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Commodity Futures Trading Commission:
Proposed Reauthorization in the 114th
Congress

Rena S. Miller
Specialist in Financial Economics
October 19, 2015
Congressional Research Service
7-5700
www.crs.gov
R44231

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Commodity Futures Trading Commission: Reauthorization in the 114th Congress

Summary
The Commodity Futures Trading Commission (CFTC), created in 1974, regulates futures, most
options, and swaps markets. The CFTC administers the Commodity Exchange Act (CEA),
enacted in 1936 to monitor trading in certain derivatives markets. The CEA contains a sunset
provision, meaning Congress periodically reauthorizes appropriations to carry out the CEA. If an
explicit authorization of appropriations for a program or activity is present—as in the CEA—and
it expires, the underlying authority in the statute to administer such a program does not, however.
Thus, the CFTC continues functioning and administering the CEA even if its authorization has
expired—which has been the case since the last CFTC reauthorization expired on September 30,
2013. It has not been uncommon for Congress to pass CFTC reauthorization bills several years
after the prior authorization had expired.
The current CFTC reauthorization process is the first since the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010’s (P.L. 111-203) passage brought the roughly $400 trillion
U.S. swaps market under regulatory oversight. Historically, the reauthorization process has often
been one of the principal vehicles for modifying the CFTC's’ regulatory authority and evaluating
the efficacy of its regulatory programs. The most recent CFTC reauthorization bill, H.R. 2289, the
Commodity End-User Relief Act, passed the House on June 9, 2015, by a 246 to 171 vote. It was
referred to the Senate Committee on Agriculture, Nutrition, and Forestry on June 10, 2015. The
Obama Administration threatened to veto H.R. 2289, stating that the bill “ ... undermines the
efficient functioning of the CFTC by imposing a number of organizational and procedural
changes and would undercut efforts taken by the CFTC over the last year to address end-user
concerns.” This report examines the following selected major provisions of H.R. 2289 which
have generally garnered the most attention:
 Section 202 expands the current 5 cost-benefit analysis provisions in the CEA to
12. It adds a requirement that the CFTC conduct quantitative as well as
qualitative assessments, which appears to mark a change from previous practice.
 Section 301 includes a provision that would extend an exemption from certain
Dodd Frank swaps trading and clearing requirements granted to nonfinancial
companies so as to also include certain of their affiliates.
 Section 306 would modify the definition of a “financial entity,” potentially
enabling a wider range of companies to claim certain exemptions from the Dodd
Frank derivatives requirements.
 Section 313 would potentially broaden the bona fide hedging definition to allow
anticipated, as well as current, risks to be hedged, which might increase the
number of swaps that qualify as hedges. Bona fide hedging is often used to
determine which swaps count towards registration requirements, position limits,
large trader reporting, and other regulatory requirements.
 Section 314 mandates that, starting 18 months from enactment, the swaps
regulatory requirements of the eight largest foreign swaps markets must be
considered comparable to those of the United States—unless the CFTC issued a
rule finding that any of those foreign jurisdictions’ requirements were not
comparable to U.S. requirements.
 Section 302 of H.R. 2289 would remove a requirement in Dodd-Frank that
foreign regulators indemnify a U.S-based swap data repository for any expenses
arising from litigation related to a request for market data. Indemnification
generally refers to compensating someone for harm or loss.
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Contents
Background on the CFTC ................................................................................................................ 1
The CFTC Reauthorization Process ................................................................................................ 2
The Commodity End-User Relief Act (H.R. 2289): Selected Provisions ........................................ 4
Cost-Benefit Analysis ................................................................................................................ 4
Existing CFTC Requirements for Cost-Benefit Analysis ................................................... 4
Cost Benefit Provisions in H.R. 2289 ................................................................................. 5
How Valuable Is Cost-Benefit Analysis? ............................................................................ 6
Trading by Affiliates: Amendment to the “End-User” Exception ............................................. 7
Background ......................................................................................................................... 7
Analysis: Affiliate Activities Under the End-User Exception of H.R. 2289 ...................... 11
Which Companies Are “Financial Entities?” .......................................................................... 12
Changes to Definition of Bona Fide Hedging ......................................................................... 14
Global Cross-Border Swaps .................................................................................................... 15
Background: Cross Border Swaps and Extra-Territoriality .............................................. 15
Past CFTC Action ............................................................................................................. 15
H.R. 2289 on Cross-Border Swaps ................................................................................... 16
Swap Data Repository Indemnifications ................................................................................. 18

Figures
Figure 1. Hypothetical Example of Swaps Trading ....................................................................... 12

Contacts
Author Contact Information .......................................................................................................... 19

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Background on the CFTC
The Commodity Futures Trading Commission (CFTC) was created in 1974 through enactment of
the Commodity Futures Trading Commission Act1 to regulate commodities futures and options
markets. At the time these markets were poised to expand beyond their traditional base in
agricultural commodities to encompass contracts based on financial variables, such as interest
rates and stock indexes.2 The CFTC’s mission is to prevent excessive speculation, manipulation
of commodity prices, and fraud. The agency administers the Commodity Exchange Act (CEA),3
which was passed in 1936. Prior to the CFTC’s creation, trading in agricultural commodities
regulated by the CEA was overseen by the Commodity Exchange Administration, an office within
the U.S. Department of Agriculture which was also formed in 1936.
The CFTC oversees industry self-regulatory organizations (SROs)—such as the futures
exchanges and the National Futures Association—and requires the registration of a range of
industry firms and personnel, including futures commission merchants (or brokers), floor traders,
commodity pool operators, and commodity trading advisers. The Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 (Dodd-Frank)4 significantly expanded the CFTC’s
jurisdiction to include over-the-counter (OTC) derivatives, also called swaps.5 As a result of
Dodd-Frank, major participants in the swaps markets must register with the CFTC, and certain
swaps must be cleared by clearinghouses and traded on electronic trading platforms similar to
exchanges.6 Newly regulated swap market participants include swap dealers, major swap
participants, swap clearing organizations, swap execution facilities, and swap data repositories.
These entities are subject to new business conduct standards contained in the statute or
promulgated as CFTC rules. Like the Securities and Exchange Commission (SEC), the CFTC
does not generally regulate the safety and soundness of individual firms, with the exception of
newly regulated swap dealers and major swap participants, for whom it will set capital standards
pursuant to Dodd-Frank.
Although most derivatives trading in today’s market relates to financial variables (i.e., interest
rates, currency prices, and stock indexes), congressional oversight remains vested in the House
and Senate Agriculture Committees in part because of the market’s historical origins in
agricultural commerce. Appropriations for the CFTC are under the jurisdiction of the Agriculture
Appropriations Subcommittee in the House and the Financial Services and General Government
Appropriations Subcommittee in the Senate.
To meet additional responsibilities for oversight of swaps, the Obama Administration has
requested additional funding for the CFTC since FY2011, when the CFTC’s budget was $202

