves as a 
        disincentive to be an exchange member. Finally, the 
        cost figures contained in the cost-benefit analysis in 
        the final rule are not justified. Compliance costs are 
        exponentially higher than they estimate, and in some 
        cases the technology is not even available to market 
        participants. Requests for clarification have not yet 
        been answered, and CMC will be submitting a written 
        request soon in a continued effort to clarify and 
        hopefully narrow the scope of what must be retained 
        and, therefore, reduce what we view as unnecessary 
        compliance costs.--Mr. Lance Kotschwar, Senior 
        Compliance Attorney, The Gavilon Group, LLC, on behalf 
        of the Commodity Markets Council

          Given the infrequent and low volume of futures/
        options transactions handled by ``branches'' associated 
        with those FCMs, complying with the oral recording 
        requirements (recording of all phone calls) under this 
        regulation would not be economically feasible. The 
        necessary investment to put in place and maintain a 
        system to comply with the regulations would exceed not 
        only any profits, but in many cases the total revenues 
        of those FCM branches--to the point that those local 
        branches could no longer provide brokerage services. 
        The effect would be reduced risk management options, 
        and their use, by farmers and ranchers.--Mr. Scott 
        Cordes, President, CHS Hedging, Inc., on behalf of the 
        NCFC

Section 354--Relief for end-users who use physical contracts with 
        volumetric optionality

    Forward contracts that result in the physical delivery of 
commodities are expressly exempted from the definition of a 
``swap'' under the Commodity Exchange Act. Section 354 would 
clarify the application of this exemption in order to prevent 
unnecessary and costly regulations on companies that enter into 
transactions to ensure the efficient physical delivery of 
commodities necessary to conduct their core business 
operations. Without clarification, the CFTC could impose costly 
regulations on risk management transactions, which increases 
companies' operating costs and ultimately results in increased 
costs to consumers across the nation.
    Risk management contracts that allow for an adjustment of 
the quantity of a commodity delivered do not pose a threat to 
the stability of financial markets and should not be regulated 
the same as financial derivatives. These contracts do provide 
companies with an efficient and cost effective means of 
acquiring the commodities they need to conduct their daily 
business, such as providing affordable sources of energy to 
millions of American households. The misguided regulation of 
these harmless transactions will actually have the effect of 
increasing companies' costs of doing business, will consolidate 
risk in the marketplace because some businesses will be forced 
out of the market, and will ultimately raise costs for everyday 
American consumers. Such costly and unnecessary regulation 
defies the intent of Congress and needlessly subjects a large 
segment of the energy marketplace to burdensome regulation 
under the Dodd-Frank Act.
    The Dodd-Frank Act, passed to reform the U.S. financial 
system, should not result in increased utility rates for 
consumers of natural gas, electricity, and other forms of 
energy used to heat homes, run factories, and power the 
American economy. Without relief, many utilities and energy 
companies will not be able to effectively manage risk--which 
will only increase their costs and possibly lead to higher 
energy rates for millions of Americans--an unacceptable result 
during a period of tremendous economic uncertainty.
    As such, Section 354 would exempt forward contracts between 
end-users that allow for deferred delivery or shipment of a 
non-financial commodity, so long as the contract results in an 
actual physical settlement obligation, is between commercial 
market participants, and the option to receive more or less of 
a commodity cannot be sold separately for financial gain. The 
Committee notes that optionality includes both allowing a 
counterparty to reduce the amount of commodity delivered and 
allowing a counterparty to increase the amount of commodity 
delivered.
    On July 24, 2013, at a hearing entitled ``The Future of the 
CFTC: End-User Perspectives,'' the following witnesses provided 
testimony with respect to provisions included in Section 354:

          Because gas consumption to residential and commercial 
        customers is largely weather driven (consumption 
        increases as the weather gets colder) and predicting 
        the weather is not an exact science, gas supply 
        contracts with delivery flexibility help AGA members 
        make sure gas supplies are, or can be made, available 
        when the customers actually need the gas without having 
        to pay excessively higher prices at the actual time of 
        need and/or other fees associated with pipeline 
        imbalance penalties. There remain disagreements and 
        confusion within the natural gas industry as to which 
        types of gas supply transactions, if any, will be 
        subject to CFTC regulation. These transactions are 
        normal commercial merchandising transactions that 
        parties use to buy and sell natural gas for ultimate 
        delivery to end-use customers. They would not normally 
        be considered speculative, financial transactions as 
        the parties contemplate physical delivery of the 
        commodity. Nevertheless, transactions that contain some 
        option or choice for one or the other counterparty, 
        raise questions for some as to whether they would be 
        considered commodity options regulated as swaps, meet a 
        three part test and a seven-part test to be excluded as 
        options embedded in forward contracts, be viewed as 
        trade options subject to a lessened reporting burden, 
        or be considered facility use agreements that meet a 
        three-part test and then a five-part test and not 
        subject to regulation at all.--Andrew K. Soto, Senior 
        Managing Counsel, Regulatory Affairs, AGA

          Recently, however, in light of the CFTC's seven-part 
        interpretation in the rule, some NCFC members have 
        raised concerns over the appropriate treatment of 
        forward contracts commonly used in physical supply 
        arrangements that contain volumetric optionality. If 
        the CFTC were to take a narrow view of the seven-part 
        interpretation, it may view as options many other 
        routine physical supply contracts in which the 
        predominant feature is delivery. Such an interpretation 
        would require those common commercial forward contracts 
        to come under the regulations intended for swaps such 
        as reporting and position limits. The uncertainty of 
        the CFTC interpretation of these types of contracts, 
        all previously covered under the forward contracting 
        exclusion, will require NCFC members to expend 
        significant labor and costs to review hundreds of sales 
        transactions to determine if they continue to meet the 
        forward contract exclusion. Again, this is an 
        unnecessary resource and cost burden on end-users that 
        should be avoided. We hope CFTC will interpret this 
        exclusion consistently with its historical 
        understanding and prior guidance.--Mr. Scott Cordes, 
        President, CHS Hedging, Inc., on behalf of the NCFC

Section 355--Commission vote required before automatic change of swap 
        Dealer de minimis level

    Section 355 would simply require the CFTC Commissioners to 
vote before changing the current $8 billion swap dealer de 
minimis exemption from registering as a swap dealer. Without 
Section 355, a CFTC rule will automatically set the de minimis 
exemption at $3 billion, potentially requiring dozens of end-
users to register with the Commission in the coming years as 
``swap dealers'' and imposing costly new regulations on public 
utilities, energy companies, and other end-users that played no 
part in the financial crisis.
    As the regulations currently stand, if a company does more 
than $8 billion worth of swap business per year (known as the 
de minimis level of swap dealing), it must register with the 
CFTC as a ``swap dealer.'' The CFTC's regulations will 
arbitrarily lower the registration threshold to $3 billion 
starting five years from October of 2012 (and possibly sooner) 
with no Commission vote, despite rules requiring a Commission 
``study'' to determine if the swap dealer registration 
threshold is appropriately set at $8 billion.
    An arbitrary 60% decline in the swap dealer registration 
threshold from $8 billion to $3 billion creates significant 
uncertainty for non-financial companies that engage in 
relatively small levels of swap dealing to manage business risk 
for themselves and their customers. Lowering the swap dealer 
registration threshold below its current level of $8 billion 
could drive many non-financial companies out of the business of 
offering their customers risk management products, which will 
limit risk management options for end-users, and ultimately 
consolidate marketplace risk in only a few large swap dealers. 
This consolidation runs counter to the goals of the Dodd-Frank 
Act to reduce systemic risk in the marketplace.
    CFTC regulations should not arbitrarily change the swap 
dealer registration de minimis level without a formal 
rulemaking process. The regulations themselves require a formal 
study by the Commission to determine if the current $8 billion 
level is appropriate. However, the study is completely 
irrelevant because the de minimis level is moved to $3 billion 
in five years regardless of the study's findings. Because 
provisions embedded deep within CFTC regulations failed to 
mandate that the Commission must vote to determine what policy 
is best for future market conditions, our markets could be 
forced to adhere to outdated policies for years to come. 
Further, as demonstrated in the context of utility special 
entities, a de minimis exception threshold that is too low can 
significantly disrupt markets, hinder competition, and leave 
non-financial businesses with limited ways to manage their 
economic and operational risks. Section 355 would result in a 
Commission review of whether lowering the de minimis exception 
threshold would drive participants out of the swap market, 
limit competition and potentially harm end-users. In 
particular, pursuant to Section 355, the Committee expects that 
the Commission would periodically review the de minimis 
exception threshold to consider whether, in light of changes in 
prices and market structure, the de minimis exception threshold 
should also be increased to greater than $8 billion to ensure 
non-financial end-users are able to obtain risk management 
solutions from a broad range of counterparties.
    On July 24, 2013, at a hearing entitled ``The Future of the 
CFTC: End-User Perspectives,'' the following witnesses provided 
testimony with respect to the need for the provisions included 
in Section 355:

          Current regulations have arbitrarily established a de 
        minimis level, the breach of which requires 
        registration as a swap dealer, at $8 billion with a 
        drop to $3 billion following an unpredictable CFTC 
        decision making process. The only certainty in the 
        process is that a lack of action will result in the de 
        minimis level declining in 5 years. This $3 billion 
        level is also arbitrary and would significantly affect 
        the number of firms defined and regulated as swap 
        dealers. Changes should not be made through such a long 
        and ill-defined process, which includes several 
        unpredictable and difficult to follow steps for market 
        participants. We need a more predictable process.--Mr. 
        Lance Kotschwar, Senior Compliance Attorney, The 
        Gavilon Group, LLC, on behalf of the Commodity Markets 
        Council

          A new category of market participants, swap dealers, 
        was created by the Dodd-Frank Act. These swap dealers 
        must register with the CFTC and are subject to 
        extensive record-keeping, reporting, business conduct 
        standards, clearing, and--in the future--regulatory 
        capital and margin requirements. However, the Act 
        directed the CFTC to exempt from designation as a swap 
        dealer entities that engage in a de minimis quantity of 
        swap dealing. The CFTC issued a proposed rule on the de 
        minimis threshold for comment in early 2011. After 
        review of hundreds of comments, a series of 
        Congressional hearings and after dozens of meetings 
        with market participants, the CFTC set this de minimis 
        threshold at $8 billion. However, it will then be 
        reduced automatically to $3 billion in 2018 absent CFTC 
        action. We oppose such a dramatic reduction in the de 
        minimis threshold without deliberate CFTC action. 
        Inaction is always easier than action, and inaction 
        should not be the default justification for such a 
        major regulatory action. In addition, we believe the 
        CFTC should not have the authority to change the de 
        minimis level without a formal rulemaking process that 
        allows stakeholders to provide input on what the 
        appropriate threshold should be. Absent these 
        procedural changes, we are concerned a deep reduction 
        in the de minimis level could result in commercial end-
        users being misclassified as swap dealers, hindering 
        end-users' ability to hedge market risk while imposing 
        unnecessary costs that eventually will be borne by 
        consumers.--Mr. Richard F. McMahon, Jr., Vice 
        President, EEI

Section 356--Capital requirements for bon-bank swap dealers

    Under currently-proposed CFTC regulations for capital and 
margin, non-bank swap dealers would be forced by the CFTC to 
adhere to an inflexible capital requirement standard (based 
partially on the capital requirements based on the soon-to-be 
outdated Basel II Accords first proposed in 2004, which have 
since been eclipsed by the Basel III Accords proposed in 2011). 
According to testimony received from Mr. William J. Dunaway, 
CFO, INTL FCSTONE, Inc., before the Committee on May 21, 2013, 
under the CFTC's proposal, a firm could be assessed a capital 
charge beyond their net position in a contract, especially in 
relation to commodity swaps. Furthermore, the CFTC's capital 
requirements stand in stark contrast to the SEC's capital 
requirements for security-based swap dealing due to the SEC's 
allowance for dealers to utilize pre-approved internal capital 
models. As a result, the Committee learned that, under a worst 
case scenario, ``the same derivatives portfolio that would 
require a bank-affiliated Swap Dealer to hold $10 Million in 
regulatory capital using standard internal models would require 
us to set aside up to $1 Billion in capital''. At the same 
hearing on May 21, 2013, entitled ``The Future of the CFTC: 
Market Perspectives,'' Mr. Dunaway provided more insight on how 
to correct such a potentially harmful result for the 
marketplace:

          The Commodity Exchange Act requires the CFTC, the 
        prudential regulators, and the SEC to establish and 
        maintain ``comparable'' minimum capital requirements 
        for all Swap Dealers. However, the proposed Capital 
        Rules clearly are not ``comparable.'' Pursuant to its 
        mandate under the CEA, we believe that the CFTC should 
        revise its proposed capital rules to ensure that the 
        capital and margin requirements applicable to non-bank 
        Swap Dealers are comparable to those applicable to 
        bank-affiliated Swap Dealers. This can be accomplished 
        by altering the rules to permit the following: 
        [i]nternal Models--The CFTC could permit all Swap 
        Dealers, including Commodity Swap Dealers, to request 
        approval of, and rely upon, internal models to measure 
        market risk. To the extent that the CFTC currently 
        lacks the resources to review and approve such internal 
        models, it should permit Swap Dealers to certify to the 
        CFTC or the NFA that their models produce reasonable 
        measures of risk, subject to verification by the CFTC 
        when its resources enable it to do so.--Mr. William J. 
        Dunaway, CFO, INTL FCSTONE, Inc.

    Because this potential disparity in capital charges for 
non-bank versus bank affiliated swap dealers could harm more 
than one market participant, Section 356 would require that the 
CFTC amend its proposed rule so as to closely consult with the 
SEC and prudential financial regulators and to allow the use of 
comparable capital requirements that will be utilized by swap 
dealers regulated by the SEC and prudential regulators.

Section 357--Harmonization with the Jumpstart Our Business Startups Act

    In letters to the CFTC, stakeholders representing a wide 
variety of market participants, such as SIFMA, the Managed 
Funds Association (MFA), and the Financial Services Roundtable 
requested that the Commission harmonize its ``private 
offering'' requirements in CFTC Rules 4.7 and 4.13(a)(3) with 
the broadened scope of solicitation permitted by the SEC after 
it proposed amendments to Rule 506 of Regulation D and Rule 
144A under the Securities Act of 1933. The SEC's proposed 
changes to the solicitation rules for securities offerings came 
about after the Jumpstart Our Business Startups Act (JOBS Act) 
(P.L. 112-106) was signed into law in April of 2012 which 
allows for solicitation of accredited investors for private 
securities offerings in order to raise needed capital for 
companies to expand and create jobs.
    While the JOBS Act mandates consistent treatment of 
Regulation D, Rule 506 offerings across the federal securities 
laws, unintentionally omitted harmonizing changes to the CFTC's 
regulations, which creates an inconsistency between the SEC's 
rules and the CFTC's rules governing solicitation. Accordingly, 
because the relief is needed quickly as to not impede use of 
the JOBS Act by the marketplace, Section 357 would directly 
amend CFTC regulations (which would obviate the need for a 
Commission rulemaking) to provide an exemption for any 
registered commodity pool operator to engage in the general 
solicitation for the sale of commodity pools parallel to the 
exemption provided for general solicitation of securities under 
the JOBS Act.

