Published October 16, 2012
Congress could revisit position limits and other controversial aspects of derivatives regulation as early as next year, when lawmakers take up reauthorization of the U.S. Commodity Futures Trading Commission (CFTC), in what promises to be a fierce fight over the direction of Wall Street regulation.
"I believe the best course of action for position limits is for the Commission to ask Congress for clarification during the 2013 reauthorization process and go back to the drawing board," CFTC Commissioner Jill Sommers said last week.
Efforts to rewrite parts of the Dodd-Frank Act on derivatives might not stick to position limits. Criticising the Commission's rulemaking to date, Sommers predicted:
"Unfortunately, we (or Congress, through reauthorization) will most likely be re-writing many of our Dodd-Frank rules over the next couple of years because they do not reflect the input we have received from the market. To the contrary, we have routinely rejected legitimate comments with little justification to support our analysis."
The CFTC's new position limits rule was killed off last month by U.S. District Judge Robert Wilkins, just two weeks before it was scheduled to go into effect, when he ruled that the Commission had failed to consider the "ambiguities" in the statutory language before deciding to adopt the new regulation.
Wilkins' ruling upheld the status quo. The Commission is free to continue enforcing federal position limits on agricultural contracts.
But before it can impose similar limits on energy contracts "it must bring its experience and expertise to bear in the light of the competing interests at stake to resolve the ambiguities in the statute."
It had always been expected that supporters of position limits might go back to Congress to ask legislators to resolve the ambiguities by removing the words "as the Commission finds necessary" (7 USC 6a(a)(1)) and "as appropriate" (7 USC 6a(a)(3)) which the judge found unclear in the context of Section 6a as a whole.
But Sommers is a Republican, close to the views of the major commodity dealing banks and exchanges, who voted against the imposition of position limits in 2011.
Her decision to raise the question of position limits in the context of the agency's regular reauthorisation process suggests opponents as well as supporters may try to secure amendments to this and other aspects of the law next year.
Congress controls federal spending through a two-step process: (1) Expenditure by agencies and programmes must be authorised by law. (2) Appropriations legislation allows the agency actually to withdraw money from the U.S. Treasury to spend, or enter other financial commitments such as loan guarantees.
Congressional power over appropriations stems from the U.S. Constitution: "No money shall be drawn from the Treasury, but in consequence of appropriations made by law" (Article 1, Section 9). It is therefore absolute.
But the authorization process stems from the internal rules of the Senate and the House of Representatives, enforced by points of order, so is more flexible.
No money can be spent without appropriations. But it is possible to pass legislation appropriating money without it first being authorized ("unauthorised appropriations").
Unauthorized appropriations are fairly common. In the fiscal year ending on Sept 30, 2012, Congress appropriated $261 billion for programmes and activities whose authorizations had expired, including $31 billion for the National Institutes of Health, $10 billion for the Coast Guard, and $189 million for the Violence Against Women Act, according to the Congressional Budget Office ("Unauthorized and expiring authorizations" January 2012).
The authorization and reauthorization process is therefore a semi-compulsory bit of congressional procedure, used by legislators to give directions to agencies on matters of budget, organisation and programmes, and to enact substantive changes in the law ("Overview of the authorization-appropriations process," Congressional Research Service, November 2010).
Jurisdiction over the annual appropriations process is controlled by the powerful Appropriations Committees in both the House and the Senate, and their 12 specialised subcommittees.
But responsibility for authorizing bills falls under the jurisdiction of the regular standing committees with oversight over each agency. In the case of the CFTC, reauthorization is under the control of the House and Senate agriculture committees.
A GOLDEN OPPORTUNITY
The most recent CFTC Reauthorization Act was approved in 2008, as part of the Food, Conservation and Energy Act (PL 110-246), passed by Congress over one of the very few vetoes cast by President George W Bush.
It authorised appropriations for the next five years ending on Sept 30, 2013. "There are authorized to be appropriated such sums as are necessary to carry out this act for each of the fiscal years 2008 through 2013" (Section 13104).
In theory, therefore, Congress needs to pass fresh authorising legislation in the first part of next year.
Reauthorization is not absolutely essential, however, and the deadline is a semi-soft one. Between fiscal 2006 and fiscal 2008, the CFTC relied on unauthorized appropriations, after its previous authorization expired in 2005 and was not renewed until 2008.
The 2008 act also made a number of modest substantive changes: clarifying the Commission's jurisdiction over retail foreign exchange derivatives, adding some anti-fraud provisions, and giving the Commission new powers over significant price discovery contracts (SPDCs) which had previously been excluded from its remit under the infamous Enron loophole.
Earlier reauthorisation laws were passed in 2000, 1995, 1992, 1986, 1983 and 1978; and many were used to enact changes to commodities laws. The 2000 reauthorisation process culminated in the enactment of wholesale reforms to derivatives regulation in the form of the Commodity Futures Modernization Act (CFMA).
The need for fresh reauthorisation legislation in 2013 will provide an ideal vehicle for both supporters and opponents to reopen many contested parts of the Dodd-Frank law to force changes in either the legislation itself or the way in which the CFTC and other agencies enforce it.
BATTLE LINES ARE DRAWN
For critics, such as the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA), the reauthorisation process could provide another venue to challenge the CFTC's recent rulemakings.
Both organisations have already successfully challenged the CFTC in court. The wider industry has been lobbying Congress intensely for relief, as well as donating record amounts to Republican candidates in the current election cycle who have promised to repeal or amend Dodd-Frank.
For supporters of tougher regulation, on the other hand, reauthorisation is an opportunity to reword aspects of the law to give regulators a better chance of surviving legal challenges.
In the event that Republican Mitt Romney wins November's presidential election, a Romney administration would almost certainly want to use the reauthorisation process to enact changes to Dodd-Frank, possibly as part of a much bigger promised overhaul of the law.
Romney's campaign has promised to "repeal Dodd-Frank and replace (it) with (a) streamlined, modern regulatory framework".
In contrast, a re-elected Obama administration would push to protect as much of the 2010 derivatives reforms as possible.
Both foes and supporters are likely to present a long list of proposed changes. But with the House of Representatives almost certain to remain under the control of the Republican Party, and neither party likely to have 60 votes in the Senate to over-ride a filibuster, any proposals are likely to generate fierce and protracted argument.
If either side decides to push its most ambitious proposals, the resulting battle could be almost as big as Dodd-Frank itself.
(The author would like to thank the late Stephen Daggett of the Congressional Research Service, who was kind enough to share some his legendary expertise on the budget process over the last 15 years)