WASHINGTON -- The House Agriculture Committee on Feb. 13 approved a bill sponsored by House Agriculture Chairman Collin Peterson, D-Minn., to increase the powers of the Commodity Futures Trading Commission to regulate commodity markets even though House Financial Services Chairman Barney Frank, D-Mass., said Peterson should have waited until Finance Services conducts its overview of systemic risk in the financial markets.
Peterson developed the bill in response to complaints from petroleum dealers, farmers and country elevator operators that speculation by hedge funds and other institutional investors in the oil and agricultural commodity markets led to artificially high prices and in reaction to the role that credit default swaps played in the financial crisis.
What it does
The bill would amend the Commodity Exchange Act to require most over-the-counter derivatives contracts to be settled and cleared on an exchange regulated by either the CFTC or the Securities and Exchange Commission. It gives the CFTC the authority to grant exemptions, but says the transactions that get exemptions would have to be highly customized, transacted infrequently, not serve a significant price-discovery function in the marketplace and be entered into by parties that meet CFTC-set capital requirements.
Peterson told reporters that the bill would make it illegal for the Intercontinental Exchange and eight big banks to proceed with a plan to create a clearing corporation that would be regulated by the Fed. Peterson said he does not want the Fed to regulate a derivatives clearing corporation because he fears that in a time of trouble the Fed would stand behind the banks and use taxpayer funds to bail them out.
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Peterson had proposed mandatory clearing for most over-the-counter derivatives and strict rules for exemptions, but after futures industry voiced objections, he took them out. Early Feb. 12, consumer activists threatened to oppose the bill and come out in favor of allowing other committees, the SEC and the Fed a bigger role in the futures markets. House Agriculture General Commodities and Risk Management Subcommittee Chairman Leonard Boswell, D-Iowa, proposed an amendment to restore the stricter rules and Peterson supported it. The Boswell amendment was adopted by voice vote, although some Republican members could be heard to oppose it.
The committee passed the bill by voice vote. Republicans proposed other amendments that would have weakened the bill, but the Democrats stopped them. Rep. Jerry Moran, R-Kan., proposed to give the CFTC more freedom to grant exemptions to derivative settling, but the committee rejected it by a vote of 27 to 16.
The bill also requires the CFTC to set limits on the amount of positions traders can hold on physical commodities, which means largely energy and agricultural commodities. The bill says the limits shall apply to spot month (the month in which the contract is due) each month and aggregate positions held by a person for all months. Rep. Frank Lucas, R-Okla., introduced an amendment to apply the limits only to the spot month, but the committee rejected that amendment also on a vote of 27 to 16.
Republicans also voiced objections to an amendment offered by Rep. Larry Kissell, D-N.C., to require more diversity on boards of commodity trading exchanges, but it passed by voice vote after Peterson added a provision to restrict it to publicly traded exchanges.
The bill also requires the CFTC to hold public hearings twice a year for interested parties in energy and agriculture to make recommendations on position limits. The bill called for a once a year meetings, but the committee also adopted an amendment by Rep. Earl Pomeroy, D-N.D., to require the CFTC to hold public hearings twice a year and to publish a report in the Federal Register in reaction to the hearings.
Differing views
After the markup, Peterson told reporters that he did not agree with Frank "that it would be useful to wait" and added that he does not think his bill will "undermine" Frank's efforts. Peterson acknowledged, however, that he and Frank have "a difference of opinion" on the role of the Fed in regulating the financial markets. Frank has said he sees an expansion of the Fed as central, while Peterson has expressed opposition to giving the Fed too much power. Peterson noted that sections of the bill will be referred to the Financial Services Committee. It also may be referred to the Energy and Commerce and Judiciary committees. He said that the House leadership eventually will have to decide whether and how to bring the bill to the floor.
Peterson also is facing a battle over proposals to merge the CFTC and the SEC and shift jurisdiction to other committees. A futures industry source said New York banks favor the merger, while the Chicago-based futures exchanges and firms that deal only in futures prefer that the CFTC remain independent.
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Peterson said he considers a merger between the CFTC and the SEC "highly unlikely." He said he has not discussed the issue with Obama administration officials, but "given the fact that Mr. Obama and Mr. (White House Chief of Staff Rahm) Emanuel are from Chicago, I would imagine Chicago will have a lot to say about things."