Section 358--Bona fide hedge defined to protect end-user risk 
        management

    In 2010, the Dodd-Frank Act instructed the CFTC on how to 
define what constitutes a bona fide hedging transaction (i.e.: 
non-speculative trading) or position so those trades would not 
count towards any positions limits. The statutory definition 
states that the reduction of risk inherent to a commercial 
enterprise is a component in determining what qualifies as a 
bona fide hedging transaction. However, in a change from prior 
practice, the CFTC's approach in both the originally proposed 
2011 position limits rule (which was overturned by a federal 
district court for the District of Columbia in September 2012) 
and the position limits rule proposed in November of 2013 was 
to limit the availability of the bona fide hedge exemption to a 
limited set of transactions, unless the CFTC gave specific 
approval to a particular form of transaction.
    In the most-recently proposed position limits rule, instead 
of providing a clear bona fide exemption from position limits 
to allow end-users of physical commodities to properly hedge 
their commercial risk was not included, many risk-reducing 
practices commonly used in the futures markets today were 
excluded from the list of bona fide hedging transactions 
prescribed in CFTC Rule 151.5(a)(2). This concern was confirmed 
by Mr. Jeffrey Sprecher, CEO of Intercontinental Exchange, 
Inc., in testimony before the Committee on May 21, 2013, when 
he stated that ``[t]he narrow definition of bona fide hedge 
will likely hurt commercial end-users that these markets are 
intended to serve, and thus support the bona fide hedge 
exemption relied upon historically would bring greater 
certainty to end-users in executing their risk management 
operations.''
    The CFTC's limitation of bona fide hedges to only a handful 
of transaction types places significant limitations on many 
end-users' ability to hedge risk efficiently. As such, the 
Committee formulated Section 358 to provide for a workable 
hedge exemption process. The bona fide hedge provisions in 
Section 4a(c) of the Commodity Exchange Act are intended to 
provide market participants with certain relief from position 
limits therefore give end-users with the flexibility necessary 
to hedge their legitimate anticipated business risks.
    One of the main purposes of Section 358 is to make clear 
that the statutory requirements with respect to what 
constitutes a bona fide hedge transaction must be reflected in 
the CFTC's further definition of that term. Specifically, 
changing ``may'' to ``shall'' in Section 4a(c)(1) reflects the 
intent of the Committee that the CFTC is not authorized to 
promulgate a further definition of ``bona fide hedge 
transaction'' that is narrower or more restrictive than what is 
described in the CEA. In addition, Section 358 intended to 
clarify that the CFTC's further definition of ``bona fide hedge 
transaction'' must include hedges of legitimate anticipated 
business needs.
    Section 358 is also intended to provide more flexibility to 
market participants as hedging practices evolve. It is 
Congress' intent that the CFTC provide bona fide hedge status 
to all legitimate risk management practices now and in the 
future. A narrow definition of what constitutes bona fide 
hedging that is limited to an enumerated list of transactions 
will place significant limitations on many end-users' ability 
to hedge risk properly and efficiently. In further defining 
what constitutes a bona fide hedging transaction, the CFTC 
should provide flexibility such that changes and advances in 
hedging practices so they can easily be incorporated into the 
bona fide hedging regime in an efficient and timely manner, 
without further Commission rulemakings that would add 
uncertainty to the marketplace.
    On July 24, 2013, at a hearing entitled ``The Future of the 
CFTC: End-User Perspectives,'' the following witnesses provided 
testimony with respect to the need for provisions included in 
Section 358:

          Congress provided a definition of a bona fide hedge 
        within Dodd-Frank that the CFTC has unnecessarily 
        narrowed, including related to anticipatory hedging, 
        and has created at least five different definitions in 
        various rules of what constitutes a bona fide hedge. 
        This is nonsensical and creates unnecessary confusion, 
        while disrupting legitimate risk mitigation practices. 
        We are committed to working with Congress to set 
        clearer direction on bona fide hedges so that 
        transactions that limit economic risks are viewed as 
        bona fide hedges by the CFTC.--Mr. Lance Kotschwar, 
        Senior Compliance Attorney, The Gavilon Group, LLC, on 
        behalf of the Commodity Markets Council

          On September 28, 2012, the U.S. District Court for 
        the District of Columbia vacated final CFTC rules 
        regarding position limits. These vacated rules defined 
        the term bona fide hedging. As written in the CFTC's 
        rule that was vacated, the definition was unnecessarily 
        narrow and would have discouraged a significant amount 
        of important and beneficial risk management activity. 
        Specifically, the rule narrowed the existing definition 
        considerably by providing that a transaction or 
        position that would otherwise qualify as a bona fide 
        hedge also must fall within one of eight categories of 
        enumerated hedging transactions, a definitional change 
        neither supported in nor required by the Dodd-Frank 
        Act. This restrictive definition of bona fide hedging 
        transactions could disrupt the commodity markets, make 
        hedging more difficult and costly, and may increase 
        systemic risk by encouraging end-users to leave a 
        relatively large portion of their portfolios un-
        hedged.--Mr. Richard F. McMahon, Jr., Vice President, 
        EEI

Section 359--Cross-border regulation of derivatives transactions.

    As the global financial system has evolved, U.S. 
institutions have expanded their derivatives operations 
overseas to provide services to both U.S. and non-U.S. 
customers. At the same time, foreign institutions have 
established subsidiaries and branches in the U.S. to offer 
derivatives directly to U.S. customers. The growth of this 
cross-border activity makes questions regarding the application 
of the Dodd-Frank Act to activities that occur outside the U.S. 
(known as ``extraterritorial'') complex and critical.
    Section 722(d) of Title VII sets forth that provisions of 
the Dodd-Frank Act shall not apply to activities outside the 
United States unless those activities: (1) have a direct and 
significant connection with activities in, or effect on, 
commerce of the United States, or (2) contravene such rules or 
regulations as the CFTC prescribes are necessary to prevent 
evasion of the Dodd-Frank Act. This is consistent with 
historical practice by both the CFTC and the prudential 
regulators in their treatment of foreign entities with 
operations in the U.S., or of U.S. entities with regard to 
their operations in foreign jurisdictions. Generally, the 
regulatory agencies have deferred to foreign regulatory 
authorities for the supervision of entities located abroad if 
the agencies found that those entities were subject to a 
regulatory regime comparable to that imposed by the U.S.
    However, in April of 2012, the prudential regulators 
proposed a rule for the application of margin requirements as 
required by Title VII for Major Swap Participants and Swap 
Dealers. Under the prudential regulators' proposal, margin 
requirements would apply to all transactions of U.S. financial 
institutions--whether they involve their U.S. or non-U.S. 
customers. For example, a foreign subsidiary of a U.S. bank in 
Europe would be subject to the Dodd-Frank Act's margin rules 
even when dealing with European customers.
    On June 29, 2012, the CFTC issued proposed ``interpretive 
guidance'' for the cross-border application of Title VII of the 
Dodd-Frank Act. The release of this guidance, approved by all 
five commissioners, was done so without the concurrent release 
of similar guidance from the SEC for security-based swaps and, 
as it was not in the form of a proposed rule, did not include a 
cost-benefit analysis. When the guidance was released, then-
CFTC Commissioner Jill Sommers stated that ``[CFTC] staff had 
been guided by what could only be called the `Intergalactic 
Commerce Clause' of the United States Constitution, in that 
every single swap a U.S. person enters into, no matter what the 
swap or where it was transacted, was stated to have a direct 
and significant connection with activities in, or effect on, 
commerce of the United States. This statutory and 
constitutional analysis of the extraterritorial application of 
U.S. law was, in my view, nothing short of extra-statutory and 
extra-constitutional.''
    On December 13, 2012, the Committee on Agriculture 
Subcommittee on General Farm Commodities and Risk Management 
held a hearing where Commissioners Sommers and Chilton 
testified alongside top regulators from Japan and the European 
Commission. Combined, the three regulatory jurisdictions 
testifying at the hearing represented an overwhelming majority 
of the global derivatives marketplace. Based on testimony the 
subcommittee received, there appeared to be a serious lack of 
coordination between both foreign and domestic regulators.
    For example, Mr. Masamichi Kono with the Financial Services 
Agency of Japan (who at the time was Chairman of IOSCO) 
testified during the hearing that ``much needs to be done'' by 
the CFTC and that ``it is important that the details of the 
applicable laws and regulations are made clear as much as 
possible before their implementation in order to minimize 
regulatory uncertainty.'' Further, with respect to minimizing 
risk in the marketplace--a goal central to the creation of the 
Dodd-Frank Act--Mr. Kono testified that:

          [S]uch risks need not be addressed by 
        extraterritorial application of the U.S. laws and 
        regulations; rather, the U.S. authorities could rely on 
        foreign regulators upon establishing of course that the 
        foreign regulators have the required authority and 
        competence to exercise appropriate regulation and 
        oversight over those entities and activities. This is 
        what we consider as the most efficient and effective 
        approach, in line with the principles of international 
        comity between sovereign jurisdictions.

    At the same hearing, Mr. Patrick Pearson with the European 
Commission also testified before the Committee about regulatory 
conflicts between the United States and 27 member nations of 
the European Union. With respect to the risk posed to global 
markets if international regulators do not properly coordinate 
the regulation of the markets, he stated that:

          [T]rades will not be able to be cleared. If they 
        can't be cleared, they won't take place. This means 
        that firms and users will not hedge their risks, or 
        firms will hedge their risks but they will only take 
        place within one jurisdiction, which means that risk 
        will be concentrated in one jurisdiction on the planet. 
        That could be the United States. If your firms can't 
        hedge their risks outside of the United States, they'll 
        have to hedge them here. The consequences of that is 
        obviously a fragmented market and a significant 
        concentration of financial risk in the U.S. system, and 
        this is exactly what we tried to prevent with our 
        global regulatory reform.

    In the 113th Congress, on March 14, 2013, at a Committee 
hearing entitled ``Examining Legislative Improvements to Title 
VII of the Dodd-Frank Act,'' the Hon. Kenneth E. Bentsen, 
Acting President and CEO, SIFMA, provided the following 
testimony that informed the drafting of Section 359:

          Though Title VII was signed into law 2\1/2\ years 
        ago, we still do not know which swaps activities will 
        be subject to U.S. regulation and which will be subject 
        to foreign regulation. Section 722 of the Dodd-Frank 
        Act limits the CFTC's jurisdiction over swap 
        transactions outside of the United States to those that 
        ``have a direct and significant connection with 
        activities in, or effect on, commerce of the U.S.'' or 
        are meant to evade Dodd-Frank. Section 772 limits the 
        SEC's jurisdiction over security based swap 
        transactions outside of the United States to those 
        meant to evade Dodd- Frank. However, the CFTC and SEC 
        have not yet finalized (or, in the SEC's case, 
        proposed) rules clarifying their interpretation of 
        these statutory provisions. The result has been 
        significant uncertainty in the international 
        marketplace and, due to the aggressive position being 
        taken by the CFTC as described below, a reluctance of 
        foreign market participants to trade with U.S. 
        financial institutions until that uncertainty is 
        resolved. While the CFTC has proposed guidance on the 
        cross-border impact of their swaps rules, that guidance 
        inappropriately recasts the restriction that Congress 
        placed on CFTC jurisdiction over swap transactions 
        outside the United States into a grant of authority to 
        regulate cross-border trades. The CFTC primarily does 
        so with a very broad definition of ``U.S. Person,'' 
        which it applies to persons with even a minimal 
        jurisdictional nexus to the United States. In addition, 
        the CFTC has released several differing interim and 
        proposed definitions of ``U.S. Person'' for varying 
        purposes, resulting in a great deal of ambiguity and 
        confusion for market participants. SIFMA supports a 
        final definition of U.S. Person that focuses on real, 
        rather than nominal, connections to the United States 
        and that is simple, objective and determinable so a 
        person can determine its status and the status of its 
        counterparties.

    On April 18, 2013, the finance ministers of the European 
Commission, France, Germany, United Kingdom, Japan, 
Switzerland, Russia, South Africa and Brazil wrote to Treasury 
Secretary Jacob Lew stating that ``[w]e are already starting to 
see evidence of fragmentation in this vitally important 
financial market as a result of lack of regulatory 
coordination'' and ``[w]e are concerned that, without clear 
direction from global policymakers and regulators, derivatives 
markets will recede into localised and less efficient 
structures, impairing the ability of business across the globe 
to manage risk.''
    On May 21, 2013, testifying before the Committee at a 
hearing entitled ``The Future of the CFTC: Market 
Perspectives,'' the following testimony was provided by 
witnesses with respect to provisions included in Section 359:

          If regulators fail to harmonize, the effects of 
        uncertainty and the prospect for regulatory arbitrage 
        will be damaging. Because markets are global and 
        capital flows across borders, no single country or 
        regulatory regime oversees the derivatives market. In 
        order to make long-term business decisions, market 
        participants require certainty that their transactions 
        will not be judged on conflicting standards. The 
        derivatives markets are international: the majority of 
        companies that operate globally use derivatives to 
        manage price risks, and they conduct these transactions 
        with both U.S. and non-U.S. counterparties. The likely 
        outcome will be that regulators deem other countries' 
        financial regulatory systems as ``nonequivalent'', 
        which would lead to those countries erecting barriers 
        to its financial markets. It is crucial to understand 
        that if countries erect these barriers, WE markets and 
        market participants will be damaged. Currently, the 
        U.S. derivatives markets are home to vital global 
        benchmark contracts in agriculture, energy, financial 
        asset classes. These have become benchmark contracts 
        because Asian and European market participants have 
        direct access to U.S. markets. Importantly, the long-
        standing global nature of the derivatives markets and 
        the resulting international competition has lead to 
        advances in transparency, risk management, and 
        historically, regulatory cooperation. Over the past 
        year, ICE has been delivering this message to domestic 
        and international regulators, yet regulations continue 
        to diverge, particularly in the U.S. and Europe. We ask 
        the Committee, in its oversight role, to impress upon 
        the Commodity Futures Trading Commission the importance 
        of working with European and Asian counterparts to 
        harmonize regulation and avoid creating unintended, 
        unpredictable impacts on financial markets and their 
        users. The time for agreement is closing.--Mr. Jeffrey 
        C. Sprecher, Founder, Chairman, and CEO of 
        IntercontinentalExchange, Inc.