1 P.L. 93-463.
2 Futures, options, and swaps are examples of derivatives. Derivatives are financial instruments with one feature in
common: their value is linked to changes in some underlying variable, such as the price of a physical commodity, a
stock index, or an interest rate. Derivatives contracts—futures contracts, options, and swaps—gain or lose value as the
underlying rates or prices change, even though the holder may not actually own the underlying asset.
3 P.L. 74-765, 7 U.S.C. §1 et seq.
4 P.L. 111-203.
5 A swap is an exchange of one asset or liability for a similar asset or liability for the general purpose of shifting risks.
The basic terms of a swap often require two counterparties to exchange payments periodically for a prearranged
duration of time. For instance, one party may pay a fixed rate payment stream and receive in return a variable rate
payment stream from their swap counterparty (or vice versa) for a certain time period.
6 These platforms are called swap execution facilities.
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million. For FY2016, the CFTC requested a budget of $322 million, and a staff of 895 full-time
equivalent employees (FTEs).7 This represents an increase of $72 million (or 29%) and 149 FTEs
over the FY2015 enacted appropriations amount of $250 million for the CFTC.8 Of the requested
$72 million increase, the CFTC has targeted 39% for information technology (IT) investments
and the remaining 61% toward an increase in staffing, particularly in the areas of enforcement,
registration, economic and legal analysis, and examinations.9 The House-reported bill (H.R.
3049) would appropriate $245 million, and the Senate reported bill for the CFTC (S.1910) would
appropriate $250 million. The President’s budget request stated that “the funding level has not
enabled the Commission to keep pace with the increased technological complexity and
globalization of the markets overseen by the Commission” since its jurisdiction was expanded to
include swaps in 2010.10
Organizationally, the CFTC is led by five commissioners appointed by the President, with the
advice and consent of the Senate, to serve staggered five-year terms. No more than three
commissioners at any one time may be from the same political party. The President designates
one commissioner to serve as chair. The agency is organized around four divisions:11
Clearing and Risk, which oversees derivatives clearing organizations and other
major market participants;
Enforcement, which investigates and prosecutes alleged violations of the CEA
and CFTC regulations;
Market Oversight, which conducts trade surveillance and oversees trading
facilities, such as futures exchanges and swap execution facilities, and swap data
repositories; and
Swap Dealer and Intermediary Oversight, which oversees registration and
compliance by SROs, such as the futures exchanges (e.g., the Chicago Mercantile
Exchange), the National Futures Association, and the registration of swap dealers
and major swap participants.
The CFTC Reauthorization Process
The CEA, the statute governing futures and swaps markets in which the CFTC administers,
contains a sunset provision. This means Congress must periodically reauthorize appropriations to
carry out the CEA.12 However, if an explicit authorization of appropriations for a program or
activity is present—as in the CEA—and it expires, the underlying authority in the statute to
administer such a program or engage in such an activity does not. 13 In other words, the CFTC

7 Please see Commodity Futures Trading Commission, President’s Budget Fiscal Year 2016, p. 3. Available, at
http://www.cftc.gov/About/CFTCReports/ssLINK/cftcbudget2016.
8 Ibid.
9 Ibid., at p. 3.
10 Commodity Futures Trading Commission, President’s Budget Fiscal Year 2016, Prepared for the Committee on
Appropriations, February, 2015, at pg. 1. Available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/
file/cftcbudget2016.pdf.
11 Please see “CFTC Organization,” available at http://www.cftc.gov/About/CFTCOrganization/index.htm.
12 An authorization may generally be described as a statutory provision that defines the authority of the government to
act. The primary purpose of authorization statutes or provisions is to provide authority for an agency to administer a
program or engage in an activity. For further information, please see CRS Report R42098, Authorization of
Appropriations: Procedural and Legal Issues
, by Jessica Tollestrup and Brian T. Yeh.
13 The Government Accountability Office (GAO) guidance states that “the existence of a statute (organic legislation)
(continued...)
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continues functioning and administering the CEA even if its authorization has expired—which
has been the case since the last CFTC reauthorization expired on September 30, 2013. It has not
been uncommon for Congress to pass CFTC reauthorization bills several years after the prior
authorization had expired.14
The 114th Congress is considering a new CFTC reauthorization bill. Historically, the
reauthorization process has often been one of the principal vehicles for modifying the CFTC's’
regulatory authority and evaluating the efficacy of its regulatory programs. Congress often uses
the reauthorization process as a vehicle to consider a wide range of issues related to the regulation
of derivatives trading.
The current CFTC reauthorization process is the first since the Dodd Frank Act’s passage brought
the more than $400 trillion U.S. swaps market15 under regulatory oversight.16 For some in
Congress, it may be an opportunity to reexamine provisions of Dodd-Frank they feel may have
created excessive regulatory burdens or industry costs. Others have been critical of any perceived
weakening of derivatives oversight introduced in the wake of the financial crisis. Still others may
be using the current CFTC reauthorization process to try to make changes to futures regulation
that industry, or regulators themselves, have long sought.
This report examines selected provisions of the most recent CFTC reauthorization bill, H.R.
2289,17 the Commodity End-User Relief Act, which passed the House on June 9, 2015, by a vote
of 246 to 171. The bill was referred to the Senate Committee on Agriculture, Nutrition, and
Forestry on June 10, 2015. The Obama administration threatened to veto H.R. 2289, stating that
the bill “ ... undermines the efficient functioning of the CFTC by imposing a number of
organizational and procedural changes and would undercut efforts taken by the CFTC over the
last year to address end-user concerns.”18

(...continued)
imposing substantive functions upon an agency that require funding for their performance is itself sufficient legal
authorization for the necessary appropriations, regardless of whether the statute addresses the question of subsequent
appropriations.” (GAO Red Book, Volume I, at 2-41, 2-69 [3d ed. 2004]).
14 For a closer look at some of the past CFTC reauthorizations, please see, e.g., CRS Report 89-520E Commodity
Futures Trading Commission Reauthorization in 1982 and 1986: Major Issues in Futures Regulations
by Mark
Jickling (out-of-print report; available from the author upon request.)
15 The $400 trillion figure is measured in terms of notional value. Please see Testimony of Chairman Timothy G.
Massad before the U.S. Senate Committee on Agriculture, Nutrition & Forestry,
Washington, DC, May 14, 2015,
which says in part: “In addition to the challenges posed by the growth and increasing complexity of the futures and
options market, our responsibilities now include overseeing the swaps market, an over $400 trillion market in the U.S.,
measured by notional amount.” Available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-22.
16 Since Dodd-Frank, (P.L. 111-203) oversight of the swaps market is divided between the CFTC, which oversees the
vast majority of swaps, and the Securities and Exchange Commission (SEC), which regulates a smaller subset of swaps
called security-based swaps (SBS). SBS are swaps based on a single security or loan or a narrow-based group or index
of securities (or events relating to a single issuer or issuers of securities in a narrow-based security). Please see U.S.
Securities and Exchange Commission, Derivatives, Background, available at https://www.sec.gov/spotlight/dodd-frank/
derivatives.shtml.
17 For a comprehensive summary of each of H.R. 2289’s provisions, please see CRS Summary, May 29, 2015,
available at http://www.lis.gov/cgi-lis/bdquery/D?114:1:./temp/~bdaf0x:@@@D&summ2=m&:dbs=n:|/billsumm/
billsumm.php?id=2|.
18 Executive Office of the President, Office of Management and Budget, Statement of Administration Policy on H.R.
2289 – Commodity End-User Relief Act, June 2, 2105). Available at https://www.whitehouse.gov/sites/default/files/
omb/legislative/sap/114/saphr2289r_20150602.pdf.
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The Commodity End-User Relief Act (H.R. 2289):
Selected Provisions
The next sections examine more closely selected major provisions of the most recent CFTC
reauthorization bill, H.R. 2289, the Commodity End-User Relief Act, which have generally been
the most actively debated—beginning with the bill’s changes to required cost-benefit analysis in
CFTC regulatory actions.19
Cost-Benefit Analysis
This section analyzes the provision in H.R. 2289 that would expand the number of factors for the
CFTC to consider in cost-benefit analysis, and include the need for quantitative as well as
qualitative analysis, among other changes. It first examines the existing requirements for the
CFTC to conduct cost-benefit analysis; then the changes in H.R. 2289; and then the academic
research on how valuable cost benefit may be.
Existing CFTC Requirements for Cost-Benefit Analysis
The CFTC already has certain requirements to perform cost-benefit analysis in its rulemakings
under the CEA. The CFTC and other independent regulatory agencies20 (such as the SEC) are not
subject to the general requirements that apply to other government agencies to conduct cost-
benefit analysis under Executive Order 12866.21
For the CFTC, Section 15(a) of the CEA requires that “before promulgating a regulation under
this chapter or issuing an order (except as provided in paragraph (3)), the Commission shall
consider the costs and benefits of the action of the Commission.”22 In addition,
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.23

