July 2015 LEGISLATIVE DEVELOPMENTS

July 2015 LEGISLATIVE DEVELOPMENTS IN THIS ISSUE: LEGISLATIVE DEVELOPMENTS ............1 Congress Exempts End-Users from Margin Requirements ACTIONS TO IMPLEMENT DODD- FRANK ...........................................................3 In January 2015, Congress passed a uncleared swap transaction who use OTHER REGULATORY ACTIONS .........6 bill, signed by the President, amend- the swap to hedge or mitigate com- CFTC AND CRIMINAL ing provisions in the Dodd-Frank Act mercial risk exempt from the require- ENFORCEMENT ACTIONS..................... 7 relating to margin requirements for ment to post initial and variation CME GROUP REGULATORY uncleared swaps. This new law made margin on their uncleared swaps. DEVELOPMENTS .......................................9 non-financial counterparties to an CME AND ICE ENFORCEMENT ACTIONS ......................................................9 House Passes Commodity End User Relief Act NFA REGULATORY DEVELOPMENTS ......................................11 On June 9, 2015, by a vote of 246-171, dards” and would impose procedural NFA ENFORCEMENT ACTIONS ..........11 the U.S. House of Representatives requirements on the CFTC that are passed a bill known as the Commod- not imposed on any other indepen- SCHIFF HARDIN ity End User Relief Act. The bill would dent agency. The Administration DERIVATIVES & FUTURES reauthorize the CFTC through 2019, issued a statement opposing passage PRACTICE and it would amend numerous provi- of the House bill and noting that the sions of the Commodity Exchange bill “would unnecessarily disrupt the Act (CEA). The Senate has not yet effective management and operation Carl A. Royal considered the House bill, nor has it of the agency.” Managing Editor proposed its own CFTC reauthoriza- tion bill. The amendments proposed in the Paul E. Dengel House bill fall into three broad cate- Practice Group Leader CFTC Chairman Timothy Massad gories: (1) enhancing customer pro- and the Obama Administration have tections, (2) reforming CFTC opera- Stacie R. Hartman both raised objections to the House tions, and (3) providing relief to end Deputy Practice Group Leader bill. Chairman Massad sent a letter to users of derivatives. Some of the the Chairman of the House Agricul- more significant amendments are Geoffrey H. Coll ture Committee stating that the bill summarized below. Jack P. Drogin would impose “unworkable stan- Jacob L. Kahn Andrew M. Klein Enhancing customer protections Kenneth W. McCracken Michael L. Meyer The House expressed concern that intended to improve the protections Victoria Pool farmers, ranchers, and other users of for futures customers and to restore Kathleen E. Roblez the futures markets lost money as a confidence in the marketplace. It Christine Ayako Schleppegrell result of the failures of M.F. Global, would amend the CEA to provide Michael K. Wolensky Inc. in 2011 and Peregrine Financial that, in the event of a commodity John S. Worden Group, Inc. in 2012. The House bill is broker bankruptcy, cash, securities, Elyse K. Yang ANN ARBOR ATLANTA CHICAGO DALLAS LAKE FOREST NEW YORK PALO ALTO SAN FRANCISCO WASHINGTON DC July 2015 or other property in the commodity In addition, the House bill would cod- Requiring FCMs to follow strict broker’s estate would generally be ify the following customer protection reporting and permission require- treated as “customer property” to the safeguards that were adopted by the ments before moving more than a extent that other customer property CFTC and National Futures Associa- specified percentage of customer held by the commodity broker is tion (NFA) by: funds from one account to insufficient to satisfy the net equity another; and claims of public customers. Thus, this Requiring regulators to confirm amendment would give public cus- electronically the customer fund Requiring FCMs that become tomers of a commodity broker priority account balances held by futures undercapitalized to report such over the claims of general unsecured commission merchants (FCMs) at fact immediately to their regula- creditors. depository institutions; tors. Reforming CFTC operations The House bill would mandate the fol- only by the commissioners’ action. the circumstances under which per- lowing changes to the CFTC’s admin- sons in compliance with foreign istrative procedures: The notice and comment require- swaps regulatory requirements shall ments of the Administrative Proce- be exempt from U.S. swaps require- A more rigorous cost-benefit dure Act would apply to CFTC statements. analysis for proposed rules would ments of policy, interpretations, or be required. guidance that were voted on by the The House bill also would modify the commissioners. According to the process for seeking judicial review of The CFTC’s division directors legislative history, this provision was CFTC rules. Under the bill, a person would be answerable to the entire included in the bill because of con- adversely affected by a