          ISDA and our members believe that a globally 
        harmonized approach to cross-border regulation is of 
        paramount importance. What they face now is 
        considerable uncertainty. Uncertainty is never a good 
        thing in financial markets, as there are typically only 
        two things to do in face of that uncertainty. One 
        response is to pull back and wait until such time as 
        greater certainty is provided. On a firm level, that 
        means missed opportunity. On a market level, that 
        translates to less efficient, less liquid and more 
        volatile markets, material harm to financing and 
        investing activities and a drag on the economy in 
        general. To achieve the goal of a globally harmonized 
        framework, the CFTC and SEC should work together to 
        achieve consensus with global regulators. H.R. 1256 
        would help the U.S. regulators to provide a unified 
        front when addressing the extraterritorial application 
        of U.S. rules and when dealing with non-U.S. 
        regulators. Harmonization of regulatory approaches, 
        particularly on issues with systemic risk implications, 
        and a concerted program of mutual recognition of 
        regulatory regimes by global regulators are essential 
        parts of the solution to ET.--Mr. Stephen O'Conner, 
        Chairman, ISDA

    As of the writing of this Report, global regulators have 
yet to harmonize their approach to global derivatives 
regulation. In order to address the serious concerns voiced by 
both international and domestic regulators, Section 359 would 
require the CFTC to propose and finalize a rule, not 
``guidance'' to which the APA does not apply, on cross-border 
swaps regulation. The bill would also require that the CFTC 
grant the top 9 global jurisdictions for swaps transactions by 
volume substituted compliance to regulate institutions 
operating within their borders unless the CFTC makes a 
determination that a jurisdiction's rules are not equivalent to 
the regulations of the United States.

                           Section-by-Section

    Sec. 1 is the short title of the bill.
    Sec. 2 is the table of contents.

                     Title I--Customer Protections

    Sec. 101 is the short title of title I.
    Sec. 102 amends section 17 of the Commodity Exchange Act 
(CEA) to require that each member of a registered futures 
association (NFA) maintain written policies concerning the 
residual interest in segregated accounts, cleared swaps 
collateral accounts, and secured amount funds in foreign 
futures and options customer accounts. The member must also 
establish rules to govern the withdrawal, transfer or 
disbursement by a futures commission merchant (FCM) of the same 
funds.
    Sec. 103 amends section 17 of the CEA to require an FCM to 
use an electronic system to report financial and operational 
information to the NFA in accordance with such terms and 
conditions that the NFA establishes. A registered FCM must 
require any depository institution that holds segregated 
accounts and the customer secured amount funds to report 
balances to the NFA. If the depository institution will not 
report the fund balances, the registered member cannot use the 
depository institution to hold customer segregated funds or 
secured amount funds.
    Sec. 104 amends section 17 of the CEA to require an FCM to 
immediately report to the CFTC and the NFA when the funds in a 
customer's account, segregated account or secured amount 
account are less than required by regulation. It also requires 
the chief compliance officer of the FCM to file with the 
Commission a yearly assessment of the FCM's internal compliance 
programs.
    Sec. 105 amends section 4d of the CEA to allow an FCM one 
business day after a trade to comply with the amounts of money, 
securities and property required to be held in a customer 
account by section 4d(a)(2) of the CEA.
    Sec. 106 amends section 20(a) of the CEA to allow the use 
of the cash, securities or other property of a bankrupt 
commodity broker to satisfy any deficient public customer 
account.
    Sec. 107 requires the CFTC to report to the authorizing 
committees on high-frequency trading on markets under its 
jurisdiction. The report shall examine the technology, 
personnel and other resources the Commission may require to 
monitor high-frequency trading; the role the trading plays in 
providing market liquidity; whether the technology creates 
discrepancies in the marketplace; and whether the Commission's 
existing authority protects the market and fosters 
transparency.

                                Title II

    Sec. 201 is the short title of title II.
    Sec. 202 amends section 12(d) of the CEA to reauthorize the 
CFTC through FY 2018.
    Sec. 203 amends section 15(a) of the CEA to harmonize the 
cost benefit requirements of the CFTC with those of executive 
order 13563. The section also requires that the cost benefit 
analysis be performed by the Chief Economist and published 
within the proposed rule along with the rule's statutory 
justification.
    Sec. 204 amends section 2(a) of the CEA to require that 
each division of the CFTC have a Director that is hired by the 
Commission, and performs functions as the Commission may 
prescribe.
    Sec. 205 amends section 2(a) of the CEA to establish the 
Office of the Chief Economist. The structure and powers of the 
Office of the Chief Economist mirrors the structure and powers 
of the General Counsel.
    Sec. 206 amends section 2(a)(12) of the CEA to require 7 
days notice to the Commission before any division or office of 
the Commission issues an interpretive rule of general 
applicability, a statement of general policy, response to a 
petition for guidance, or an exemptive, a no-action, or an 
interpretive letter. After receiving notice, any member of the 
Commission may request a meeting of the Commission to further 
consider the staff-proposed action, and if the Commission 
decides to hold the meeting by majority vote, the matter may 
not be issued until the meeting has concluded. The 7 day notice 
requirement can be waived by a majority vote of the Commission 
if the Commission determines that requiring such notice would 
be impracticable, unnecessary, or contrary to the public 
interest.
    Sec. 207 amends section 2(a) of the CEA to require the 
Commission to file with the authorizing committees a strategic 
technology plan every 5 years. The plan shall include a 
detailed technology strategy focused on market surveillance and 
risk detection, and must include a detailed accounting of how 
the funds provided for technology will be used.
    Sec. 208 amends section 2(a)(12) of the CEA to require the 
Commission staff, led by the Chief Economist, to develop 
internal risk control mechanisms to safeguard the storage and 
privacy of market data by the Commission. Special attention 
should be given to market data sharing agreements and academic 
research performed at the Commission using market data. The 
Commission shall report to the authorizing committees on 
progress made in implementing the internal risk controls 60 
days after enactment, and again 120 days after enactment of the 
Act.
    Sec. 209 amends section 6(c)(5) of the CEA to require that 
subpoenas issued by the Commission comply with the common law 
standards set forth by the United States Supreme Court. A 
subpoena authorized to be issued by the Commission shall state 
in good faith the purpose of the investigation, shall require 
only information reasonably relevant to the purpose of the 
investigation and shall be for a finite period. A subpoena may 
be renewed only by Commission vote.
    Sec. 210 amends section 2(a)(12) of the CEA to require that 
all proposed rules include a plan for when and for how long a 
comment period will be open, and when compliance with the final 
rule will be required.
    Sec. 211 amends section 2(a)(12) to apply the notice and 
comment provisions of the Administrative Procedure Act to 
guidance that is issued and voted on by the Commission.
    Sec. 212 amends the CEA by adding a new section (section 
24) committing the original jurisdiction of the review of a 
CFTC issued final rule to the United States Court of Appeals 
for the District of Columbia Circuit or the U.S. Court of 
Appeals for the circuit where the party resides. This is 
similar to the judicial review process for rules and orders of 
the Securities and Exchange Commission set forth in section 
25(b) of the Securities Exchange Act of 1934.
    Sec. 213 requires the GAO to conduct a study of the 
Commission's resources and assess whether the resources are 
sufficient to enable the Commission to effectively carry out 
its duties. The study shall also examine the prior expenditures 
of the Commission on hardware, software and analytical 
processes designed to protect customers in the areas of market 
surveillance and data collection.

                               Title III

    Sec. 301 is the short title for title III.

        SUBTITLE A--END-USER EXEMPTION FROM MARGIN REQUIREMENTS

    Sec. 311 amends section 4s(e) of the CEA to clarify that 
initial and variation margin requirements shall not apply to a 
swap in which one of the counterparties to the swap is not a 
financial entity and qualifies for the end-user clearing 
exception in Section 2(h)(7)(A).
    Sec. 312 excludes the amendments made by this subtitle from 
the requirements of the Paperwork Reduction Act and from notice 
and comment requirements of the Administrative Procedure Act.

                   SUBTITLE B--INTER-AFFILIATE SWAPS

    Sec. 321(a) amends 2(h)(7)(D)(i) of the CEA to clarify that 
transactions between affiliates need not be cleared provided 
that a credit support measure is utilized with a swap entered 
into with a swap dealer or major swap participant.
    Subsection (b) clarifies that the credit support measure 
requirement contained in (a) shall only be effective in a 
prospective manner starting on the date of enactment of the 
act.

     SUBTITLE C--INDEMNIFICATION REQUIREMENTS RELATED TO SWAP DATA 
                              REPOSITORIES

    Sec. 331 amends section 5b(k)(5) of the CEA by striking the 
confidentiality and indemnification agreement paragraph of the 
derivatives clearing organization reporting requirements and 
inserting a new confidentiality agreement paragraph, 
eliminating the need to indemnify the Commission for any 
expense arising from litigation related to information provided 
under section 8. An identical amendment is made to section 
21(d) of the CEA eliminating the indemnification requirement 
for swap data repositories.

               SUBTITLE D--RELIEF FOR MUNICIPAL UTILITIES

    Sec. 341 amends section 1a(49) of the CEA by creating 
within the definition of swap dealer, a new category of 
transactions in utility operations-related swaps, which shall 
be reported according to the reporting requirements of 
uncleared swaps and exempted from inclusion in an entity's 
general de minimis calculation established in (D).
    Sec. 342 amends section 4s(h)(2) of the CEA to add the 
definition of a ``utility special entity'': an entity 
established by a state, or political subdivision thereof, which 
owns or operates an electric or natural gas facility; supplies 
natural gas or electric energy to another utility special 
entity; has public service obligation under federal, state or 
local law or regulation to deliver electric energy or natural 
gas service to customers; or is a Federal power marketing 
agency.
    Sec. 343 amends section 1a(47) of the CEA to add to the 
definition of swap a list of ``commonly known'' transactions to 
further describe a utility operations-related swap. It further 
amends section 1a to define a ``utility operations related 
swap'' as a swap that is entered into to hedge or mitigate 
risk, is not based on an interest rate, credit, equity, or 
currency asset class nor a metal, agriculture commodity, or 
crude oil or gasoline commodity for any grade except as used as 
fuel for electric energy generation, and is associated with the 
generation, production or sale of natural gas or electric 
energy.

                 SUBTITLE E--END-USER REGULATORY RELIEF

    Sec. 351(a) amends section 2(h)(7)(C)(iii) of the CEA to 
exclude from the definition of a financial entity those 
entities not supervised by a prudential regulator and that are 
commercial market participants, but considered financial 
entities because they predominantly engage in physical delivery 
contracts or enter into swaps, futures and other derivatives on 
behalf of, or to hedge the commercial risk of, non-financial 
affiliates.
    Subsection (b) amends section 1a of the CEA to define a 
commercial market participant as a producer, processor, 
merchant, or commercial user of an exempt or agricultural 
commodity, or the products or byproducts of such commodity.
    Sec. 352 amends section 2(a)(13) of the CEA to require the 
Commission to promulgate a rule that would delay the public 
reporting of a non-cleared swap traded in an illiquid market 
and entered into by a non-financial entity to no sooner than 30 
days after the transaction has been executed. An illiquid 
market is defined as any market in which the volume and 
frequency of trading in swaps is at such a level as to allow 
identification of individual market participants.
    Sec. 353 amends the CEA by adding a new section, 4u, which 
clarifies the record keeping requirements of non-registered 
members of a designated contract market (DCM) or swap execution 
facility (SEF). All recordkeeping requirements, and rules 
promulgated pursuant to the CEA, shall be satisfied if such 
entities maintain written records of each transaction in a 
contract for future delivery, option on a future, swap, 
swaption, trade option, or related cash or forward transaction. 
Such records must be searchable by transaction and include the 
final agreement between the parties as well as the material 
economic terms of the transaction.
    Sec. 354 amends section 1a(47)(B)(ii) of the CEA to clarify 
that the exclusion from the definition of the term swap 
includes contracts that are intended to be physically settled 
that include any stand-alone or embedded option which, if 
exercised, results in a physical delivery obligation.
    Sec. 355 amends section 1a(49)(D) of the CEA to require the 
Commission to take an affirmative action by rule or regulation 
to reduce the $8 billion de minimis exception from the swap 
dealer definition.
    Sec. 356 amends section 4s(e) of the CEA to require the 
Commission to permit swap dealers and major swap participants 
that are not banks to use financial models that calculate 
minimum capital requirements and minimum initial and variation 
margin requirements that have been approved for use by banks by 
prudential regulators or the SEC.
    Sec. 357 requires the CFTC to change the regulation 
regarding the advertisement of participation in commodity 
pools. The changes will allow any registered commodity pool 
that also qualifies for an exemption from the registration 
requirements of the Securities Act to be sold pursuant to the 
changes made to section 4 of the Securities Act under the 
Jumpstart our Business Startups Act (P.L. 112-106).
    Sec. 358 amends section 4a(c) of the CEA to require the 
Commission to recognize anticipatory hedging transactions as 
part of the exemption from trading limits.
    Sec. 359(a) requires the CFTC to issue rules setting forth 
the application of the U.S. swaps requirements relating to 
swaps transacted between U.S. and non-U.S. persons. The rules 
shall address the nature of connections to the U.S. which would 
require a non-U.S. person to register as a swap dealer or major 
swap participant; which of the U.S. swap requirements shall 
apply to the activities of non-U.S. persons, U.S. persons, and 
their branches, agencies, subsidiaries and affiliates outside 
the U.S.; and the circumstances under which a non-U.S. person 
shall be exempt from U.S. swap requirements.
    Subsection (b) prohibits the issuance of guidance, 
memorandum of understanding or any such other agreement in 
place of the Commission's requirement to issue a rule in 
accordance with the APA.
    Subsection (c) requires the Commission to exempt from U.S. 
swaps requirements non-U.S. persons that are in compliance with 
the swaps regulatory requirements of a country or 
administrative region that has 1 of the world's 9 largest swap 
markets by notional amount in the preceding calendar year, or 
other foreign jurisdictions as determined by the Commission, 
unless the Commission determines that the regulatory 
requirements are not broadly equivalent to the United States 
swap requirements.
    Exemptions for the 5 largest swap markets by notional 
amount shall go into effect on the date the final rule is 
issued. The remaining market exemptions will occur one year 
after the date the final rule is issued.
    Once the final rules are issued, the Commission shall 
assess the regulatory requirements of the countries or 
administrative regions described in this subsection to 
determine if the regulatory requirements of a foreign 
jurisdiction are not broadly equivalent to U.S. swaps 
requirements.
    Subsection (d) requires the Commission to report to 
Congress any determination that a foreign jurisdiction is not 
broadly equivalent to the U.S. swaps requirements within 30 
days of that determination.
    Subsection (e) defines the terms ``U.S. person'' and 
``United States swaps requirements.''
    Subsection (f) is a conforming amendment.