19 This is a selective, not a comprehensive list of issues. For a comprehensive summary of each of H.R. 2289’s
provisions, please see CRS Summary, May 29, 2015, available at http://www.lis.gov/cgi-lis/bdquery/D?d114:1:./temp/
~bdaf0x:@@@D&summ2=m&:dbs=n:|/billsumm/billsumm.php?id=2|.
20 As defined in 44 U.S.C. §3502.
21 Under E.O. 12866, the Office of Management and Budget’s (OMB’s) Office of Information and Regulatory Affairs
(OIRA) reviews “significant” proposed and final regulations for agencies that are covered, and those agencies are
required to conduct a cost-benefit analysis if they deem a rule to be “economically significant” (e.g., if it has a $100
million effect on the economy). For a more detailed examination of cost-benefit analysis, please see CRS Report
R41974, Cost-Benefit and Other Analysis Requirements in the Rulemaking Process, coordinated by Maeve P. Carey.
22 7 U.S.C. §19(a).
23 7 U.S.C. §19(a). Subsection (a) (3) in 7 U.S.C. §19(a) also states that these requirements do not apply to “(A) An
order that initiates, is part of, or is the result of an adjudicatory or investigative process of the Commission. (B) An
emergency action. (C) A finding of fact regarding compliance with a requirement of the Commission.”
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The CFTC also may have additional required considerations when issuing a particular rule.
Section 15(a) of the CEA applies more broadly than E.O. 12866, which applies only to rules
deemed to reach a certain “significance” threshold—Section 15(a) applies to all rules issued by
the CFTC.
In practice, the CFTC relies on guidance provided by the Office of Management and Budget’s
(OMB’s) Office of Information and Regulatory Affairs (OIRA) when considering costs and
benefits under Section 15(a) of the CEA, although it is not required to do so. This practice is
documented in a May 2012 Memorandum of Understanding (MOU) between OIRA and CFTC
regarding implementation of the Dodd-Frank Act.24 OIRA has issued a variety of documents to
assist agencies in conducting their cost-benefit analyses, including OMB Circular A-4 and
accompanying guidance documents. Thus, while the CFTC is not subject to the executive order’s
requirements, the CFTC’s analyses conducted pursuant to the CEA likely share some similarities
with analyses that are completed pursuant to the executive order.25
Cost Benefit Provisions in H.R. 2289
Section 202 of H.R. 2289 expands the CEA’s current five cost-benefit analysis provisions listed
above to twelve considerations. Some of the considerations are similar to requirements other
agencies are subject to under E.O. 12866, and some are currently in Section 15(a) of the CEA.
H.R. 2289 includes the following factors:
(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);

24 Memorandum of Understanding Between Office of Information and Regulatory Affairs, Executive Office of the
President, and U.S. Commodity Futures Trading Commission
, May 9, 2012. Available at https://www.whitehouse.gov/
... /oira_cftc_mou_2012.pdf.
25 In September 2010, the CFTC Office of General Counsel and Office of Chief Economist created a template for a
uniform cost-benefit analysis methodology to be used in Dodd-Frank Act proposed rules. That template stated, in part,
that Section 15(a) “does not require the Commission to quantify the costs and benefits of a rule or 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.” It went on to say that CFTC “could in its discretion determine that, notwithstanding its costs, a particular
rule is necessary or appropriate to protect the public interest or to effectuate any of the provisions or accomplish any of
the purposes of the Act.” See Office of the Inspector General, U.S. Commodity Futures Trading Commission, “A
Review of Cost-Benefit Analyses Performed by the Commodity Futures Trading Commission in Connection with
Rulemakings Undertaken Pursuant to the Dodd-Frank Act,” June 13, 2011, p. 3, available at http://www.cftc.gov/ucm/
groups/public/@aboutcftc/documents/file/oig_investigation_061311.pdf.
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(I) whether the proposed regulation or order is inconsistent, incompatible, or duplicative
of other federal regulations or orders;
(J) the cost to the Commission of implementing the proposed regulation or order by the
Commission staff, including a methodology for quantifying the costs;
(K) whether, in choosing among alternative regulatory approaches, those approaches
maximize net benefits (including potential economic and other benefits, distributive
impacts, and equity); and
(L) other public interest considerations.
Arguably, at least some of these considerations, such as liquidity and market efficiency,
incorporate the existing statutory mission of the CFTC.
In addition, Section 202 adds a requirement that the CFTC conduct quantitative as well as
qualitative assessments of costs and benefits.26 The requirement for quantitative cost-benefit
analysis appears to mark a change from previous practice.27 It also raises the question of how
accurately one may quantify benefits involving economic externalities. In economics, an
externality refers to a consequence of an economic activity that is experienced by unrelated third
parties; it can be either positive or negative. Pollution is often used as an example of a negative
externality, in which the effects may be widely dissipated and hard to quantify. Risks to the
financial system could be another example of a negative externality.
Quantifications of such externalities may involve judgments or estimates as to the value of
intangible or speculative benefits that might be experienced differently by individuals, such as the
value of financial stability, or, in the case of pollution, the value of avoiding certain diseases.28 In
the realm of financial regulation, benefits are often widely dissipated (for instance, prospective
investors broadly benefit from fuller and more accurate corporate disclosures and related investor
protections), and are sometimes speculative (e.g., trying to measure the benefit of avoiding
potential financial fraud). This, according to critics, can make benefits harder to reliably quantify.
Costs of compliance, meanwhile, may be more easily measurable (e.g., through payment-hours
for accountants, lawyers, and staff).29
How Valuable Is Cost-Benefit Analysis?
Proponents of cost-benefit analysis argue that it can force agencies to focus on and clarify the
benefits of their proposed rulemakings and better weigh the costs they will impose against those
benefits.30 According to this line of reasoning, by putting cost-benefit requirements in statute,

26 “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.” H.R. 2289, The Commodity End User Relief Act, 114th Congress, §202.
27 See Office of the Inspector General, U.S. Commodity Futures Trading Commission, “A Review of Cost-Benefit
Analyses Performed by the Commodity Futures Trading Commission in Connection with Rulemakings Undertaken
Pursuant to the Dodd-Frank Act,” June 13, 2011, p. 3, available at http://www.cftc.gov/ucm/groups/public/@aboutcftc/
documents/file/oig_investigation_061311.pdf.
28 For an analysis of these issues, please see Tosihiro Oka, Effectiveness and Limitations of Cost-benefit Analysis in
Policy Appraisal,
p. 26. Available at http://www.jbaudit.go.jp/english/exchange/pdf/e10d02.pdf.
29 For a more detailed discussion of the debate over cost-benefit analysis, please see CRS Report R42821, Independent
Regulatory Agencies, Cost-Benefit Analysis, and Presidential Review of Regulations
, by Maeve P. Carey and Michelle
D. Christensen.
30 See, e.g., Robert W. Hahn and Paul C. Tetlock, “Has Economic Analysis Improved Regulatory Decisions?” Journal
of Economic Perspectives
, vol. 22, no. 1 (Winter 2008), p. 68.
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such as those in the CEA and those proposed in H.R. 2289, Congress can have some influence
over the considerations and outcomes in agency rulemakings.31
By contrast, some administrative law scholars have argued that the increased use of cost-benefit
analysis has “ossified” the rulemaking process, slowing down the process or causing agencies to
issue guidance documents rather than regulations, thereby avoiding rulemaking requirements
altogether.32 Some academics argue that, particularly for financial rulemakings, costs can be
easier to quantify than widely dispersed potential benefits (such as “a safer financial system” or
“better investor disclosure”), and that this may lead to an overstatement of costs over benefits.33
Finally, critics argue that the practice opens the agency’s rules to court challenges by industry
groups on the grounds of inadequate cost-benefit analysis, tying up agency resources and at times
leading to the invalidation of regulations.34
Trading by Affiliates: Amendment to the “End-User” Exception35
Background
Sections 301 and 306 of H.R. 2289, taken together, would expand the exception from certain
Dodd-Frank swaps trading and clearing requirements granted to nonfinancial companies. Under
current language, the Dodd-Frank Act requires many swaps deals to be cleared through a
clearinghouse and traded on an electronic exchange.36 But it provides an exception from these
two requirements to nonfinancial firms when certain conditions are met. The exception is
commonly referred to as the end-user exception.
Section 723 of Dodd Frank states that the clearing and exchange-trading requirements shall not
apply to the swap if one of the counterparties to the swap is “not a financial entity” and is using
the swap to hedge or mitigate commercial risk.37 The exception applies to affiliates of non-
financial entities when those affiliates are using the swap to hedge or mitigate the commercial
risk of the non-financial entity. H.R. 2289 would expand the exception by amending the
definition of financial entities ineligible to use the exception and by expanding the types of
activities in which eligible affiliates may engage while using the exception.

