30 • OIL
&
ENERGY
brokerage clients, including commodity
hedgers. It is likely that lawmakers simply
did not foresee that commodity hedging
would become such a widespread and vital
component of the American economy as it
is today. As a result, when the brokerage
firm MF Global filed for bankruptcy over
18 months ago, its clients lacked adequate
federal protections for their funds, accounts
and positions. They were thrown into the
chaos and uncertainty of recovering their
funds, a problem that could have been
alleviated if SIPA-style protections existed
for these customers.
Therefore, we believe the committee
should enhance protections for commodity
brokerage clients, including:
• The prioritization of commodity
brokerage clients’ claims filed with
bankruptcy Trustees;
• The creation of a new insurance fund
for the protection of commodity
brokerage clients that would provide
similar protections as the SIPA-created
securities investor insurance fund;
• The creation of a non-profit
Commodity Futures Protection
Corporation (CFPC) that will be
separate from the Securities Investor
Protection Corporation and oversee
the remediation of customer funds in
the event of a commodity broker/dealer
failure and to manage the insurance
fund associated with the new law; and
• A requirement that in the event of a
bankruptcy, the CFPC work with the
CFTC, self regulatory organizations
and the courts in carrying out its
mission, especially the restoration of
client funds and the liquidation or
transference of commodity positions.
When combined with enhanced
customer protections currently being con-
sidered by the Commodity Futures Trading
Commission, self-regulatory organizations,
futures exchanges and brokerage firms, we
believe that a futures insurance program
will go a long way to restoring confidence
in these markets. This is especially true
for Main Street businesses, farmers and
ranchers, and other industries that utilize
futures, options and swaps to mitigate price
risks and to help insulate their companies
and their consumers from volatility and
uncertainty.
TRADE OPTIONS EXEMPTION
The Dodd-Frank Act made it unlawful
for anyone that is not an Eligible Contract
Participant (ECP) to enter into an over-the-
counter or off-exchange swap. In order to
qualify as an ECP, an entity has to meet a
$10 million net worth requirement, with a
separate $1 million net worth requirement
for
bona fide
hedgers. Although many small
businesses, farmers and other end-users
may qualify as an ECP, their net worth can
often fluctuate, causing them to be unsure
from time-to-time whether they satisfy
the $1 million net worth requirement for
hedgers. Moreover, an entity’s net worth
may have an inverse relationship with its
liabilities; that is, as liabilities increase and
the business finds itself with an urgent need
to hedge, its net worth may decrease.
For businesses that do not qualify as
ECPs and that hedge commodity prices
through physically settled bilateral options,
the CFTC has proposed a “trade options
exemption” in order to extend measured
regulatory relief. However, some CMOC
members have recommended that the
CFTC extend the trade options exemption
to small hedgers that engage in “financially
settled,” not just physically-settled, options.
Financially settled options allow some
third-party hedging firms serving small
businesses to aggregate a collection of
less-than-standard contract volumes into a
single financially settled option.
The CFTC has not yet finalized the
Trade Options rule.
We encourage the
committee to consult with the CFTC on
the status of the trade options exemption
and, if necessary, take action to codify
regulatory relief for small hedgers.
ENERGY & ENVIRONMENTAL
MARKETS ADVISORY COMMITTEE
In response to unprecedented volatility
in the energy markets and at the urging
of members of this coalition, the CFTC
established the Energy Markets Advisory
Committee in June of 2008. The purpose
of this advisory committee, according to
then-Acting CFTC Chairman Walt Lukken,
was to assemble representatives from the
energy industry, end-user groups and
other market stakeholders to “ensur[e]
that the Commission is fully informed of
industry developments and innovations so
that the Commission can rapidly respond
to changing market conditions and ensure
that these markets are not subject to foul
play.” In 2009 the committee’s charter was
revised to include emerging environmental
markets such as carbon trading markets
and renamed the “Energy & Environmental
Markets Advisory Committee” (EEMAC).
Congress clearly felt the EEMAC was
important enough to make it permanent
under Section 751 of the Dodd-Frank Act.
Despite this, the advisory committee has
only met three times since it was formed in
2008. Not a single meeting has been held
since the EEMAC was made permanent in
2010. Meanwhile, the CFTC’s Agriculture
Advisory Committee, Global Markets
Advisory Committee and the Technology
Advisory Committee have met over 20
times.
The committee should require
the CFTC to establish a charter for the
EEMAC by a date certain and require at
least annual meetings to receive input
from energy market stakeholders.
CFTC RESOURCES
In retrospect, not to criticize but to make
an observation with the benefit of hindsight,
in establishing deadlines for the comple-
tion of regulatory proceedings within 365
days of the enactment of Dodd-Frank was
an error. The hundreds of complex issues
that needed to be addressed, most with the
coordination of other agencies, was a recipe
for putting the CFTC severely behind in
meeting their statutory deadlines.
Today CFTC staff is at 689 people,
only 9 percent bigger than 20 years ago.
At minimum CFTC needs 1,015 people in
addition to new technology investments.
CFTC collected 2 billion in fines last year
(benefiting the Treasury, not CFTC budget)
– that is CFTC appropriations funding for
22 prior fiscal years. This year the size of
the CFTC actually contracted because of
sequestration and cut 20-30 people from
the staff. The CFTC hasn’t been able to hire
experts on swaps markets, which is needed.
The CFTC needs new technology in order
to even try to keep up with the $600 trillion
derivatives market and the private sector
technology advancements that the agency is
responsible for overseeing. If flat funding is
provided, CFTC would have to cut another
50 people (about 8 or 9 percent) despite the
responsibility to cover the swaps market.
Therefore, we continue to urge Congress to
fully fund the CFTC at the levels requested
by the administration.
CONCLUSION
In this reauthorization effort we need to
not only examine the necessary corrections
for the imperfections in Dodd-Frank that
we have cited, but also the magnitude of
the new authorities the CFTC was given to
protect the sanctity of the commodity mar-
kets and the pocketbooks of American tax-
payers and the diminished resources with
which this agency has had to operate under
extraordinarily difficult circumstances.
Government Affairs