                       SUBTITLE F--EFFECTIVE DATE

    Sec. 371 sets the effective date for this title as July 21, 
2010.

                        COMMITTEE CONSIDERATION


                              I. HEARINGS

    The Committee on Agriculture held five hearings during the 
113th Congress in anticipation of legislation to extend and 
reform the operations of the Commodity Futures Trading 
Commission.
    On March 14, 2013, the Full Committee on Agriculture held a 
hearing entitled, ``Examining Legislative Improvements to Title 
VII of the Dodd-Frank Act'' where the following witnesses 
testified on several measures that where included in H.R. 4413:
    
 The Honorable Gary Gensler, Chairman, U.S. 
Commodity Futures Trading Commission, Washington, D.C.
    
 The Honorable Kenneth E. Bentsen, Jr., Acting 
President and CEO, Securities Industry and Financial Markets 
Association (SIFMA), Washington, D.C.
    
 Mr. Jim Colby, Assistant Treasurer, Honeywell 
International Inc., Morristown, New Jersey; on behalf of the 
Coalition for Derivatives End-Users
    
 Mr. Terrance Naulty, General Manager & CEO, 
Owensboro Municipal Utilities, Owensboro, Kentucky; on behalf 
of the American Public Power Association
    
 Mr. Larry Thompson, General Counsel, Depository 
Trust and Clearing Corporation (DTCC), New York, New York
    
 Ms. Marie Hollein, President and CEO, Financial 
Executives International (FEI) and Financial Executives 
Research Foundation, Washington, D.C.; on behalf of the 
Coalition for Derivatives End-Users
    
 Mr. Wallace C. Turbeville, Senior Fellow, Demos, 
New York, New York; on behalf of Americans for Financial Reform
    On May 21, 2013, the Full Committee on Agriculture held a 
hearing entitled, ``The Future of the CFTC: Market 
Perspectives'' where the following witnesses testified on 
matters included in H.R. 4413:
    
 Mr. Terrence A. Duffy, Executive Chairman and 
President, CME Group, Inc., Chicago, Illinois
    
 Mr. Jeffrey C. Sprecher, Chairman and CEO, 
IntercontinentalExchange, Inc., Atlanta, Georgia
    
 Mr. Daniel J. Roth, President and CEO, National 
Futures Association, Chicago, Illinois
    
 The Honorable Walter L. Lukken, President and CEO, 
Futures Industry Association, Washington, D.C.
    
 Mr. Stephen O'Connor, Chairman, International 
Swaps and Derivatives Association, Inc., New York, New York
    
 Mr. William Dunaway, Chief Financial Officer, INTL 
FCStone, Inc., Kansas City, Missouri
    On July 23, 2013, the Full Committee on Agriculture held a 
hearing entitled, ``The Future of the CFTC: Commission 
Perspectives'' where the following witnesses testified on 
matters included in H.R. 4413:
    
 The Honorable Scott D. O'Malia, Commissioner, U.S. 
Commodity Futures Trading Commission, Washington, D.C.
    
 The Honorable Mark P. Wetjen, Commissioner, U.S. 
Commodity Futures Trading Commission, Washington, D.C.
    On July 24, 2013, the Full Committee on Agriculture held a 
hearing entitled, ``The Future of the CFTC: End-User 
Perspectives'' where the following witnesses testified on 
matters included in H.R. 4413:
    
 Mr. Scott Cordes, President, CHS Hedging, Inc., 
St. Paul, Minnesota, on behalf of the National Council of 
Farmer Cooperatives
    
 Mr. Lance Kotschwar, Senior Compliance Attorney, 
The Gavilon Group, LLC, Omaha, Nebraska, on behalf of the 
Commodity Markets Council
    
 Mr. Richard F. McMahon, Jr., Vice President, 
Edison Electric Institute, Washington, D.C.
    
 Mr. Chris Monroe, Treasurer, Southwest Airlines, 
Dallas, Texas
    
 Mr. Andrew K. Soto, Senior Managing Counsel, 
Regulatory Affairs, American Gas Association, Washington, DC
    
 Mr. Gene A. Guilford, National & Regional Policy 
Counsel, Connecticut Energy Marketers Association, Cromwell, 
Connecticut, on behalf of the Commodity Markets Oversight 
Coalition
    On October 2, 2013, the Full Committee on Agriculture held 
a hearing entitled, ``The Future of the CFTC: Perspectives on 
Customer Protections'' where the following witnesses testified 
on matters included in H.R. 4413:
    
 Mr. Terrence A. Duffy, Executive Chairman and 
President, CME Group, Inc., Chicago, Illinois
    
 Mr. Daniel J. Roth, President and CEO, National 
Futures Association, Chicago, Illinois
    
 Dr. Christopher L. Culp, Senior Advisor, Compass 
Lexecon, Chicago, Illinois
    
 Mr. Michael J. Anderson, Regional Sales Manager, 
The Andersons Inc., Union City, Tennessee, on behalf of the 
National Grain and Feed Association
    
 Mr. James L. Koutoulas, Esq., President and Co-
Founder, Commodity Customer Coalition, Inc., Chicago, Illinois
    
 Mr. Theodore L. Johnson, President, Frontier 
Futures, Inc., Cedar Rapids, Iowa

                           II. FULL COMMITTEE

    The Committee on Agriculture met, pursuant to notice, with 
a quorum present, on April 9, 2014, to consider H.R. 4413. 
Chairman Lucas called the meeting to order to consider the 
Customer Protection and End User Relief Act. Chairman Lucas 
gave a statement as did Mr. Peterson, Mr. Conaway, and Mr. 
David Scott.
    Without objection the Customer Protection and End User 
Relief Act was brought before the Committee, the first reading 
of the text was waived, and it was open for amendment at any 
point.
    Mr. Conaway offered an amendment to sunset all new CFTC 
rules or regulations promulgated after the enactment of this 
act, unless the CFTC reissues the rule or regulation, in a 
manner consistent with the Administrative Procedure Act and by 
a majority vote of the Commission, and determines it to have 
force or effect. Mr. Conaway then withdrew his amendment.
    Mr. Goodlatte offered an amendment to require the CFTC to 
report on actions taken to ensure a stable aluminum market. Mr. 
Goodlatte then withdrew his amendment.
    Mr. Peterson offered a motion that the Committee favorably 
report the Customer Protection and End User Relief Act to the 
House with the recommendation that it do pass. By voice vote, 
the motion was adopted.
    At the conclusion of the meeting, Chairman Lucas advised 
Members that pursuant to the rules of the House of 
Representatives Members had 2 calendar days to file any 
supplemental or minority views with the Committee.
    Without objection, staff was given permission to make any 
necessary clerical, technical or conforming changes to reflect 
the intent of the Committee. Chairman Lucas thanked all the 
Members and adjourned the meeting.

                            Committee Votes

    In compliance with clause 3(b) of rule XIII of the House of 
Representatives, H.R. 4413 was reported by voice vote with a 
majority quorum present. There was no request for a recorded 
vote.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee on Agriculture's 
oversight findings and recommendations are reflected in the 
body of this report.

           Budget Act Compliance (Sections 308, 402, AND 423)

    The provisions of clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives and section 308(a)(1) of the 
Congressional Budget Act of 1974 (relating to estimates of new 
budget authority, new spending authority, new credit authority, 
or increased or decreased revenues or tax expenditures) are not 
considered applicable. The estimate and comparison required to 
be prepared by the Director of the Congressional Budget Office 
under clause 3(c)(3) of rule XIII of the Rules of the House of 
Representatives and sections 402 and 423 of the Congressional 
Budget Act of 1974 submitted to the Committee prior to the 
filing of this report are as follows:
                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, May 19, 2014.
Hon. Frank D. Lucas,
Chairman, Committee on Agriculture,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 4413, the Customer 
Protection and End User Relief Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

H.R. 4413--Customer Protection and End User Relief Act

    Summary: H.R. 4413 would authorize appropriations for the 
Commodity Futures Trading Commission (CFTC) through 2018 and 
make changes in some of the agency's operating procedures. The 
bill also would amend the Commodity Exchange Act to provide 
greater protections for customer funds held by entities that 
broker transactions in commodity futures and to relax 
requirements on certain participants in swap transactions in a 
number of different circumstances. (A swap is a contract that 
calls for an exchange of cash between two participants, based 
on an underlying rate or index or on the performance of an 
asset.)
    CBO estimates that implementing H.R. 4413 would cost $207 
million in 2015 and $948 million over the 2015-2019 period, 
assuming appropriation of the necessary amounts. CBO expects 
that enacting H.R. 4413 would affect direct spending and 
revenues; therefore, pay-as-you-go procedures apply. However, 
CBO estimates that those effects would not be significant.
    H.R. 4413 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA).
    Estimated cost to the Federal Government: The estimated 
budgetary effect of H.R. 4413 is shown in the following table. 
The costs of this legislation fall within budget function 370 
(commerce and housing credit).

----------------------------------------------------------------------------------------------------------------
                                                                 By fiscal year, in millions of dollars--
                                                         -------------------------------------------------------
                                                            2015     2016     2017     2018     2019   2015-2019
----------------------------------------------------------------------------------------------------------------
                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATION

CFTC Reauthorization:
    Estimated Authorization Level.......................      221      228      236      245        0       930
    Estimated Outlays...................................      197      223      231      239       22       912
Other Provisions:
    Estimated Authorization Level.......................       12        6        6        6        7        37
    Estimated Outlays                                          10        7        6        6        7        36
    Total Changes:
        Estimated Authorization Level...................      233      234      242      251        7       967
        Estimated Outlays...............................      207      230      237      245       29      948
----------------------------------------------------------------------------------------------------------------
Notes: CBO estimates that enacting H.R. 4413 would not have a significant effect on revenues or direct spending
  over the 2014-2024 period.
CFTC = Commodity Futures Trading Commission.

    Basis of Estimate: For this estimate, CBO assumes that the 
bill will be enacted near the end of fiscal year 2014, the 
necessary amounts will be appropriated near the beginning of 
each fiscal year, and outlays will follow spending patterns for 
similar activities at the CFTC.

Spending subject to appropriation

    CFTC Reauthorization. H.R. 4413 would authorize 
appropriations for CFTC operations through 2018; for 2014, the 
CFTC received an appropriation of $215 million. Based on the 
agency's current budget and adjusting for anticipated 
inflation, CBO estimates that extending the authorization of 
appropriations for the current functions of the CFTC through 
2018 would cost $912 million over the 2015-2019 period, 
assuming those inflation-adjusted amounts are appropriated each 
year.
    Other Provisions. H.R. 4413 would require the agency to 
change certain procedures in its rulemaking process and to 
improve safeguards of market data in the agency's control. The 
bill also would direct the CFTC to prepare a report for the 
Congress examining the effect of high-frequency trading (the 
use of technology and computer algorithms to rapidly trade 
contracts) on the markets it oversees.
    In addition, the bill would require entities that broker 
transactions in commodity futures, known as futures commission 
merchants, and the national association that regulates them to 
implement practices that provide additional protections for 
funds held for their clients. Finally, under the bill, certain 
swap transactions or participants in those transactions would 
be exempt from new regulations developed to meet the 
requirements of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. For example, the bill would, under certain 
circumstances, exempt nonfinancial entities that enter into a 
swap transaction from meeting certain margin requirements.
    Based on information from the CFTC, CBO estimates that the 
agency would require 25 additional personnel annually to handle 
the increased workload under these provisions, an increase of 
about 4 percent over the agency's 2013 staffing level. We 
estimate that salaries, benefits, and overhead for those 
additional staff, as well as new administrative expenses, would 
cost $36 million over the 2015-2019 period, assuming 
appropriation of the necessary amounts.

Direct spending and revenues

    H.R. 4413 would increase costs for the financial regulators 
(the Federal Reserve System, the Federal Deposit Insurance 
Corporation, and the Office of the Comptroller of the Currency) 
to amend certain regulations, which would affect direct 
spending and revenues. The bill also would affect federally 
owned utilities by changing the way CFTC regulates certain 
electric and natural gas utility contracts. Taken together, CBO 
estimates that these costs would not be significant over the 
2014-2024 period.
    Pay-As-You-Go considerations: CBO expects that enacting 
H.R. 4413 would affect direct spending and revenues; therefore, 
pay-as-you-go procedures apply. However, CBO estimates that 
those effects would not be significant.
    Intergovernmental and Private-sector impact: H.R. 4413 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would impose no costs on state, local, or 
tribal governments.
    Previous CBO estimates: On April 1, 2013, CBO transmitted a 
cost estimate for H.R. 1003, a bill to improve consideration by 
the Commodity Futures Trading Commission of the costs and 
benefits of its regulations and orders, as ordered reported by 
the House Committee on Agriculture on March 20, 2013. 
Provisions in title II of H.R. 4413 are similar to H.R. 1003, 
and the CBO cost estimates are the same.
    CBO prepared two cost estimates for H.R. 634, the Business 
Risk Mitigation and Price Stabilization Act of 2013. On April 
11, 2013, we transmitted a cost estimate for a version of the 
bill ordered reported by the House Committee on Agriculture on 
March 20, 2013. On May 29, 2013, we transmitted a cost estimate 
for a version of the bill ordered reported by the House 
Committee on Financial Services on May 7, 2013. Both versions 
of the bill are similar to provisions in title III of H.R. 
4413, and the CBO cost estimates for those similar provisions 
are the same.
    CBO prepared two cost estimates for H.R. 677, the Inter-
Affiliate Swap Clarification Act. On April 11, 2013, we 
transmitted an estimate for a version of the bill ordered 
reported by the House Committee on Agriculture on March 20, 
2013. On May 30, 2013, we transmitted a cost estimate for a 
version of the bill ordered reported by the House Committee on 
Financial Services on May 7, 2013. Both versions of H.R. 677 
would place new requirements on the CFTC and the Securities and 
Exchange Commission. Provisions in title III of H.R. 4413 are 
similar to the provisions of H.R. 677 that applied to the CFTC; 
the CBO cost estimates for the similar provisions are the same.
    CBO prepared two cost estimates for H.R. 742, the Swap Data 
Repository and Clearinghouse Indemnification Correction Act of 
2013. On April 11, 2013, we transmitted a cost estimate for a 
version of the bill ordered reported by the House Committee on 
Agriculture on March 20, 2013. On May 17, 2013, we transmitted 
a cost estimate for a version of the bill ordered reported by 
the House Committee on Financial Services on May 7, 2013. Both 
versions of the bill are similar to provisions in title III of 
H.R. 4413, and the CBO cost estimates for the similar 
provisions are the same.
    CBO prepared two cost estimates for H.R. 1256, the Swap 
Jurisdiction Certainty Act. On May 3, 2013, we transmitted a 
cost estimate for a version of the bill ordered reported by the 
House Committee on Agriculture on March 20, 2013. On May 30, 
2013, we transmitted a cost estimate for a version of the bill 
ordered reported by the House Committee on Financial Services 
on May 7, 2013. Both versions of the bill are similar to 
provisions in title III of H.R. 4413, and the CBO cost 
estimates for the similar provisions are the same.
    On April 1, 2012, CBO transmitted a cost estimate for H.R. 
1038, the Public Power Risk Management Act of 2013, as ordered 
reported by the House Committee on Agriculture on March 20, 
2013. Provisions in title III of H.R. 4413 are similar to H.R. 
1038, and the CBO cost estimates are the same.
    Estimate prepared by: Federal Costs: Susan Willie; Impact 
on State, Local, and Tribal Governments: J'nell L. Blanco; 
Impact on the Private Sector: Paige Piper/Bach.
    Estimate approved by: Theresa Gullo, Deputy Assistant 
Director for Budget Analysis.