31 See, e.g., Cass R. Sunstein, The Cost-Benefit State: The Future of Regulatory Protection (Chicago: American Bar
Association, 2002), pp. 6-10.
32 For two main proponents of the ossification thesis, see Thomas O. McGarity, “Some Thoughts on ‘Deossifying’ the
Rulemaking Process,” Duke Law Journal, vol. 41, no. 6 (June 1992), pp. 1385-1462; and Richard J. Pierce, Jr., “Seven
Ways to Deossify Agency Rulemaking,” Administrative Law Review, vol. 47, no. 1 (Winter 1995), pp. 59-98.
33 See, e.g., Dennis Kelleher, Stephen Hall, and Katelynn Bradley, Setting the Record Straight on Cost-Benefit Analysis
and Financial Reform at the SEC
, Better Markets, Inc., July 30, 2012.
34 Dennis Kelleher, Cost Benefit Analysis and Financial Reform: Overview, Better Markets, available at
ourfinancialsecurity.org/blogs/wp ... /DENNIS-KELLEHER-PPT.pdf.
35 Additional bills on this topic in the 114th Congress, which do not include a reauthorization of the CFTC, include H.R.
1317, which was marked up and ordered to be reported by the House Financial Services Committee on July 29, 2015;
and was marked up and ordered to be reported by the House Agriculture Committee on September 30, 2015; and S.
876; and H.R. 37 in §201.
36 Or on an exchange-like facility called a “swap execution facility.”
37 Codified at 7 U.S.C. §2(h)(7).
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Who Is an Eligible Affiliate?
As noted above, the Dodd Frank Act requires many swap transactions to be cleared and traded on
exchanges, but provides an exception for swaps and security-based swaps. The exception applies
when one of the parties to the transaction is not a financial entity, is using swaps to hedge or
mitigate commercial risk, and properly notifies the CFTC regarding how it meets its financial
obligations.38 The exception is commonly referred to as the end-user exception. The statute
currently allows affiliates of end-users to use the exception, but 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.”39
Without further definition, the term “affiliated companies” can loosely refer to companies that are
related to each other in some way, including foreign affiliates. However, the Dodd Frank Act does
provide that an affiliate cannot use the exception if the affiliate is a swap dealer; a security-based
swap dealer; a major swap participant; a major security-based swap participant; a hedge fund; a
commodity pool; or a bank holding company with over $50 billion in consolidated assets.40
Proponents of a broader exception have argued that the hedging activities of corporate treasury
units of non-financial parent companies could potentially be disqualified from using the
exception.41 Treasury units aggregate similar risks within various parts of a parent company, and
often consolidate the mitigation of those risks by engaging in one swap transaction that covers it
all. Treasury units may serve other financial functions for an overall non-financial parent
company as well.42
Under current statutory language, treasury units could engage in swaps activity with non-financial
affiliates without clearing the swap because the affiliate itself could use the end-user exception.
The treasury unit could also engage in an uncleared swap with another financial entity if it did so
acting on behalf of a non-financial entity and as its agent. However, treasury units often hedge
risks with other financial entities on their own behalf, as a result of the risks they have aggregated
from the non-financial entities within the parent company. Consequently, these entities may not
be able to use the “affiliate” end-user exception, and they may not be able to use the end user
exception in their own right because they “predominantly engage in activities that are in the
business of banking” which makes them “financial entities” that cannot use the exception. Any
inability of treasury affiliates of non-financial entities to use the end-user exception would make
it more expensive for their parent corporation to hedge risks using derivatives.43
Policy Issues and CFTC Actions
A key question for policymakers in deciding whether to extend any exception for affiliates is:
how widely? Would risks be posed to the financial system or to parent companies if the exception
from derivatives clearing and exchange-trading requirements were extended to non-financial

38 7 U.S.C. §2(h)(7)(D).
39 P.L. 111-203 §723.
40 P.L. 111-203 §723, codified at 7 U.S.C. §2(h)(7)(D)(ii).
41 Among other commenters, the CFTC cited comment letters from Shell Energy North America, Kraft, Philip Morris
and Siemens, as making such arguments, at 77 FR 42563 (July 19, 2012).
42 Without additional definition, however, the term “treasury unit” does not necessarily refer to a unit only within a
non-financial parent company. Financial companies can and do have “treasury units” as well.
43 See, e.g., comment letters from Shell Energy North America, Kraft, Philip Morris and Siemens, as making such
arguments, at 77 FR 42563 (July 19, 2012).
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affiliates of financial companies? And under what circumstances should such exception be
extended to financial affiliates of non-financial companies to minimize such risks?
The CFTC, in its 2012 final rule on the end-user exception, addressed some of the questions
involved in deciding which entities to appropriately exclude from the end-user exception, as
financial entities.44 The CFTC found that treasury units that operate as separate legal entities and
whose primary function is financial in nature would be precluded from the “end user” exception,
but treasury units housed within a non-financial corporation, and in which the non-financial
company enters into the swaps in its own name, could be eligible to use the end user exception.45
The CFTC also noted that some commenters had argued that the end-user exception “should be
narrowly tailored to businesses that produce, refine, process, market, or consume underlying
commodities and to counterparties transacting with non-financial counterparties;”46 and that a
number of form letters had argued that extending the end user exception to certain financial
entities could increase systemic financial risks from derivatives trading.47
More questions regarding the proper application of the end-user exception to treasury affiliates
continued to arise, however, and in 2014, the CFTC attempted to address them. The CFTC
indicated that it would not bring enforcement actions against certain treasury affiliates in its
November 26, 2014 no-action letter on centralized treasury units.48 The CFTC defines an
“eligible treasury affiliate”—which would qualify for the enforcement forbearance—as entities
meeting each of six conditions. The conditions include, among other things, that the affiliate is
neither affiliated with nor is itself a swap dealer or a major swap participant. The CFTC also
requires that the affiliate’s “ultimate parent” is not a financial entity (and defines this as the
topmost, direct or indirect, majority owner of the entity).49
Some industry participants have not been satisfied by the “no-action” letter, however.50 Treasury
affiliates that rely on the no-action letter for swaps which they neither clear, nor execute on an

