CFTC Not Dead

Agriculture committee bigwigs from both houses have introduced bills to bring over-the-counter (OTC) derivatives trading under the control of the Commodity Futures Trading Commission (CFTC).

Why agriculture? The first derivatives were agricultural commodity futures. The federal government began regulating them in the nineteenth century. As the universe of derivatives expanded, so did the reach of the federal derivatives regulator. The CFTC was created in 1974 and given exclusive power to regulate derivatives.

The Commodities Futures Modernization Act of 2000 (CFMA: look at HR 5660, 105th - this bill is incorporated by reference into PL 106-554) exempted from CTFC regulation certain OTC derivatives, including credit default swaps. This exemption has taken quite a bit of the blame for the explosion of the risky CDS market. The SEC has been busily trying to create a central counterparty for CDS transactions, but it looks like the champions of the CFTC are asserting themselves.

There is some sorting out to be done, though. The bills take very different approaches.

Tom Harkin, Chairman of the Senate agriculture committee, reintroduced his Derivatives Trading Integrity Act of 2008 as the Derivatives Trading Integrity Act of 2009 (S. 272). S. 272 brings OTC derivatives under CFTC control by repealing most of the CFMA. If OTC derivatives aren't exempt, they have to be traded on a CFTC-registered exchange.

Meanwhile, Collin Peterson, Chairman of the House agriculture committee, is distributing a draft revision of his Commodity Markets Transparency and Accountability Act of 2008 (HR 6604 - now renamed the Derivatives Markets Transparency and Accountability Act of 2009). Peterson's bill leaves the CFMA in place (after all, he wrote it), but requires that all OTC derivatives transactions be settled and cleared through a CFTC-designated central clearing party.

This suggests to me that those who have called for the SEC and the CFTC to be merged may face what Scott Kuschmider, spokesperson for the House agriculture committee called "an extremely uphill battle." (41 BNA SRLR 128)