                    Performance Goals and Objectives

    With respect to the requirement of clause 3(c)(4) of rule 
XIII of the Rules of the House of Representatives, the 
performance goals and objections of this legislation are to 
reauthorize the Commodity Futures Trading Commission, to better 
protect futures customers, to provide end users with market 
certainty, to make basic reforms to ensure transparency and 
accountability at the Commission, to help farmers, ranchers, 
and end users manage risks to help keep consumer costs low, and 
for other purposes.

                        Committee Cost Estimate

    Pursuant to clause 3(d)(2) of rule XIII of the Rules of the 
House of Representatives, the Committee report incorporates the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to sections 402 and 423 of the 
Congressional Budget Act of 1974.

                      Advisory Committee Statement

    No advisory committee within the meaning of section 5(b) of 
the Federal Advisory Committee Act was created by this 
legislation.

                Applicability to the Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act (Public Law 
104-1).

                       Federal Mandates Statement

    The Committee adopted as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act (Public Law 104-4).

  Earmark Statement Required by Clause 9 of Rule XXI of the Rules of 
                        House of Representatives

    H.R. 4413 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9(e), 9(f), or 9(g) of rule XXI of the Rules of the 
House of Representatives.

                    Duplication of Federal Programs

    This bill does not establish or reauthorize a program of 
the Federal Government known to be duplicative of another 
Federal program, a program that was included in any report from 
the Government Accountability Office to Congress pursuant to 
section 21 of Public Law 111-139, or a program related to a 
program identified in the most recent Catalog of Federal 
Domestic Assistance.

                  Disclosure of Directed Rule Makings

    The Committee estimates that H.R. 4413 specifically directs 
CFTC to conduct one rule making proceedings within the meaning 
of 5 U.S.C. 551.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

COMMODITY EXCHANGE ACT

           *       *       *       *       *       *       *



SEC. 1A. DEFINITIONS.

   As used in this Act:
          (1) * * *

           *       *       *       *       *       *       *

          (7) Commercial market participant.--The term 
        ``commercial market participant'' means any producer, 
        processor, merchant, or commercial user of an exempt or 
        agricultural commodity, or the products or byproducts 
        of such a commodity.
          [(8)] (9) Commission.--The term ``Commission'' means 
        the Commodity Futures Trading Commission established 
        under section 2(a)(2).
          [(9)] (10) Commodity.--The term ``commodity'' means 
        wheat, cotton, rice, corn, oats, barley, rye, flaxseed, 
        grain sorghums, mill feeds, butter, eggs, Solanum 
        tuberosum (Irish potatoes), wool, wool tops, fats and 
        oils (including lard, tallow, cottonseed oil, peanut 
        oil, soybean oil, and all other fats and oils), 
        cottonseed meal, cottonseed, peanuts, soybeans, soybean 
        meal, livestock, livestock products, and frozen 
        concentrated orange juice, and all other goods and 
        articles, except onions (as provided by the first 
        section of Public Law 85-839 (7 U.S.C. 13-1)) and 
        motion picture box office receipts (or any index, 
        measure, value, or data related to such receipts), and 
        all services, rights, and interests (except motion 
        picture box office receipts, or any index, measure, 
        value or data related to such receipts) in which 
        contracts for future delivery are presently or in the 
        future dealt in.
          [(10)] (11) Commodity pool.--
                  (A) * * *

           *       *       *       *       *       *       *

          [(11)] (12) Commodity pool operator.--
                  (A) * * *

           *       *       *       *       *       *       *

          [(12)] (13) Commodity trading advisor.--
                  (A) * * *

           *       *       *       *       *       *       *

          [(13)] (14) Contract of sale.--The term ``contract of 
        sale'' includes sales, agreements of sale, and 
        agreements to sell.
          [(14)] (15) Cooperative association of producers.--
        The term ``cooperative association of producers'' means 
        any cooperative association, corporate, or otherwise, 
        not less than 75 percent in good faith owned or 
        controlled, directly or indirectly, by producers of 
        agricultural products and otherwise complying with the 
        Act of February 18, 1922 (42 Stat. 388, chapter 57; 7 
        U.S.C. 291 and 292), including any organization acting 
        for a group of such associations and owned or 
        controlled by such associations, except that business 
        done for or with the United States, or any agency 
        thereof, shall not be considered either member or 
        nonmember business in determining the compliance of any 
        such association with this Act.
          [(15)] (16) Derivatives clearing organization.--
                  (A) * * *

           *       *       *       *       *       *       *

          [(16)] (17) Electronic trading facility.--The term 
        ``electronic trading facility'' means a trading 
        facility that--
                  (A) * * *

           *       *       *       *       *       *       *

          [(17)] (18) Eligible commercial entity.--The term 
        ``eligible commercial entity'' means, with respect to 
        an agreement, contract or transaction in a commodity--
                  (A) an eligible contract participant 
                described in clause (i), (ii), (v), (vii), 
                (viii), or (ix) of paragraph [(18)(A)] (19)(A) 
                that, in connection with its business--
                          (i) * * *

           *       *       *       *       *       *       *

          [(18)] (19) Eligible contract participant.--The term 
        ``eligible contract participant'' means--
                  (A) * * *
                          (i) * * *

           *       *       *       *       *       *       *

                          (vii)(I) a governmental entity 
                        (including the United States, a State, 
                        or a foreign government) or political 
                        subdivision of a governmental entity;
                          (II) a multinational or supranational 
                        government entity; or
                          (III) an instrumentality, agency, or 
                        department of an entity described in 
                        subclause (I) or (II);
                                except that such term does not 
                                include an entity, 
                                instrumentality, agency, or 
                                department referred to in 
                                subclause (I) or (III) of this 
                                clause unless (aa) the entity, 
                                instrumentality, agency, or 
                                department is a person 
                                described in clause (i), (ii), 
                                or (iii) of paragraph [(17)(A)] 
                                (18)(A); (bb) the entity, 
                                instrumentality, agency, or 
                                department owns and invests on 
                                a discretionary basis 
                                $50,000,000 or more in 
                                investments; or (cc) the 
                                agreement, contract, or 
                                transaction is offered by, and 
                                entered into with, an entity 
                                that is listed in any of 
                                subclauses (I) through (VI) of 
                                section 2(c)(2)(B)(ii);

           *       *       *       *       *       *       *

          [(19)] (20) Excluded commodity.--The term ``excluded 
        commodity'' means--
                          (i) * * *

           *       *       *       *       *       *       *

          [(20)] (21) Exempt commodity.--The term ``exempt 
        commodity'' means a commodity that is not an excluded 
        commodity or an agricultural commodity.
          [(21)] (22) Financial institution.--The term 
        ``financial institution'' means--
                  (A) * * *

           *       *       *       *       *       *       *

          [(22)] (23) Floor broker.--
                  (A) * * *

           *       *       *       *       *       *       *

          [(23)] (24) Floor trader.--
                  (A) * * *

           *       *       *       *       *       *       *

          [(24)] (25) Foreign exchange forward.--The term 
        ``foreign exchange forward'' means a transaction that 
        solely involves the exchange of 2 different currencies 
        on a specific future date at a fixed rate agreed upon 
        on the inception of the contract covering the exchange.
          [(25)] (26) Foreign exchange swap.--The term 
        ``foreign exchange swap'' means a transaction that 
        solely involves--
                  (A) * * *

           *       *       *       *       *       *       *

          [(26)] (27) Foreign futures authority.--The term 
        ``foreign futures authority'' means any foreign 
        government, or any department, agency, governmental 
        body, or regulatory organization empowered by a foreign 
        government to administer or enforce a law, rule, or 
        regulation as it relates to a futures or options 
        matter, or any department or agency of a political 
        subdivision of a foreign government empowered to 
        administer or enforce a law, rule, or regulation as it 
        relates to a futures or options matter.
          [(27)] (28) Future delivery.--The term ``future 
        delivery'' does not include any sale of any cash 
        commodity for deferred shipment or delivery.
          [(28)] (29) Futures commission merchant.--
                  (A) * * *

           *       *       *       *       *       *       *

          [(29)] (30) Hybrid instrument.--The term ``hybrid 
        instrument'' means a security having one or more 
        payments indexed to the value, level, or rate of, or 
        providing for the delivery of, one or more commodities.
          [(30)] (31) Interstate commerce.--The term 
        ``interstate commerce'' means commerce--
                  (A) * * *

           *       *       *       *       *       *       *

          [(31)] (32) Introducing broker.--
                  (A) * * *

           *       *       *       *       *       *       *

          [(32)] (33) Major security-based swap participant.--
        The term ``major security-based swap participant'' has 
        the meaning given the term in section 3(a) of the 
        Securities Exchange Act of 1934 (15 U.S.C. 78c(a)).
          [(33)] (34) Major swap participant.--
                  (A) * * *

           *       *       *       *       *       *       *

          [(34)] (35) Member of a registered entity; member of 
        a derivatives transaction execution facility.--The term 
        ``member'' means, with respect to a registered entity 
        or derivatives transaction execution facility, an 
        individual, association, partnership, corporation, or 
        trust--
                  (A) * * *

           *       *       *       *       *       *       *

        A participant in an alternative trading system that is 
        designated as a contract market pursuant to section 5f 
        is deemed a member of the contract market for purposes 
        of transactions in security futures products through 
        the contract market.
          [(35)] (36) Narrow-based security index.--
                  (A) * * *

           *       *       *       *       *       *       *

          [(36)] (37) Option.--The term ``option'' means an 
        agreement, contract, or transaction that is of the 
        character of, or is commonly known to the trade as, an 
        ``option'', ``privilege'', ``indemnity'', ``bid'', 
        ``offer'', ``put'', ``call'', ``advance guaranty'', or 
        ``decline guaranty''.
          [(37)] (38) Organized exchange.--The term ``organized 
        exchange'' means a trading facility that--
                  (A) * * *

           *       *       *       *       *       *       *

          [(38)] (39) Person.--The term ``person'' imports the 
        plural or singular, and includes individuals, 
        associations, partnerships, corporations, and trusts.
          [(39)] (40) Prudential regulator.--The term 
        ``prudential regulator'' means--
                  (A) * * *

           *       *       *       *       *       *       *

          [(40)] (41) Registered entity.--The term ``registered 
        entity'' means--
                  (A) * * *

           *       *       *       *       *       *       *

          [(41)] (42) Security.--The term ``security'' means a 
        security as defined in section 2(a)(1) of the 
        Securities Act of 1933 (15 U.S.C. 77b(a)(1)) or section 
        3(a)(10) of the Securities Exchange Act of 1934 (15 
        U.S.C. 78c(a)(10)).
          [(42)] (43) Security-based swap.--The term 
        ``security-based swap'' has the meaning given the term 
        in section 3(a) of the Securities Exchange Act of 1934 
        (15 U.S.C. 78c(a)).
          [(43)] (44) Security-based swap dealer.--The term 
        ``security-based swap dealer'' has the meaning given 
        the term in section 3(a) of the Securities Exchange Act 
        of 1934 (15 U.S.C. 78c(a)).
          [(44)] (45) Security future.--The term ``security 
        future'' means a contract of sale for future delivery 
        of a single security or of a narrow-based security 
        index, including any interest therein or based on the 
        value thereof, except an exempted security under 
        section 3(a)(12) of the Securities Exchange Act of 1934 
        as in effect on the date of the enactment of the 
        Futures Trading Act of 1982 (other than any municipal 
        security as defined in section 3(a)(29) of the 
        Securities Exchange Act of 1934 as in effect on the 
        date of the enactment of the Futures Trading Act of 
        1982). The term ``security future'' does not include 
        any agreement, contract, or transaction excluded from 
        this Act under section 2(c), 2(d), 2(f), or 2(g) of 
        this Act (as in effect on the date of the enactment of 
        the Commodity Futures Modernization Act of 2000) or 
        title IV of the Commodity Futures Modernization Act of 
        2000.
          [(45)] (46) Security futures product.--The term 
        ``security futures product'' means a security future or 
        any put, call, straddle, option, or privilege on any 
        security future.
          [(46)] (47) Significant price discovery contract.--
        The term ``significant price discovery contract'' means 
        an agreement, contract, or transaction subject to 
        section 2(h)(5).
          [(47)] (48) Swap.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the term ``swap'' means any 
                agreement, contract, or transaction--
                          (i) * * *

           *       *       *       *       *       *       *

                          (iii) that provides on an executory 
                        basis for the exchange, on a fixed or 
                        contingent basis, of 1 or more payments 
                        based on the value or level of 1 or 
                        more interest or other rates, 
                        currencies, commodities, securities, 
                        instruments of indebtedness, indices, 
                        quantitative measures, or other 
                        financial or economic interests or 
                        property of any kind, or any interest 
                        therein or based on the value thereof, 
                        and that transfers, as between the 
                        parties to the transaction, in whole or 
                        in part, the financial risk associated 
                        with a future change in any such value 
                        or level without also conveying a 
                        current or future direct or indirect 
                        ownership interest in an asset 
                        (including any enterprise or investment 
                        pool) or liability that incorporates 
                        the financial risk so transferred, 
                        including any agreement, contract, or 
                        transaction commonly known as--
                                  (I) * * *

           *       *       *       *       *       *       *

                                  (XXI) an emissions swap; 
                                [and]
                                  (XXII) a commodity swap; and
                                  (XXIII) a utility operations-
                                related swap;

           *       *       *       *       *       *       *

                  (B) Exclusions.--The term ``swap'' does not 
                include--
                          (i) * * *
                          [(ii) any sale of a nonfinancial 
                        commodity or security for deferred 
                        shipment or delivery, so long as the 
                        transaction is intended to be 
                        physically settled;]
                          (ii) any purchase or sale of a 
                        nonfinancial commodity or security for 
                        deferred shipment or delivery, so long 
                        as the transaction is intended to be 
                        physically settled, including any 
                        stand-alone or embedded option for 
                        which--
                                  (I) exercise results in a 
                                physical delivery obligation;
                                  (II) cannot be severed or 
                                marketed separately from the 
                                overall transaction for the 
                                purpose of financial 
                                settlement; and
                                  (III) both parties are 
                                commercial market participants.