44 See 77 FR 42560 (July 19, 2012), “End-User Exception to the Clearing Requirement for Swaps,” CFTC Final Rule at
42561 and at 42563. Available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-
17291a.pdf.
45 “However, the Commission notes that it is important to distinguish where the treasury function operates in the
corporate structure. Treasury affiliates that are separate legal entities and whose sole or primary function is to undertake
activities that are financial in nature as defined under Section 4(k) of the Bank Holding Company Act are financial
entities as defined in Section 2(h)(7)(C)(VIII) of the CEA because they are ‘‘predominantly engaged’’ in such
activities. If, on the other hand, the treasury function through which hedging or mitigating the commercial risks of an
entire corporate group is undertaken by the parent or another corporate entity, and that parent or other entity is entering
into swaps in its own name, then the application of the end-user exception to those swaps would be analyzed from the
perspective of the parent or other corporate entity of the parent or other corporate entity directly.” 77 FR 42563 (July
19, 2012).
46 CFTC citing comment letter from Idaho Petroleum Marketers & Convenience Store Association (IPM&CSA) at FR
42560 (July 19, 2012).
47 “We must not broaden this narrow, commonsense exception to include financial and commercial institutions that
want to gamble in the derivatives markets. Doing so would allow systemically important companies to enter into risky
trades in a market with zero transparency and accountability.’’ CFTC citing Form Letters received as comments at 77
FR 42560 (July 19, 2012).
48 CFTC Letter No. 14-144, “No Action Relief from the Clearing Requirement for Swaps Entered into by Eligible
Treasury Affiliates,” (Nov. 26, 2014). Available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/
documents/letter/14-144.pdf.
49 CFTC Letter No. 14-144, pp. 3-7.
50 See, e.g., Letter from the United State Chamber Of Commerce, June 8, 2015, entered into the Congressional Record,
daily edition, vol. 161, No. 91 (June 9, 2015), p. H3937, during House Floor Debate on H.R. 2289, 114th Cong., 1st
sess. Available at https://www.congress.gov/crec/2015/06/09/CREC-2015-06-09.pdf. and Letter from the National
Association of Manufacturers, June 5, 2015, entered into the Congressional Record, daily edition, vol. 161, No. 91
(continued...)
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exchange, are technically in violation of the Dodd Frank Act’s clearing requirement as interpreted
by the CFTC. The CFTC’s No-action Letter (NAL), while it assures those that qualify to rely on
it that they will not face an enforcement action for violating the clearing and exchange trading
requirements, does not actually change the statute. Consequently, proponents of the language in
Section 301 have argued that a statutory amendment is necessary to provide clarity and certainty
to end-users that use treasury affiliates to hedge their commercial risk.51 Sections 301 and 306 of
H.R. 2289 appear to attempt to address those concerns, though they may expand the exception
beyond those entities covered by the CFTC’s NAL as well.
Broader Issues and H.R. 2289
At issue for Congress in deciding whether to expand the existing exception is whether derivatives
trading between affiliates within the same umbrella organization could pose substantial risk of
losses to either the affiliate or the parent, or spread losses outside the organization. Various
questions for policymakers to consider include the following:
 Might one affiliate have an incentive to gain through a swaps trade at another
affiliate’s expense?
 What repercussions could this have within the conglomerate?
 What would be the best way to control risks of excessive losses by a single
affiliate from such trades?
 Is any proposed legislative exemption tailored narrowly enough to meet concerns
from regulators that large swap market players might funnel swaps through an
affiliate to avoid U.S. derivatives requirements?
 Would a legislative provision allow overseas affiliates to use this exception, and
if so, what would be the cross-border regulatory implications?
Proponents of the provision in H.R. 2289 argue that it would prevent the redundant regulation of
inter-affiliate transactions and prevent capital from being tied up unnecessarily, such as through
the duplicative posting of margin for derivatives trades.52 The expansion of the exception, they
argue, would allow businesses that centralize their hedging activities to reduce costs, simplify
financial dealings, and reduce their counterparty credit risk. Proponents contend that the provision
would allow affiliates—such as centralized treasury units—within a corporate entity to trade
swaps under the end-user exception to the clearing and exchange-trading requirements both
within and outside the umbrella organization.53

(...continued)
(June 9, 2015), p. H3933, during House Floor Debate on H.R. 2289, 114th Cong., 1st sess. Available at
https://www.congress.gov/crec/2015/06/09/CREC-2015-06-09.pdf.
51 See, e.g., Letter from the United State Chamber Of Commerce, June 8, 2015, entered into the Congressional Record,
daily edition, and vol. 161, No. 91 (June 9, 2015), p. H3937, during House Floor Debate on H.R. 2289, 114th Cong., 1st
sess. (“Non-financial companies that use centralized treasury units to manage their enterprise-wide risk should not be
penalized for adopting this risk reducing structure, and H.R. 2289 acknowledges and would address this issue.”)
Available at https://www.congress.gov/crec/2015/06/09/CREC-2015-06-09.pdf.
52 See, e.g., Letter from the United State Chamber Of Commerce, June 8, 2015, entered into the Congressional Record,
daily edition, and vol. 161, No. 91 (June 9, 2015), p. H3937, during House Floor Debate on H.R. 2289, 114th Cong., 1st
sess. Available at https://www.congress.gov/crec/2015/06/09/CREC-2015-06-09.pdf.
53 Letter from the National Association of Manufacturers, June 5, 2015, entered into the Congressional Record, daily
edition, vol. 161, No. 91 (June 9, 2015), p. H3933, during House Floor Debate on H.R. 2289, 114th Cong., 1st sess.
Available at https://www.congress.gov/crec/2015/06/09/CREC-2015-06-09.pdf.
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Opponents of the provision in H.R. 2289 argue that it would allow financial firms with
commercial business affiliates to “take advantage of exemptions from key Dodd-Frank risk
controls that were meant to apply only to commercial end users.”54 Opponents of widening the
exception as it applies to affiliates from the Dodd-Frank requirements have also stated that “the
potential for affiliates to cause massive losses to their parent companies cannot be denied.”55
They cite examples such as the derivatives losses incurred by the large insurance conglomerate
American International Group Inc.’s (AIG’s) overseas affiliate in London and derivatives losses
incurred by J.P. Morgan’s so-called “London Whale” trading losses in its London affiliate. They
argue that any expansions of the exception should be restricted only to 100%-owned subsidiaries
of a parent company, and be subject to strict risk management controls.56
Analysis: Affiliate Activities Under the End-User Exception of H.R. 2289
Section 301 of H.R. 2289 seemingly would expand the hedging activities in which affiliates of
non-financial entities could engage while being able to use the end-user exception. Under current
statutory language, affiliates may use the end-user exception “only if the affiliate, acting on
behalf of the [non-financial entity] and as an agent, uses the swap to hedge or mitigate the
commercial risk of the person or other affiliate.”57
Section 301 would expand that language by allowing affiliates to engage in more hedging
activities while using the exception. Specifically, Section 301 would permit affiliates to use the
end-user 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
hedge or mitigation of such commercial risk is addressed by entering into a swap with a swap
dealer or major swap participant, an appropriate credit support measure or other mechanism must
be utilized.”58 Removing the requirement that the affiliate act on behalf of the non-financial entity
and as an agent could permit the affiliate to act in its own capacity as an independent entity while
hedging the commercial risk of the non-financial entity.
As noted above, affiliates of end users cannot use the end-user exception if they are swap dealers,
security-based swap dealers, major swap participants (MSPs), major security-based swap
participants, hedge funds, commodity pool operators (CPOs), or large bank holding companies
(BHCs) with more than $50 billion in assets. This portion of the statute appears to prevent large
BHCs, swap dealers, MSPs, hedge funds and CPO’s affiliated with a non-financial firm from
using the end-user exception even if H.R. 2289 became law.59 However, barring further action
from the regulators, this part of the statute would not appear to prevent affiliated financial firms
with less than $50 billion in assets, or who did not otherwise fall into these categories, from using
this end-user exemption from the derivatives requirements.

54 Americans for Financial Reform, June 3, 2015, Letter to Congress. Available, at http://ourfinancialsecurity.org/2015/
06/letter-to-congress-afr-urges-congress-to-keep-our-markets-safe-reject-hr-2289/.
55 Better Markets, Letter Re. Proposed Clearing Exemption for Swaps Between Certain Affiliated Entities, September
21, 2012, p. 4. Available at http://www.bettermarkets.com/sites/default/files/documents/CFTC-CL-
%20Proposed%20Clearing%20Exeption%20for%20Swaps%20Between%20Certain%20Affiliated%20Entities-%209-
21-12.pdf.
56 Better Markets, p. 5.
57 7 U.S.C. §2(h)(7)(D).
58 H.R. 2289 §301 has a similar provision for security-based swaps, which fall under the jurisdiction of the SEC.
59 Again, using the end-user exception means the entity would not be required to clear its swaps through a derivatives
clearinghouse nor trade the swaps on an exchange or swap execution facility, which is similar to an exchange.
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Section 301 does not apparently restrict with whom the affiliate trades. It states only that the
affiliate of the nonfinancial firm or end user may qualify for the end-user exception itself “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.” H.R. 2289 does not specify that such trades
must occur within an umbrella organization.
Figure 1. Hypothetical Example of Swaps Trading