rule adopted CFTC, not just the chairman’s cerns expressed about the CFTC’s by the CFTC could obtain direct office. published guidance on the cross- review of the rule by filing a petition border implications of its swap rules. in the U.S. Court of Appeals for the The CFTC staff would be required A separate section of the bill would D.C. Circuit or in the U.S. Court of to provide proposed exemptive, require the CFTC to adopt rules to Appeals for the circuit where the no-action, and interpretive address (i) what connections to the party resides or has its principal place letters to all the commissioners, United States would require a non- of business. This provision would not just the chairman, for review U.S. person to register as a swap make the process for seeking judicial before issuing such letters. dealer, (ii) which U.S. swap require- review of CFTC rules comparable to ments would apply to the activities of the process used to seek judicial CFTC omnibus orders of investi- non-U.S. persons and U.S. persons review of SEC rules. gation would be limited to a finite (and their branches and affiliates) duration and could be renewed outside of the United States, and (iii) Relief for end-users The House bill would amend the exception from mandatory clearing. financial entity. CEA in a number of respects in order The bill also would revise the defini- to reduce the regulatory burden on tion of a “financial entity” to make it The bill would require the CFTC to end-users of derivatives. clear that a “commercial market par- adopt rules providing for later public ticipant” (defined to include any reporting of swap transactions in The bill would make it easier for producer, processor, merchant, or illiquid markets that are entered into companies with centralized treasury commercial user of an exempt or by a non-financial entity that is units to qualify for the end-user agricultural commodity) is not a hedging commercial risk. Schiff Hardin LLP Derivatives & Futures Update | 2 July 2015 Under existing CFTC rules, members The bill would limit the CFTC’s ability pool operator or commodity trading of a futures exchange or swap execu- to define the term “bona fide hedge advisor with respect to the manage- tion facility (SEF) are required to main- transaction” more narrowly than the ment of funds for such organizations. tain certain records. The House bill definition in the CEA. It also would would reduce the recordkeeping bur- provide that hedges of anticipated The bill would revise the definition of den for those members (including business risks would qualify as bona “commodity pool operator” to exclude end-users) who are not required to fide hedge transactions. investment advisers to an SEC-regis- register with the CFTC by eliminating tered investment company, provided the requirement for them to retain The bill would provide exemptions for that the investment company does written and electronic records of pre- charitable organizations such as col- not trade or hold interests in physical trade communications. leges and churches from being commodities. required to register as a commodity ACTIONS TO IMPLEMENT DODD-FRANK CFTC Proposes Cross-Border Margin Rules On June 29, 2015, the CFTC pro- ticipants (collectively, “covered swap lished in the Federal Register. posed rules that would apply its entities”) that are not subject to the margin requirements for uncleared margin requirements of certain The proposed rules are complex and swaps to cross-border transactions. bank regulators. There will be a contain many elements. Below is a The proposed rules would apply to 60-day comment period starting summary of the most important ele- swap dealers and major swap par- when the proposed rules are pub- ments. (a) Effect on U.S. swap dealers The CFTC’s margin rules would apply tuted compliance (discussed below) lected from) any non-U.S. counter- to all uncleared swaps of a U.S. cov- would be available with respect to party whose obligations are not guar- ered swap entity. However, substi- initial margin posted to (but not col- anteed by a U.S. person. (b) Effect on non-U.S. swap dealers The extent to which the CFTC’s mar- requirements would be the same as swap obligations are guaranteed by gin rules would apply to a non-U.S. for a U.S. covered swap entity. a U.S. person. covered swap entity depends on whether its swap obligations are If the swap obligations of a non-U.S. Uncleared swaps between a non-U.S. guaranteed by a U.S. person or its covered swap entity are not guaran- covered swap entity and a non-U.S. financial statements are consoli- teed by a U.S. person, the CFTC’s counterparty would be excluded from dated with those of a U.S. parent margin rules would apply, but the the CFTC’s margin rules if neither par- company. non-U.S. covered swap entity would ty’s swap obligations are guaranteed by be eligible for substituted compli- a U.S. person and neither party is a U.S.

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