           *       *       *       *       *       *       *

          [(48)] (49) Swap data repository.--The term ``swap 
        data repository'' means any person that collects and 
        maintains information or records with respect to 
        transactions or positions in, or the terms and 
        conditions of, swaps entered into by third parties for 
        the purpose of providing a centralized recordkeeping 
        facility for swaps.
          [(49)] (50) Swap dealer.--
                  (A) * * *

           *       *       *       *       *       *       *

                  [(D) De minimis exception.--The Commission ]
                  (D) De minimis exception._
                          (i) In general._The Commission shall 
                        exempt from designation as a swap 
                        dealer an entity that engages in a de 
                        minimis quantity of swap dealing in 
                        connection with transactions with or on 
                        behalf of its customers. The Commission 
                        shall promulgate regulations to 
                        establish factors with respect to the 
                        making of this determination to exempt.
                          (ii) The de minimis quantity of swap 
                        dealing as described in clause (i) that 
                        is currently set at a quantity of 
                        $8,000,000,000 shall only be amended or 
                        reduced through a new affirmative 
                        action of the Commission undertaken by 
                        rule or regulation.
                  (E) Certain transactions with a utility 
                special entity.--
                          (i) Transactions in utility 
                        operations-related swaps shall be 
                        reported pursuant to section 4r.
                          (ii) In making a determination to 
                        exempt pursuant to subparagraph (D), 
                        the Commission shall treat a utility 
                        operations-related swap entered into 
                        with a utility special entity, as 
                        defined in section 4s(h)(2)(D), as if 
                        it were entered into with an entity 
                        that is not a special entity, as 
                        defined in section 4s(h)(2)(C).
          [(50)] (51) Swap execution facility.--The term ``swap 
        execution facility'' means a trading system or platform 
        in which multiple participants have the ability to 
        execute or trade swaps by accepting bids and offers 
        made by multiple participants in the facility or 
        system, through any means of interstate commerce, 
        including any trading facility, that--
                  (A) * * *

           *       *       *       *       *       *       *

          [(51)] (52) Trading facility.--
                  (A) * * *

           *       *       *       *       *       *       *

          (52) Utility operations-related swap.--The term 
        ``utility operations-related swap'' means a swap that--
                  (A) is entered into to hedge or mitigate a 
                commercial risk;
                  (B) is not a contract, agreement, or 
                transaction based on, derived on, or 
                referencing--
                          (i) an interest rate, credit, equity, 
                        or currency asset class; or
                          (ii) a metal, agricultural commodity, 
                        or crude oil or gasoline commodity of 
                        any grade, except as used as fuel for 
                        electric energy generation; and
                  (C) is associated with--
                          (i) the generation, production, 
                        purchase, or sale of natural gas or 
                        electric energy, the supply of natural 
                        gas or electric energy to a utility, or 
                        the delivery of natural gas or electric 
                        energy service to utility customers;
                          (ii) all fuel supply for the 
                        facilities or operations of a utility;
                          (iii) compliance with an electric 
                        system reliability obligation;
                          (iv) compliance with an energy, 
                        energy efficiency, conservation, or 
                        renewable energy or environmental 
                        statute, regulation, or government 
                        order applicable to a utility; or
                          (v) any other electric energy or 
                        natural gas swap to which a utility is 
                        a party.

           *       *       *       *       *       *       *


SEC. 2. JURISDICTION OF COMMISSION; LIABILITY OF PRINCIPAL FOR ACT OF 
                    AGENT; COMMODITY FUTURES TRADING COMMISSION; 
                    TRANSACTION IN INTERSTATE COMMERCE.

  (a)  Jurisdiction of Commission; Commodity Futures Trading 
Commission.--
          (1) * * *

           *       *       *       *       *       *       *

          (6)(A) Except as otherwise provided in this paragraph 
        and in paragraphs [(4) and (5)] (4), (5), and (17) of 
        this subsection, the executive and administrative 
        functions of the Commission, including functions of the 
        Commission with respect to the appointment and 
        supervision of personnel employed under the Commission, 
        the distribution of business among such personnel and 
        among administrative units of the Commission, and the 
        use and expenditure of funds, according to budget 
        categories, plans, programs, and priorities established 
        and approved by the Commission, shall be exercised 
        solely by the Chairman.

           *       *       *       *       *       *       *

          (C) The appointment by the Chairman of the heads of 
        major administrative units under the Commission shall 
        be subject to the approval of the Commission, and the 
        heads of the units shall serve at the pleasure of the 
        Commission, report directly to the Commission, and 
        perform such functions and duties as the Commission may 
        prescribe.

           *       *       *       *       *       *       *

  [(12) The]
  (12) Rules and regulations._
          (A) In general._Subject to the other provisions of 
        this paragraph, the Commission is authorized to 
        promulgate such rules and regulations as it deems 
        necessary to govern the operating procedures and 
        conduct of the business of the Commission.
          (B) Notice to commission.--
                  (i) General rule.--A division or office of 
                the Commission may not issue an interpretive 
                rule of general applicability, a statement of 
                general policy, a response to a formal, written 
                request or petition from any member of the 
                public for guidance, or an exemptive, a no-
                action, or an interpretive letter, unless, at 
                least 7 calendar days before the issuance, the 
                division or office has provided the Commission 
                with a copy of the matter to be issued.
                  (ii) Opportunity for meeting required.--After 
                receiving a copy of the matter provided in 
                accordance with clause (i), any member of the 
                Commission may request that the Commission hold 
                a meeting to review the matter, and the 
                Chairman shall immediately put any such request 
                for a meeting before the Commission, and if the 
                Commission decides to hold the meeting by a 
                majority vote, the matter may not be issued 
                until the Commission has concluded the meeting.
                  (iii) Limitations on applicability.--By a 
                majority vote, the Commission may waive the 7-
                day prior notice requirement of clause (i) when 
                the Commission finds that requiring such a 
                notice would be impracticable, unnecessary, or 
                contrary to the public interest.
          (C) Internal risk controls.--The Commission staff and 
        the Chief Economist shall develop comprehensive 
        internal risk control mechanisms to safeguard and 
        govern the storage of all market data by the 
        Commission, all market data sharing agreements of the 
        Commission, and all academic research performed at the 
        Commission using market data.
          (E) Requirement to publish implementation plan for 
        commission rules.--The Commission shall direct its 
        staff to develop and publish in any proposed rule a 
        plan for--
                  (i) when and for how long the proposed rule 
                will be subject to public comment; and
                  (ii) by when compliance with the final rule 
                will be required.

           *       *       *       *       *       *       *

          (F) Applicability of notice and comment rules to 
        guidance voted on by the commission.--The notice and 
        comment requirements of chapter 5 of title 5, United 
        States Code, shall also apply with respect to any 
        guidance issued by the Commission after being voted on 
        by the Commission.
          (13) Public availability of swap transaction data.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) General rule.--[The Commission] Except as 
                provided in subparagraph (D), the Commission is 
                authorized and required to provide by rule for 
                the public availability of swap transaction and 
                pricing data as follows:
                          (i) * * *

           *       *       *       *       *       *       *

                  (D) Requirements for swap transactions in 
                illiquid markets.--Notwithstanding subparagraph 
                (C):
                          (i) The Commission shall provide by 
                        rule for the public reporting of swap 
                        transactions, including price and 
                        volume data, in illiquid markets that 
                        are not cleared and entered into by a 
                        non-financial entity that is hedging or 
                        mitigating commercial risk in 
                        accordance with subsection (h)(7)(A).
                          (ii) The Commission shall ensure that 
                        the swap transaction information 
                        referred to in clause (i) of this 
                        subparagraph is available to the public 
                        no sooner than 30 days after the swap 
                        transaction has been executed or at 
                        such later date as the Commission 
                        determines appropriate to protect the 
                        identity of participants and positions 
                        in illiquid markets and to prevent the 
                        elimination or reduction of market 
                        liquidity.
                          (iii) In this subparagraph, the term 
                        ``illiquid markets'' means any market 
                        in which the volume and frequency of 
                        trading in swaps is at such a level as 
                        to allow identification of individual 
                        market participants.
                  [(D)] (E) Registered entities and public 
                reporting.--The Commission may require 
                registered entities to publicly disseminate the 
                swap transaction and pricing data required to 
                be reported under this paragraph.
                  [(E)] (F) Rulemaking required.--With respect 
                to the rule providing for the public 
                availability of transaction and pricing data 
                for swaps described in clauses (i) and (ii) of 
                subparagraph (C), the rule promulgated by the 
                Commission shall contain provisions--
                          (i) * * *

           *       *       *       *       *       *       *

                  [(F)] (G) Timeliness of reporting.--Parties 
                to a swap (including agents of the parties to a 
                swap) shall be responsible for reporting swap 
                transaction information to the appropriate 
                registered entity in a timely manner as may be 
                prescribed by the Commission.
                  [(G)] (H) Reporting of swaps to registered 
                swap data repositories.--Each swap (whether 
                cleared or uncleared) shall be reported to a 
                registered swap data repository.

           *       *       *       *       *       *       *

          (17) Office of the chief economist.--
                  (A) Establishment.--There is established in 
                the Commission the Office of the Chief 
                Economist.
                  (B) Head.--The Office of the Chief Economist 
                shall be headed by the Chief Economist, who 
                shall be appointed by the Commission and serve 
                at the pleasure of the Commission.
                  (C) Functions.--The Chief Economist shall 
                report directly to the Commission and perform 
                such functions and duties as the Commission may 
                prescribe.
                  (D) Professional staff.--The Commission shall 
                appoint such other economists as may be 
                necessary to assist the Chief Economist in 
                performing such economic analysis, regulatory 
                cost-benefit analysis, or research the 
                Commission may direct.
          (18) Strategic technology plan.--
                  (A) In general.--Every 5 years, the 
                Commission shall develop and submit to the 
                Committee on Agriculture of the House of 
                Representatives and the Committee on 
                Agriculture, Nutrition, and Forestry of the 
                Senate a detailed plan focused on the 
                acquisition and use of technology by the 
                Commission.
                  (B) Contents.--The plan shall--
                          (i) include for each related division 
                        or office a detailed technology 
                        strategy focused exclusively on market 
                        surveillance and risk detection, market 
                        data collection, aggregation, 
                        interpretation, standardization, 
                        harmonization, streamlining, and 
                        internal management and protection of 
                        data collected by the Commission, 
                        including a detailed accounting of how 
                        the funds provided for technology will 
                        be used and the priorities that will 
                        apply in the use of the funds; and
                          (ii) set forth annual goals to be 
                        accomplished and annual budgets needed 
                        to accomplish the goals.

           *       *       *       *       *       *       *

  (h)  Clearing Requirement.--
          (1) * * *

           *       *       *       *       *       *       *

          (7) Exceptions.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) Financial entity definition.--
                          (i) * * *

           *       *       *       *       *       *       *

                          [(iii) Limitation.--Such definition 
                        shall not include an entity whose 
                        primary business is providing 
                        financing, and uses derivatives for the 
                        purpose of hedging underlying 
                        commercial risks related to interest 
                        rate and foreign currency exposures, 90 
                        percent or more of which arise from 
                        financing that facilitates the purchase 
                        or lease of products, 90 percent or 
                        more of which are manufactured by the 
                        parent company or another subsidiary of 
                        the parent company.]
                          (iii) Limitation.--Such definition 
                        shall not include an entity--
                                  (I) whose primary business is 
                                providing financing, and who 
                                uses derivatives for the 
                                purpose of hedging underlying 
                                commercial risks related to 
                                interest rate and foreign 
                                currency exposures, 90 percent 
                                or more of which arise from 
                                financing that facilitates the 
                                purchase or lease of products, 
                                90 percent or more of which are 
                                manufactured by the parent 
                                company or another subsidiary 
                                of the parent company; or
                                  (II) who is not supervised by 
                                a prudential regulator, and is 
                                not described in any of 
                                subclauses (I) through (VII) of 
                                clause (i), and--
                                          (aa) is a commercial 
                                        market participant and 
                                        is considered a 
                                        financial entity under 
                                        clause (i)(VIII) 
                                        because the entity 
                                        predominantly engages 
                                        in physical delivery 
                                        contracts; or
                                          (bb) enters into 
                                        swaps, contracts for 
                                        future delivery, and 
                                        other derivatives on 
                                        behalf of, or to hedge 
                                        or mitigate the 
                                        commercial risk of, 
                                        whether directly or in 
                                        the aggregate, 
                                        affiliates that are not 
                                        so supervised or 
                                        described.
                  (D) Treatment of affiliates.--
                          [(i) In general.--An affiliate of a 
                        person that qualifies for an exception 
                        under subparagraph (A) (including 
                        affiliate entities predominantly 
                        engaged in providing financing for the 
                        purchase of the merchandise or 
                        manufactured goods of the person) may 
                        qualify for the exception only if the 
                        affiliate, acting on behalf of the 
                        person and as an agent, uses the swap 
                        to hedge or mitigate the commercial 
                        risk of the person or other affiliate 
                        of the person that is not a financial 
                        entity.]
                          (i) In general.--An affiliate of a 
                        person that qualifies for an exception 
                        under subparagraph (A) (including 
                        affiliate entities predominantly 
                        engaged in providing financing for the 
                        purchase of the merchandise or 
                        manufactured goods of the person) may 
                        qualify for the exception only if the 
                        affiliate enters into the swap to hedge 
                        or mitigate the commercial risk of the 
                        person or other affiliate of the person 
                        that is not a financial entity, 
                        provided that if the transfer of 
                        commercial risk is addressed by 
                        entering into a swap with a swap dealer 
                        or major swap participant, a credit 
                        support measure or other mechanism is 
                        utilized.