Source: Congressional Research Service.
The hypothetical scenario in Figure 1 illustrates the issues: If a nonfinancial firm, such as an
energy or metals business, had an affiliate that was a financial firm, could that financial firm
engage in swaps trading with an unaffiliated large financial firm and still use the end-user
exception under Section 301? While no restriction appears in Section 301 to prevent this scenario
so long as the financial affiliate engaged in the swap “to hedge or mitigate the commercial risk of
the person or other affiliate of the person that is not a financial entity,” the prohibition on certain
affiliates in Section 723 of Dodd-Frank would appear to preclude affiliates that were large banks
with more than $50 billion in assets, or were swap dealers or MSPs, hedge funds,60 or commodity
pool operators (CPOs), from using the end-user exemption as an affiliate even if H.R. 2289
passed. Financial firms with fewer assets, however, (and that are not swap dealers, MSPs, hedge
funds, or CPOs) would not appear to be prohibited from using the exception, so long as the
standard for hedging or mitigating the commercial risk of the non-financial affiliate was met.
Which Companies Are “Financial Entities?”
Section 306 of H.R. 2289 would modify the definition of a “financial entity,” potentially enabling
a wider range of companies to claim the end-user exception to the clearing requirement in the
Dodd Frank Act. As discussed above, the “end user” exception is limited to a company that “is
not a financial entity,”61 as the term “financial entity” is defined by the bill. Section 306 would
potentially allow certain financial entities who are non-banks to use the end user exception even
when trading on behalf of another financial entity, so long as neither entity has a prudential
regulator.

60 As per the Commodity Exchange Act’s Prohibition on Affiliates, in 7 U.S.C. §2(h)(7)(D)(ii), what would commonly
be referred to as a hedge fund is defined as, “an issuer that would be an investment company, as defined in section 3 of
the Investment Company Act of 1940 (15 U.S.C. 80a–3), but for paragraph (1) or (7) of subsection (c) of that Act [8]
(15 U.S.C. §80a–3(c)).”
61 7 U.S.C. §2(h) (7) (A).
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Section 306 would exclude from the definition of financial entity one “who is not supervised by a
prudential regulator, and is not described in any of subclauses (I) through (VII)62 ... and is a
commercial market participant, or 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.”63 Section 306 would define a
“commercial market participant” as “any producer, processor, merchant, or commercial user of an
exempt or agricultural commodity, or the products or byproducts of such a commodity.”64
Under this language, entities that are not supervised by a prudential regulator, and are not swap
dealers, major swap participants, hedge funds, large banks, or other enumerated financial entities
that enter into swaps to hedge the commercial risk of other affiliates not supervised by a
prudential regulator and are not among the types of entities listed in subclauses (I)-(VII) are not
“financial entities” for the purposes of qualifying for the end-user exception. If these entities are
not financial entities, then they could use the end-user exception in their own right, and need not
meet the affiliate requirements of Section 723 of the Dodd-Frank Act, as it would be amended by
Section 301. They would need only to use the swaps to hedge or mitigate commercial risk of
other qualifying non-financial entities, and notify the CFTC in accordance with agency
regulations, to use the clearing and exchange trading exceptions.
H.R. 2289 would create a broader, statutory exception from the Dodd Frank clearing and
exchange-trading requirements. It may allow for certain non-bank financial entities that do not
have banking regulators to be eligible for the exception, if they could show that they were
“commercial market participants” or they met the requirements for trading on behalf of other non-
prudentially supervised affiliates. The bill leaves to the CFTC to further clarify who would be a
“commercial market participant” and to determine which types of non-bank financial firms would
qualify for the end-user exception.

62 The Commodity Exchange Act (7 U.S.C. §2(h)(7)(C)) currently reads as follows:
(C) Financial entity definition
(i) In general. For the purposes of this paragraph, the term “financial entity” means—
(I) a swap dealer;
(II) a security-based swap dealer;
(III) a major swap participant;
(IV) a major security-based swap participant;
(V) a commodity pool;
(VI) a private fund as defined in section 80b–2(a) of title 15;
(VII) an employee benefit plan as defined in paragraphs (3) and (32) of section 1002 of title 29;
(VIII) a person predominantly engaged in activities that are in the business of banking, or in activities that are
financial in nature, as defined in section 1843(k) of title 12.

H.R. 2289 §306, however, does not include the last of these items, item (VIII), in its limitation on who is excluded
from the definition of a financial entity. This could effectively limit the application of subclause VIII to a large extent,
potentially permitting certain non-bank financial entities to no longer be considered “financial entities” for the purposes
of determining which entities may use the end user exception in their own right.
63 H.R. 2289 §306.
64 H.R. 2289 §306.
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Changes to Definition of Bona Fide Hedging
Section 313 of H.R. 2289 would also make changes to the definition of “bona fide hedging” in
the Commodity Exchange Act.65 The concept of “bona fide hedging” refers to transactions that in
some way genuinely offset commercial risks. The CFTC relies on its established rules and
guidance on what constitutes a bona fide hedge to help determine which types of swaps count
towards the requirement to register as a swap dealer or major swap participant (MSP). The
agency also uses it to determine which derivatives count towards limits on position size, referred
to as “position limits;” and, similarly, which transactions count towards “large trader reporting.”66
Large trading reporting requirements refer to a system the CFTC uses to monitor how large any
one trading party’s position size is. The broad purpose of this is to ensure that no one entity
wields excessive market power.67 The CFTC has the discretion to raise or lower the large trader
reporting levels in specific markets so as to strike a balance between collecting sufficient
information to oversee the markets and minimizing the reporting burden on market participants.68
Similarly, a position limit broadly refers to the maximum position in any one type of future,
option or swap for one commodity that may be held or controlled by one person.69
The current definition of a bona fide hedge in the Commodity Exchange Act specifies, among
other factors, that
(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 a transaction or position that—
(A) (i) represents a substitute for transactions made or to be made or positions taken or to be taken at a
later time in a physical marketing channel;

(ii) is economically appropriate to the reduction of risks in the conduct and management of a
commercial enterprise; and.... 70
Among other changes, H.R. 2289’s Section 313 would change (A)(ii) above so as to read:
(ii) is economically appropriate to the reduction or management of current or anticipated risks
in the conduct and management of a commercial enterprise; and...
This change could potentially broaden the bona fide hedging definition so as to allow anticipated,
as well as current risks. It could also potentially allow trades that were not only needed to reduce
risks, but simply to manage risks. This could potentially enable many more types of trades to be
permitted under this bona fide hedging definition, in which case more swap trades would
potentially not count towards the registration requirements nor towards restrictions on position
size.