           *       *       *       *       *       *       *

  Sec. 4. (a) * * *

           *       *       *       *       *       *       *

  (c)(1) In order to promote responsible economic or financial 
innovation and fair competition, the Commission by rule, 
regulation, or order, after notice and opportunity for hearing, 
may (on its own initiative or on application of any person, 
including any board of trade designated or registered as a 
contract market or derivatives transaction execution facility 
for transactions for future delivery in any commodity under 
section 5 of this Act) exempt any agreement, contract, or 
transaction (or class thereof) that is otherwise subject to 
subsection (a) (including any person or class of persons 
offering, entering into, rendering advice or rendering other 
services with respect to, the agreement, contract, or 
transaction), either unconditionally or on stated terms or 
conditions or for stated periods and either retroactively or 
prospectively, or both, from any of the requirements of 
subsection (a), or from any other provision of this Act (except 
subparagraphs (C)(ii) and (D) of section 2(a)(1), except that--
          (A) unless the Commission is expressly authorized by 
        any provision described in this subparagraph to grant 
        exemptions, or except as necessary to effectuate 
        section 361 of the Customer Protection and End User 
        Relief Act, with respect to amendments made by subtitle 
        A of the Wall Street Transparency and Accountability 
        Act of 2010--
                  (i) with respect to--
                          (I) paragraphs (2), (3), (4), (5), 
                        and [(7), paragraph (18)(A)(vii)(III), 
                        paragraphs (23), (24), (31), (32), 
                        (38), (39), (41), (42), (46), (47), 
                        (48), and (49)] (8), paragraph 
                        (19)(A)(vii)(III), paragraphs (24), 
                        (25), (32), (33), (39), (40), (42), 
                        (43), (47), (48), (49), and (50) of 
                        section 1a, and sections 2(a)(13), 
                        2(c)(1)(D), 4a(a), 4a(b), 4d(c), 4d(d), 
                        4r, 4s, 5b(a), 5b(b), 5(d), 5(g), 5(h), 
                        5b(c), 5b(i), 8e, and 21; and

           *       *       *       *       *       *       *

  Sec. 4a. (a) * * *

           *       *       *       *       *       *       *

  (c)(1) No rule, regulation, or order issued under subsection 
(a) of this section shall apply to transactions or positions 
which are shown to be bona fide hedging transactions or 
positions, as such terms shall be defined by the Commission by 
rule, regulation, or order consistent with the purposes of this 
Act. Such terms [may] shall be defined to permit producers, 
purchasers, sellers, middlemen, and users of a commodity or a 
product derived therefrom to hedge their legitimate anticipated 
business needs for that period of time into the [future for 
which] future, to be determined by the Commission, for which 
either an appropriate swap is available or an appropriate 
futures contract is open and available on an exchange. To 
determine the adequacy of this Act and the powers of the 
Commission acting thereunder to prevent unwarranted price 
pressures by large hedgers, the Commission shall monitor and 
analyze the trading activities of the largest hedgers, as 
determined by the Commission, operating in the cattle, hog, or 
pork belly markets and shall report its findings and 
recommendations to the Senate Committee on Agriculture, 
Nutrition, and Forestry and the House Committee on Agriculture 
in its annual reports for at least two years following the date 
of enactment of the Futures Trading Act of 1982.
          (2) For the purposes of implementation of [subsection 
        (a)(2) for contracts of sale for future delivery or 
        options on the contracts or commodities, the Commission 
        shall define what constitutes a bona fide hedging 
        transaction or position as] paragraphs (2) and (5) of 
        subsection (a) for swaps, contracts of sale for future 
        delivery, or options on the contracts or commodities, a 
        bona fide hedging transaction or position is a 
        transaction or position that--
                  (A)(i) * * *
                  (ii) is economically appropriate to the 
                reduction [of risks] or management of current 
                or anticipated risks in the conduct and 
                management of a commercial enterprise; and

           *       *       *       *       *       *       *

          (3) The Commission may further define, by rule or 
        regulation, what constitutes a bona fide hedging 
        transaction, provided that the rule or regulation is 
        consistent with the requirements of subparagraphs (A) 
        and (B) of paragraph (2).

           *       *       *       *       *       *       *

  Sec. 4d. (a) (1) It shall be unlawful for any person to be a 
futures commission merchant unless--
                  [(1)] (A) such person shall have registered, 
                under this Act, with the Commission as such 
                futures commission merchant and such 
                registration shall not have expired nor been 
                suspended nor revoked; and
                  [(2)] (B) such person shall, whether a member 
                or nonmember of a contract market or 
                derivatives transaction execution facility, 
                treat and deal with all money, securities, and 
                property received by such person to margin, 
                guarantee, or secure the trades or contracts of 
                any customer of such person, or accruing to 
                such customer as the result of such trades or 
                contracts, as belonging to such customer. Such 
                money, securities, and property shall be 
                separately accounted for and shall not be 
                commingled with the funds of such commission 
                merchant or be used to margin or guarantee the 
                trades or contracts, or to secure or extend the 
                credit, of any customer or person other than 
                the one for whom the same are held: Provided, 
                however, That such money, securities, and 
                property of the customers of such futures 
                commission merchant may, for convenience, be 
                commingled and deposited in the same account or 
                accounts with any bank or trust company or with 
                the clearing house organization of such 
                contract market or derivatives transaction 
                execution facility, and that such share thereof 
                as in the normal course of business shall be 
                necessary to margin, guarantee, secure, 
                transfer, adjust, or settle the contracts or 
                trades of such customers, or resulting market 
                positions, with the clearing-house organization 
                of such contract market or derivatives 
                transaction execution facility or with any 
                member of such contract market or derivatives 
                transaction execution facility, may be 
                withdrawn and applied to such purposes, 
                including the payment of commissions, 
                brokerage, interest, taxes, storage, and other 
                charges, lawfully accruing in connection with 
                such contracts and trades: Provided further, 
                That in accordance with such terms and 
                conditions as the Commission may prescribe by 
                rule, regulation, or order, such money, 
                securities, and property of the customers of 
                such futures commission merchant may be 
                commingled and deposited as provided in this 
                section with any other money, securities, and 
                property received by such futures commission 
                merchant and required by the Commission to be 
                separately accounted for and treated and dealt 
                with as belonging to the customers of such 
                futures commission merchant: Provided further, 
                That such money may be invested in obligations 
                of the United States, in general obligations of 
                any State or of any political subdivision 
                thereof, and in obligations fully guaranteed as 
                to principal and interest by the United States, 
                such investments to be made in accordance with 
                such rules and regulations and subject to such 
                conditions as the Commission may prescribe.
          (2) Any rules or regulations requiring a futures 
        commission merchant to maintain a residual interest in 
        accounts held for the benefit of customers in amounts 
        at least sufficient to exceed the sum of all 
        uncollected margin deficits of such customers shall 
        provide that a futures commission merchant shall meet 
        its residual interest requirement as of the end of each 
        business day calculated as of the close of business on 
        the previous business day.

           *       *       *       *       *       *       *

  (h) [Notwithstanding subsection (a)(2)] Notwithstanding 
subsection (a)(1)(B) or the rules and regulations thereunder, 
and pursuant to an exemption granted by the Commission under 
section 4(c) of this Act or pursuant to a rule or regulation, a 
futures commission merchant that is registered pursuant to 
section 4f(a)(1) of this Act and also registered as a broker or 
dealer pursuant to section 15(b)(1) of the Securities Exchange 
Act of 1934 may, pursuant to a portfolio margining program 
approved by the Securities and Exchange Commission pursuant to 
section 19(b) of the Securities Exchange Act of 1934, hold in a 
portfolio margining account carried as a securities account 
subject to section 15(c)(3) of the Securities Exchange Act of 
1934 and the rules and regulations thereunder, a contract for 
the purchase or sale of a commodity for future delivery or an 
option on such a contract, and any money, securities or other 
property received from a customer to margin, guarantee or 
secure such a contract, or accruing to a customer as the result 
of such a contract. The Commission shall consult with the 
Securities and Exchange Commission to adopt rules to ensure 
that such transactions and accounts are subject to comparable 
requirements to the extent practical for similar products.

           *       *       *       *       *       *       *


SEC. 4Q. SPECIAL PROCEDURES TO ENCOURAGE AND FACILITATE BONA FIDE 
                    HEDGING BY AGRICULTURAL PRODUCERS.

  (a)  Authority.--The Commission shall consider issuing rules 
or orders which--
          (1) prescribe procedures under which each contract 
        market is to provide for orderly delivery, including 
        temporary storage costs, of any agricultural commodity 
        enumerated in section [1a(9)] 1a(10) which is the 
        subject of a contract for purchase or sale for future 
        delivery;

           *       *       *       *       *       *       *


SEC. 4S. REGISTRATION AND REGULATION OF SWAP DEALERS AND MAJOR SWAP 
                    PARTICIPANTS.

  (a) * * *

           *       *       *       *       *       *       *

  (e)  Capital and Margin Requirements.--
          (1) * * *
          (2) Rules.--
                  (A) * * *
                  (B) Swap dealers and major swap participants 
                that are not banks.--The Commission, in 
                consultation with the prudential regulators and 
                the Securities and Exchange Commission, shall 
                adopt rules for swap dealers and major swap 
                participants, with respect to their activities 
                as a swap dealer or major swap participant, for 
                which there is not a prudential regulator 
                imposing--
                          (i) * * *

           *       *       *       *       *       *       *

          (3) Standards for capital and margin.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (D) Comparability of capital and margin 
                requirements.--
                          (i) * * *
                          (ii) Comparability.--The entities 
                        described in clause (i) [shall, to the 
                        maximum extent practicable,] shall 
                        establish and maintain comparable 
                        minimum capital requirements and 
                        minimum initial and variation margin 
                        requirements, including the use of non 
                        cash collateral, for--
                                  (I) * * *

           *       *       *       *       *       *       *

                          (iii) Financial models.--To the 
                        extent that swap dealers and major swap 
                        participants that are banks are 
                        permitted to use financial models 
                        approved by the prudential regulators 
                        or the Securities and Exchange 
                        Commission to calculate minimum capital 
                        requirements and minimum initial and 
                        variation margin requirements, 
                        including the use of non-cash 
                        collateral, the Commission shall, in 
                        consultation with the prudential 
                        regulators and the Securities and 
                        Exchange Commission, permit the use of 
                        comparable financial models by swap 
                        dealers and major swap participants 
                        that are not banks.
          (4) Applicability with respect to counterparties.--
        The requirements of paragraphs (2)(A)(ii) and 
        (2)(B)(ii), including the initial and variation margin 
        requirements imposed by rules adopted pursuant to 
        paragraphs (2)(A)(ii) and (2)(B)(ii), shall not apply 
        to a swap in which a counterparty qualifies for an 
        exception under section 2(h)(7)(A), or an exemption 
        issued under section 4(c)(1) from the requirements of 
        section 2(h)(1)(A) for cooperative entities as defined 
        in such exemption, or satisfies the criteria in section 
        2(h)(7)(D).
  (f)  Reporting and Recordkeeping.--
          (1) In general.--Each registered swap dealer and 
        major swap participant--
                  (A) * * *

           *       *       *       *       *       *       *

                  (D) shall keep any such books and records 
                relating to swaps defined in section 
                [1a(47)(A)(v)] 1a(48)(A)(v) open to inspection 
                and examination by the Securities and Exchange 
                Commission.

           *       *       *       *       *       *       *

  (h)  Business Conduct Standards.--
          (1) * * *
          (2) Responsibilities with respect to special 
        entities.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (D) Utility special entity.--For purposes of 
                this Act, the term ``utility special entity'' 
                means a special entity, or any instrumentality, 
                department, or corporation of or established by 
                a State or political subdivision of a State, 
                that--
                          (i) owns or operates an electric or 
                        natural gas facility or an electric or 
                        natural gas operation;
                          (ii) supplies natural gas and or 
                        electric energy to another utility 
                        special entity;
                          (iii) has public service obligations 
                        under Federal, State, or local law or 
                        regulation to deliver electric energy 
                        or natural gas service to customers; or
                          (iv) is a Federal power marketing 
                        agency, as defined in section 3 of the 
                        Federal Power Act.

           *       *       *       *       *       *       *

          (5) Special requirements for swap dealers as 
        counterparties to special entities.--
                  (A) Any swap dealer or major swap participant 
                that offers to enter or enters into a swap with 
                a Special Entity shall--
                          (i) comply with any duty established 
                        by the Commission for a swap dealer or 
                        major swap participant, with respect to 
                        a counterparty that is an eligible 
                        contract participant within the meaning 
                        of subclause (I) or (II) of clause 
                        (vii) of section [1a(18)] 1a(19) of 
                        this Act, that requires the swap dealer 
                        or major swap participant to have a 
                        reasonable basis to believe that the 
                        counterparty that is a Special Entity 
                        has an independent representative 
                        that--
                                  (I) * * *

           *       *       *       *       *       *       *


SEC. 4T. LARGE SWAP TRADER REPORTING.

  (a) * * *
  (b)  Requirements.--
          (1) In general.--Books and records described in 
        subsection (a)(2)(B) shall--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) be open at all times to inspection and 
                examination by the Securities and Exchange 
                Commission, to the extent such books and 
                records relate to transactions in swaps (as 
                that term is defined in section [1a(47)(A)(v)] 
                1a(48)(A)(v)), and consistent with the 
                confidentiality and disclosure requirements of 
                section 8.

           *       *       *       *       *       *       *


SEC. 4U. RECORDKEEPING REQUIREMENTS APPLICABLE TO NON-REGISTERED 
                    MEMBERS OF CERTAIN REGISTERED ENTITIES.

  Except as provided in section 4(a)(3), a member of a 
designated contract market or a swap execution facility that is 
not registered with the Commission and not required to be 
registered with the Commission in any capacity shall satisfy 
the recordkeeping requirements of this Act and any 
recordkeeping rule, order, or regulation under this Act by 
maintaining a written record of each transaction in a contract 
for future delivery, option on a future, swap, swaption, trade 
option, or related cash or forward transaction. The written 
record shall be sufficient if it includes the final agreement 
between the parties and the material economic terms of the 
transaction and is identifiable and searchable by transaction.

SEC. 5. DESIGNATION OF BOARDS OF TRADE AS CONTRACT MARKETS.

  (a) * * *

           *       *       *       *       *       *       *

  (d)  Core Principles for Contract Markets.--
          (1) * * *

           *       *       *       *       *       *       *

          (23) Securities and exchange commission.--The board 
        of trade shall keep any such records relating to swaps 
        defined in section [1a(47)(A)(v)] 1a(48)(A)(v) open to 
        inspection and examination by the Securities and 
        Exchange Commission.
  (e)  Current Agricultural Commodities.--
          (1) Subject to paragraph (2) of this subsection, a 
        contract for purchase or sale for future delivery of an 
        agricultural commodity enumerated in section [1a(9)] 
        1a(10) that is available for trade on a contract 
        market, as of the date of the enactment of this 
        subsection, may be traded only on a contract market 
        designated under this section.