65 Specifically, H.R. 2289 would change portions of 7 U.S.C. §6a(c).
66 A position limit, which can be set either by the CFTC or by an exchange, refers to the maximum position size in any
one future or option contract type the exchange makes available to trade, or in all futures or options of one commodity
combined, that may be held or controlled by one person or one entity. See Speculative Position Limits, CFTC Glossary,
at http://www.cftc.gov/ConsumerProtection/EducationCenter/CFTCGlossary/index.htm#S.
67 See Commodity Futures Trading Commission, “Large Trader Reporting Program,” available at http://www.cftc.gov/
IndustryOversight/MarketSurveillance/LargeTraderReportingProgram/ltrp.
68 CFTC, “Large Trader Reporting Program.”
69 For a more detailed definition, please see the CFTC’s glossary under “speculative position limits,” available at
http://www.cftc.gov/ConsumerProtection/EducationCenter/CFTCGlossary/index.htm#S.
70 7 U.S.C. §6a(c)(2).
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Global Cross-Border Swaps
Background: Cross Border Swaps and Extra-Territoriality
The topic of cross-border swaps broadly relates to the question of to what degree did Congress
intend, and did the Dodd-Frank Act authorize, the CFTC to regulate swaps that may extend
beyond U.S. borders or be transacted between U.S. and non-U.S. persons? Because the swaps
market is international in nature, with considerable cross-border trading, this question is material.
Section 722(d) of the Dodd-Frank Act stated that swaps reforms shall not apply to activities
outside the United States unless the activities have “a direct and significant connection with
activities in, or effect on, commerce of the United States.”
This mandate left much discretion to the CFTC as to how to interpret it. Former CFTC Chair
Gary Gensler, under whom the CFTC first issued rules and interpretations implementing Section
722, stated that “Failing to bring swaps market reform to transactions with overseas branches and
overseas affiliates guaranteed by U.S. entities would mean American jobs and markets would
likely move offshore, but, particularly in times of crisis, risk would come crashing back to our
economy.” Gensler and others have noted that derivatives trading by overseas affiliates of U.S.
financial conglomerates can and has resulted in significant losses to U.S.-based entities. They cite
examples such as AIG’s London-based Financial Products Group, which sold credit default swap
derivatives related to mortgage-backed securities that incurred losses during the financial crisis,
or the more recent J.P. Morgan “London Whale” derivatives trading losses of roughly $6 billion.71
By contrast, industry participants have warned that if CFTC rules were too burdensome or out of
sync with other countries’—putting in place requirements that other jurisdictions lacked—then
“swap business will migrate, in the short term, away from U.S. financial institutions to other
jurisdictions that are putting in place similar regulatory reform initiatives but are not as far
advanced in doing so as the United States”—and have warned that, once gone, such business
would be unlikely to return to U.S. companies.72
Past CFTC Action
The CFTC issued proposed guidance73 on the cross-border application of Title VII of Dodd-
Frank. In it, the agency sought to clarify who would count as a “U.S. person” for the purposes of
meeting the requirements of Dodd-Frank, such as the clearing requirement for swaps, among
other questions. Subsequently, on December 21, 2012, the agency issued a temporary exemption,
extending the deadline for meeting all the requirements for cross-border swaps, while it continued
to try to work with foreign regulators to create a more uniform system of requirements.74 Then,
on May 1, 2013, the SEC proposed a rule and interpretive guidance on cross-border security-
based swaps—swaps related to a security, such as an equity—which the SEC regulates. The
SEC's’ proposed rule has been widely interpreted as taking a narrower approach to defining who

71 Ibid., Gensler, 2012.
72 Testimony of Samara Cohen, Goldman, Sachs & Co., Subcommittee on Capital Markets and Government Sponsored
Enterprises, House Financial Services Committee, December 12, 2012, p. 3, available at
http://financialservices.house.gov/uploadedfiles/hhrg-112-ba16-wstate-scohen-20121212.pdf.
73 CFTC Proposed Interpretive Guidance and Policy Statement Regarding Cross-Border Application of Certain Swaps
Provisions of the Commodity Exchange Act, available at http://www.cftc.gov/ucm/groups/public/@newsroom/
documents/file/federalregister062912.pdf.
74 See “CFTC Approves Exemptive Order on Cross-Border Application of the Swaps Provisions of Dodd-Frank,”
available at http://www.cftc.gov/PressRoom/PressReleases/pr6478-12.
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is a U.S. person than did the CFTC—and thus restricting the reach of Dodd-Frank requirements
on security-based swaps to fewer overseas transactions or entities.75
The CFTC issued its final guidance on July 26, 2013, setting out the scope of the term U.S.
person, the general framework for determining which entities had to register as swap dealers and
major swap participants (MSPs), and which swaps involving non-U.S. persons who were
guaranteed by U.S. persons were subject to U.S. requirements.76 On November 14, 2013, the
CFTC issued a staff advisory77 aimed at determining when to apply U.S.-derivatives requirements
to trades that were booked in an offshore affiliate, but in which the non-U.S. affiliate used U.S.
personnel to arrange, negotiate, or execute the swap.
The CFTC continues to issue rules aimed at clarifying how to apply Dodd-Frank derivatives
requirements to cross border trades. Other issues that have arisen more recently include the need
for U.S. and foreign regulators to recognize one another’s derivatives clearinghouses, trading
exchanges, and data repositories for reporting trades as “equivalent,” so that one trade spanning
multiple jurisdictions need only be cleared, traded, and reported one time. This has proven
challenging, as, among other things, the European Union has thus far not granted such an
“equivalence” determination to U.S. clearinghouses and trading facilities.78
H.R. 2289 on Cross-Border Swaps
Section 314 of H.R. 2289 bears some similarities to the 113th Congress’ H.R. 1256.79 H.R. 2289
drops the earlier bill’s requirement that the CFTC and SEC must jointly issue a cross-border rule.
But, similarly to H.R. 1256, the current bill mandates that, starting 18 months from its enactment,
the swaps regulatory requirements of the eight largest foreign swaps markets80 must be
considered comparable to those of the United States – unless the CFTC issues a rule or order

75 Peter Madigan, “SEC cross-border rules an improvement on CFTC proposals, say lawyers,” Risk Magazine, May 2,
2013, available at http://www.risk.net/risk-magazine/news/2265545/sec-crossborder-rules-are-an-improvement-on-cftc-
proposals-say-lawyers.
76 78 FR 45292 (July 26, 2013).
77 CFTC Staff Advisory 13-69, Division of Swap Dealer and Intermediary Oversight, November 14, 2013. Available at
http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-69.pdf.
78 For additional details, please see “Remarks of Chairman Timothy G. Massad before the FIA International
Derivatives Conference (London),” June 9, 2015. Available, at http://www.cftc.gov/PressRoom/SpeechesTestimony/
opamassad-25.
79 In the 113th Congress, legislation was passed by the House (H.R. 1256) on June 12, 2013, by a roll call vote of 301 to
124, which would have mandated that the CFTC and SEC issue joint, identical rules “relating to cross-border swaps
and security-based swaps transactions involving U.S. persons or non-U.S. persons.” The legislation, had it been
enacted, would likely have superseded the proposed CFTC and SEC rules on cross-border swaps. Instead, the CFTC
and SEC would have been required to jointly introduce a new proposed rule on cross-border swaps. In addition, H.R.
1256 required the CFTC and SEC to allow non-U.S. persons in compliance with the laws of any countries with one of
the nine largest swaps markets to be exempt from U.S. regulatory requirements on swaps, unless the two agencies
issued a joint rule finding that the regulatory requirements of any of those nine countries or administrative regions “are
not broadly equivalent to U.S. swaps requirements.”
In House floor debate, opponents of H.R. 1256 asserted that it would weaken the Dodd-Frank requirements on swaps
by allowing foreign banks and overseas affiliates of large U.S. conglomerates to escape these requirements, and would
slow the pace of agency rulemakings and implementation of the Dodd-Frank derivatives reforms. Supporters stated that
it would subject U.S. and foreign businesses to harmonized U.S.-swaps requirements, and avoid potentially conflicting
regulations between U.S. and overseas jurisdictions, thereby reducing the regulatory burden on U.S. businesses.
80 As calculated by notional value during the 12-month period ending with H.R. 2289’s date of enactment. See H.R.
2289 §314(c)(2). The notional value of a derivative is the nominal or face amount of the assets that are used to calculate
payments made on the derivative. This notional amount generally does not change hands, however.
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finding that any of those foreign jurisdictions’ requirements are not comparable to or as
comprehensive as those of the United States.81
It is not, however, immediately straightforward to list who those eight largest jurisdictions would
be. For one thing, it would depend on how regulators treated the member countries of the
European Union, for purposes of the statute. For another, the total notional value of swaps traded
in a jurisdiction fluctuates over time, so how the 12-month period was drawn would likely impact
the results. Further, regulators would have to determine “where” a swap is traded – i.e., in whose
jurisdiction it would fall – when a large portion of the market is considered “cross-border” in
nature. This is essentially the same problem U.S. regulators are already facing in deciding when a
swap qualifies as a “U.S. transaction.”
Under H.R. 2289, if the CFTC were not to make such a determination (of non-comparability),
then “a non-United States person or a transaction between two non-United States persons shall be
exempt from United States swaps requirements” as long as they are in compliance with any of the
eight permitted foreign jurisdictions.82 Effectively, the bill appears to substitute as a default, for
trades that involved a non-U.S. person, the swaps requirements of the eight largest foreign swaps
markets (which would encompass most of the world of swaps trading, particularly if countries in
the European Union were treated as one-swaps jurisdiction) for U.S. requirements – unless the
CFTC found a foreign jurisdiction to be lacking.
One question that would presumably be left to the CFTC to determine in a rulemaking would be
how widely to apply this provision to “a non-United States person or a transaction between two
non-United States persons,” were the provision enacted. For instance, would any swap in which a
non-U.S. person were at least one counterparty, potentially be encompassed? If so, that would
potentially encompass a large majority of swaps, the bulk of which appear to be transacted in
some way between a U.S. and non-U.S. person.83 It would presumably be left to the regulator to
interpret and clarify its application.
Section 314 also includes a definition of a U.S. person, which, among other factors, includes “any
other person as the Commission may further define to more effectively carry out the purposes of
this section”—thereby apparently giving the CFTC some leeway.84 However, Section 314 also
specifies that, in developing its cross-border rules, the CFTC “shall not take into account, for the
purposes of determining the applicability of United States swaps requirements, the location of
personnel that arrange, negotiate, or execute swaps.”85 This requirement drew some criticism in
congressional debate over the bill.86

81 H.R. 2289 §314(c)(2).
82 H.R. 2289 §314(c)(2)(B).
83 For instance: “According to data analyzed by SEC staff, a majority of transactions involving single-name credit
default swaps on U.S. reference entities involve one or more counterparties located abroad. Based on staff estimates,
only 12 percent of global notional volume between 2008 and 2014 was between two U.S.-domiciled counterparties.
This compares to 48 percent entered into between one U.S-domiciled counterparty and one foreign-domiciled
counterparty, and 40 percent entered into between two foreign-domiciled counterparties.” SEC, “SEC Proposes Cross-
Border Security-Based Swap Rules Regarding Activity in the U.S,
Press Release,” April 29, 2015. Available at
http://www.sec.gov/news/pressrelease/2015-77.html.
84 H.R. 2289 §314(f).
85 H.R. 2289 §314(b)(4).
86 “There is even a provision in this bill that absurdly directs the CFTC to ignore the physical location of a bank’s swap
trader when determining whether the derivative was conducted inside the United States for purposes of applying U.S.
law.” Rep. Maxine Waters, during House floor debate on H.R. 2289, Congressional Record, daily edition, vol. 161, No.
91 (June 9, 2015), p. H3940, 114th Cong., 1st sess. Available, at https://www.congress.gov/crec/2015/06/09/CREC-
(continued...)
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The provision would appear to overturn CFTC Advisory 13-6987, which had drawn much industry
opposition.88 The advisory was aimed at resolving questions regarding the precise conditions in
which swaps between U.S. and non-U.S. persons would be subject to Dodd-Frank requirements.
The advisory, which technically represented the opinion of only one division of the CFTC, held
that the Dodd-Frank requirements would apply to a swap between a non-U.S. swap dealer—even
if it were an affiliate of a U.S. swap dealer—and a non-U.S. person, as long as the foreign swap
dealer used “personnel or agents located in the U.S. to arrange, negotiate, or execute such
swap.”89 The advisory proved controversial and drew strong industry opposition.90 The CFTC has
delayed its actual implementation several times. Presumably, H.R. 2289 would overturn it.
Swap Data Repository Indemnifications91
Section 302 of H.R. 2289 would remove a requirement added in the Dodd-Frank Act’s Title VII,
that foreign regulators indemnify a U.S-based swap data repository (SDR) for any expenses
arising from litigation related to a request for market data.92 Indemnification generally refers to
compensating someone for harm or loss.
In an effort to improve transparency in the opaque swaps market, Title VII of Dodd-Frank
required all swaps to be reported to SDRs. Dodd Frank included a provision requiring foreign
regulators to indemnify a U.S.-based SDR for expenses arising from litigation related to a request
for market data.93 The original purpose of this Dodd Frank provision appeared to be to try to
encourage foreign regulators to more closely protect any shared information related to swaps by
making it potentially more costly for them, should any information be leaked.
In subsequent years after Dodd Frank’s passage, however, regulators testified that the
indemnification requirement was creating barriers to information sharing.94 In the 113th Congress,

(...continued)
2015-06-09.pdf.
87 CFTC Staff Advisory 13-69, Division of Swap Dealer and Intermediary Oversight, Nov. 14, 2013. Available at
http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-69.pdf.
88 See., e.g., Comment Letter on the Application of Commission Regulations to Swaps Between Non-U.S. Swap Dealers
and Non-U.S. Counterparties Involving Personnel or Agents of the Non-U.S. Swap Dealers Located in the United
States,
March 10, 2014, from SIFMA, FIA and Financial Services Round Table at http://www.sifma.org/issues/
item.aspx?id=8589947959. This letter argued, among other things, that “The location of personnel involved in a swap
transaction does not alter the risk posed by the swap transaction.”
89 CFTC Staff Advisory 13-69, Division of Swap Dealer and Intermediary Oversight, November 14, 2013.
90 See., e.g., Comment Letter on the Application of Commission Regulations to Swaps Between Non-U.S. Swap Dealers
and Non-U.S. Counterparties Involving Personnel or Agents of the Non-U.S. Swap Dealers Located in the United
States,
March 10, 2014, from SIFMA, FIA and Financial Services Round Table at http://www.sifma.org/issues/
item.aspx?id=8589947959.
91 Additional bills on this topic in the 114th Congress, which are largely identical to this provision but which do not
include a reauthorization of the CFTC include H.R. 37 in §501; S. 1484 §603; H.R. 1847; S. 1560; and S. 1910, the
Financial Services and General Government Appropriations Act, 2016, in §973.
92 This provision in Title VII of Dodd Frank is found in §763(i) of P.L. 111-203 for security-based swaps, which are
under the jurisdiction of the SEC, and in Sections 725 and 728 for swaps generally, which are under the jurisdiction of
the CFTC.
93 This is found in §763(i) of P.L. 111-203 for security-based swaps and in §725 and §728 for other swaps.
94 See, e.g., Ethiopis Tafara, Director, Office of International Affairs, U.S. Securities and Exchange Commission,
Testimony Concerning Indemnification of Security-Based Swap Data Repositories, Before the House Financial
Services Subcommittee on Capital Markets and Government Sponsored Enterprises, March 21, 2012. Available at
http://www.sec.gov/News/Testimony/Detail/Testimony/1365171489346#.VLRamig1OHc.
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a bill was introduced (H.R. 742) which would have removed this indemnification requirement.95
According to H.R. 742’s sponsors, the concept of indemnification is only well established within
U.S. tort law, and as a result, foreign regulators were reluctant to comply with this
indemnification provision, thereby making international regulatory cooperation and information-
sharing more difficult.96 Officials from the SEC testified that they recommended removing this
provision, which they viewed as a barrier to information sharing.97
H.R. 2289’s Section 302, which is largely identical to H.R. 742, would remove the
indemnification requirement and replace it with a requirement that the SDR must enter into a
written agreement with each entity stating that the entity will abide by certain confidentiality
requirements, before sharing information with that entity.


Author Contact Information

Rena S. Miller

Specialist in Financial Economics
rsmiller@crs.loc.gov, 7-0826


95 H.R. 742 was passed in the House by a vote of 420 to 2, on June 12, 2013.
96 Floor Statement of H.R. 742 Co-sponsor Rep. Crawford, Congressional Record, p. H3305, June 12, 2013, available
at http://www.gpo.gov/fdsys/pkg/CREC-2013-06-12/pdf/CREC-2013-06-12-pt1-PgH3304.pdf#page=1.
97 Ethiopis Tafara, Director, Office of International Affairs, U.S. Securities and Exchange Commission, Testimony
Concerning Indemnification of Security-Based Swap Data Repositories,
Before the House Financial Services
Subcommittee on Capital Markets and Government Sponsored Enterprises, March 21, 2012.
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