           *       *       *       *       *       *       *


SEC. 5B. DERIVATIVES CLEARING ORGANIZATIONS.

  (a) * * *

           *       *       *       *       *       *       *

  (k)  Reporting Requirements.--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Reports on security-based swap agreements to be 
        shared with the securities and exchange commission.--
                  (A) In general.--A derivatives clearing 
                organization that clears security-based swap 
                agreements (as defined in section 
                [1a(47)(A)(v)] 1a(48)(A)(v)) shall, upon 
                request, open to inspection and examination to 
                the Securities and Exchange Commission all 
                books and records relating to such security-
                based swap agreements, consistent with the 
                confidentiality and disclosure requirements of 
                section 8.

           *       *       *       *       *       *       *

          [(5) Confidentiality and indemnification agreement.--
        Before the Commission may share information with any 
        entity described in paragraph (4)--
                  [(A) the Commission shall receive a written 
                agreement from each entity stating that the 
                entity shall abide by the confidentiality 
                requirements described in section 8 relating to 
                the information on swap transactions that is 
                provided; and
                  [(B) each entity shall agree to indemnify the 
                Commission for any expenses arising from 
                litigation relating to the information provided 
                under section 8.]
          (5) Confidentiality agreement.--Before the Commission 
        may share information with any entity described in 
        paragraph (4), the Commission shall receive a written 
        agreement from each entity stating that the entity 
        shall abide by the confidentiality requirements 
        described in section 8 relating to the information on 
        swap transactions that is provided.

           *       *       *       *       *       *       *


SEC. 5C. COMMON PROVISIONS APPLICABLE TO REGISTERED ENTITIES.

  (a) * * *

           *       *       *       *       *       *       *

  (c)  New Contracts, New Rules, and Rule Amendments.--
          (1) * * *

           *       *       *       *       *       *       *

          (4) Prior approval.--
                  (A) * * *
                  (B) Prior approval required.--Notwithstanding 
                any other provision of this section, a 
                designated contract market shall submit to the 
                Commission for prior approval each rule 
                amendment that materially changes the terms and 
                conditions, as determined by the Commission, in 
                any contract of sale for future delivery of a 
                commodity specifically enumerated in section 
                [1a(10)] 1a(11) (or any option thereon) traded 
                through its facilities if the rule amendment 
                applies to contracts and delivery months which 
                have already been listed for trading and have 
                open interest.

           *       *       *       *       *       *       *


SEC. 5H. SWAP EXECUTION FACILITIES.

  (a) * * *

           *       *       *       *       *       *       *

  (f)  Core Principles for Swap Execution Facilities.--
          (1) * * *

           *       *       *       *       *       *       *

          (10) Recordkeeping and reporting.--
                  (A) In general.--A swap execution facility 
                shall--
                          (i) * * *

           *       *       *       *       *       *       *

                          (iii) shall keep any such records 
                        relating to swaps defined in section 
                        [1a(47)(A)(v)] 1a(48)(A)(v) open to 
                        inspection and examination by the 
                        Securities and Exchange Commission.''

           *       *       *       *       *       *       *

  Sec. 6. (a) * * *

           *       *       *       *       *       *       *

  (c)  Prohibition Regarding Manipulation and False 
Information.--
          (1) * * *

           *       *       *       *       *       *       *

          [(5) Subpoena.--For]
          (5) Subpoena._
                  (A) In general._For the purpose of securing 
                effective enforcement of the provisions of this 
                Act, for the purpose of any investigation or 
                proceeding under this Act, and for the purpose 
                of any action taken under section 12(f), any 
                member of the Commission or any Administrative 
                Law Judge or other officer designated by the 
                Commission (except as provided in paragraph 
                (7)) may administer oaths and affirmations, 
                subpoena witnesses, compel their attendance, 
                take evidence, and require the production of 
                any books, papers, correspondence, memoranda, 
                or other records that the Commission deems 
                relevant or material to the inquiry.
                  (B) Content of subpoena order.--An order of 
                the Commission authorizing the issuance of a 
                subpoena--
                          (i) shall state in good faith the 
                        purpose of the investigation;
                          (ii) shall require only the provision 
                        of information reasonably relevant to 
                        that purpose; and
                          (iii) shall not be for an indefinite 
                        duration.
                  (C) Renewal.--An order issued under this 
                paragraph may be renewed only by Commission 
                action.

           *       *       *       *       *       *       *

  Sec. 12. (a) * * *

           *       *       *       *       *       *       *

  (d) There are authorized to be appropriated such sums as are 
necessary to carry out this Act for each of the fiscal years 
2008 through [2013] 2018.

           *       *       *       *       *       *       *


SEC. 15. CONSIDERATION OF COSTS AND BENEFITS AND ANTITRUST LAWS.

  (a)  Costs and Benefits.--
          [(1) In general.--Before promulgating a regulation 
        under this Act or issuing an order (except as provided 
        in paragraph (3)), the Commission shall consider the 
        costs and benefits of the action of the Commission.
          [(2) Considerations.--The costs and benefits of the 
        proposed Commission action shall be evaluated in light 
        of--
                  [(A) considerations of protection of market 
                participants and the public;
                  [(B) considerations of the efficiency, 
                competitiveness, and financial integrity of 
                futures markets;
                  [(C) considerations of price discovery;
                  [(D) considerations of sound risk management 
                practices; and
                  [(E) other public interest considerations.]
          (1) In general.--Before promulgating a regulation 
        under this Act or issuing an order (except as provided 
        in paragraph (3)), the Commission, through the Office 
        of the Chief Economist, shall assess and publish in the 
        regulation or order the costs and benefits, both 
        qualitative and quantitative, of the proposed 
        regulation or order, and the proposed regulation or 
        order shall state its statutory justification.
          (2) Considerations.--In making a reasoned 
        determination of the costs and the benefits, the 
        Commission shall evaluate--
                  (A) considerations of protection of market 
                participants and the public;
                  (B) considerations of the efficiency, 
                competitiveness, and financial integrity of 
                futures and swaps markets;
                  (C) considerations of the impact on market 
                liquidity in the futures and swaps markets;
                  (D) considerations of price discovery;
                  (E) considerations of sound risk management 
                practices;
                  (F) available alternatives to direct 
                regulation;
                  (G) the degree and nature of the risks posed 
                by various activities within the scope of its 
                jurisdiction;
                  (H) the costs of complying with the proposed 
                regulation or order by all regulated entities, 
                including a methodology for quantifying the 
                costs (recognizing that some costs are 
                difficult to quantify);
                  (I) whether the proposed regulation or order 
                is inconsistent, incompatible, or duplicative 
                of other Federal regulations or orders;
                  (J) whether, in choosing among alternative 
                regulatory approaches, those approaches 
                maximize net benefits (including potential 
                economic and other benefits, distributive 
                impacts, and equity); and
                  (K) other public interest considerations.

           *       *       *       *       *       *       *

  Sec. 17. (a) * * *

           *       *       *       *       *       *       *

  (s) A registered futures association shall--
          (1) require each member of the association that is a 
        futures commission merchant to maintain written 
        policies and procedures regarding the maintenance of--
                  (A) the residual interest of the member, as 
                described in section 1.23 of title 17, Code of 
                Federal Regulations, in any customer segregated 
                funds account of the member, as identified in 
                section 1.20 of such title, and in any foreign 
                futures and foreign options customer secured 
                amount funds account of the member, as 
                identified in section 30.7 of such title; and
                  (B) the residual interest of the member, as 
                described in section 22.2(e)(4) of such title, 
                in any cleared swaps customer collateral 
                account of the member, as identified in section 
                22.2 of such title; and
          (2) establish rules to govern the withdrawal, 
        transfer or disbursement by any member of the 
        association, that is a futures commission merchant, of 
        the member's residual interest in customer segregated 
        funds as provided in such section 1.20, in foreign 
        futures and foreign options customer secured amount 
        funds, identified as provided in such section 30.7, and 
        from a cleared swaps customer collateral, identified as 
        provided in such section 22.2.
  (t) A registered futures association shall require any member 
of the association that is a futures commission merchant to--
          (1) use an electronic system or systems to report 
        financial and operational information to the 
        association, including information related to customer 
        segregated funds, foreign futures and foreign options 
        customer secured amount funds accounts, and cleared 
        swaps customer collateral, in accordance with such 
        terms, conditions, documentation standards, and regular 
        time intervals as are established by the association;
          (2) instruct each depository, including any bank, 
        trust company, derivatives clearing organization, or 
        futures commission merchant, holding customer 
        segregated funds under section 1.20 of title 17, Code 
        of Federal Regulations, foreign futures and foreign 
        options customer secured amount funds under section 
        30.7 of such title, or cleared swap customer funds 
        under section 22.2 of such title, to report balances in 
        the futures commission merchant's section 1.20 customer 
        segregated funds, section 30.7 foreign futures and 
        foreign options customer secured amount funds, and 
        section 22.2 cleared swap customer funds, to the 
        registered futures association or another party 
        designated by the registered futures association, in 
        the form, manner, and interval prescribed by the 
        registered futures association; and
          (3) hold section 1.20 customer segregated funds, 
        section 30.7 foreign futures and foreign options 
        customer secured amount funds and section 22.2 cleared 
        swaps customer funds in a depository that reports the 
        balances in these accounts of the futures commission 
        merchant held at the depository to the registered 
        futures association or another party designated by the 
        registered futures association in the form, manner, and 
        interval prescribed by the registered futures 
        association.
  (u) A futures commission merchant that has adjusted net 
capital in an amount less than the amount required by 
regulations established by the Commission or a self-regulatory 
organization of which the futures commission merchant is a 
member shall immediately notify the Commission and the self-
regulatory organization of this occurrence.
  (v) A futures commission merchant that does not hold a 
sufficient amount of funds in segregated accounts for futures 
customers under section 1.20 of title 17, Code of Federal 
Regulations, in foreign futures and foreign options secured 
amount accounts for foreign futures and foreign options secured 
amount customers under section 30.7 of such title, or in 
segregated accounts for cleared swap customers under section 
22.2 of such title, as required by regulations established by 
the Commission or a self-regulatory organization of which the 
futures commission merchant is a member, shall immediately 
notify the Commission and the self-regulatory organization of 
this occurrence.
  (w) Within such time period established by the Commission 
after the end of each fiscal year, a futures commission 
merchant shall file with the Commission a report from the chief 
compliance officer of the futures commission merchant 
containing an assessment of the internal compliance programs of 
the futures commission merchant.

           *       *       *       *       *       *       *

  Sec. 20. (a) Notwithstanding title 11 of the United States 
Code, the Commission may provide, with respect to a commodity 
broker that is a debtor under chapter 7 of title 11 of the 
United States Code, by rule or regulation--
          (1) * * *

           *       *       *       *       *       *       *

          (4) any persons to which customer property and 
        commodity contracts may be transferred under section 
        766 of title 11 of the United States Code; [and]
          (5) how the net equity of a customer is to be 
        determined[.]; and
          (6) that cash, securities, or other property of the 
        estate of a commodity broker, including the trading or 
        operating accounts of the commodities broker and 
        commodities held in inventory by the commodity broker, 
        shall be included in customer property, but only to the 
        extent that the property that is otherwise customer 
        property is insufficient to satisfy the net equity 
        claims of public customers (as such term may be defined 
        by the Commission by rule or regulation) of the 
        commodity broker.

           *       *       *       *       *       *       *


SEC. 21. SWAP DATA REPOSITORIES.

  (a) * * *

           *       *       *       *       *       *       *

  [(d)  Confidentiality and Indemnification Agreement.--Before 
the swap data repository may share information with any entity 
described in subsection (c)(7)--
          [(1) the swap data repository shall receive a written 
        agreement from each entity stating that the entity 
        shall abide by the confidentiality requirements 
        described in section 8 relating to the information on 
        swap transactions that is provided; and
          [(2) each entity shall agree to indemnify the swap 
        data repository and the Commission for any expenses 
        arising from litigation relating to the information 
        provided under section 8.]
  (d)  Confidentiality Agreement.--Before the swap data 
repository may share information with any entity described in 
subsection (c)(7), the swap data repository shall receive a 
written agreement from each entity stating that the entity 
shall abide by the confidentiality requirements described in 
section 8 relating to the information on swap transactions that 
is provided.

           *       *       *       *       *       *       *

  (f)  Core Principles Applicable To Swap Data Repositories.--
          (1) * * *

           *       *       *       *       *       *       *

          (4) Additional duties developed by commission.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) Additional duties for commission 
                designees.--The Commission shall establish 
                additional duties for any registrant described 
                in section [1a(48)] 1a(49) in order to minimize 
                conflicts of interest, protect data, ensure 
                compliance, and guarantee the safety and 
                security of the swap data repository.

           *       *       *       *       *       *       *


SEC. 24. JUDICIAL REVIEW OF COMMISSION RULES.

  (a) A person aggrieved by a final rule of the Commission 
under this Act may obtain review of the rule in the United 
States Court of Appeals for the District of Columbia Circuit or 
the United States Court of Appeals for the circuit where the 
party resides, by filing in the court, within 60 days after 
publication in the Federal Register of the entry of the rule, a 
written petition requesting that the rule be modified or set 
aside in whole or in part.
  (b) A copy of the petition shall be transmitted forthwith by 
the clerk of the court to an officer designated by the 
Commission for that purpose. Thereupon the Commission shall 
file in the court the record on which the rule complained of is 
entered, as provided in section 2112 of title 28, United States 
Code, and the Federal Rules of Appellate Procedure.
  (c) On the filing of the petition, the court has 
jurisdiction, which becomes exclusive on the filing of the 
record, to affirm or modify and enforce or to set aside the 
rule in whole or in part.
  (d) The findings of the Commission as to the facts identified 
by the Commission as the basis, in whole or in part, of the 
rule, if supported by substantial evidence, are conclusive. The 
court shall affirm and enforce the rule unless the Commission's 
action in promulgating the rule is found to be arbitrary, 
capricious, an abuse of discretion, or otherwise not in 
accordance with law; contrary to constitutional right, power, 
privilege, or immunity; in excess of statutory jurisdiction, 
authority, or limitations, or short of statutory right; or 
without observance of procedure required by law.
  (e) If either party applies to the court for leave to adduce 
additional evidence and shows to the satisfaction of the court 
that the additional evidence is material and that there was 
reasonable ground for failure to adduce it before the 
Commission, the court may remand the case to the Commission for 
further proceedings, in whatever manner and on whatever 
conditions the court considers appropriate. If the case is 
remanded to the Commission, it shall file in the court a 
supplemental record containing any new evidence, any further or 
modified findings, and any new order.