House Democrats Tuesday slammed Republicans' proposed budget cuts in the continuing resolution (CR) that could hamper the ability of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to regulate the $300 trillion derivative swaps market during the 2011 fiscal year (FY).

"We are about to debate a budget from my Republican colleagues that will provide such inadequate funding for the SEC and CFTC as to make all this [regulatory reform under the Dodd-Frank Wall Street Reform Act] academic," said Rep. Barney Frank (D-MA), the co-author of the Dodd-Frank Act, during a hearing of the House Financial Services Committee.

The Republican CR, which was offered by the House Appropriations Committee last week, calls for the CFTC budget to be cut to $112 million from $168 million for the current fiscal year, which would require the agency to cut its current staff level of 680 to fewer than 440, said CFTC Chairman Gary Gensler. He noted that the CFTC had 440 staff members when the financial crisis struck in 2008.

The entire House on Tuesday began consideration of the CR (H.R. 1), which would fund the federal government for the next seven months. If approved in the lower chamber, H.R. 1 would then go to the Senate. The federal government has been operating under CRs since Oct. 1, 2010.

On Monday President Obama proposed a budget of $308 million for the CFTC, but that wouldn't take effect until FY 2012, assuming Congress approves the president's budget request (see Daily GPI, Feb. 15).

"If it [the staff level] would return to [the] 2008 level...the agency would be unable to fulfill its statutory mission" under Dodd-Frank, Gensler told the House committee. Likewise, SEC Chairman Mary Schapiro said a funding shortfall "will have a very real effect on the SEC," not only on its new duties under Dodd-Frank but on its core mission.

The budgets proposed for the SEC and CFTC for the remainder of FY 2011 would "prevent them from doing the job the American people need them to do," Frank said. "We are at this point in jeopardy of them not being able to carry out that mandate...[The] absence of funding will make all of this invalid."

Gensler put to rest concerns that the CFTC would subject end-users to margin requirements. "Our intent is not to have margin requirements posted to end-users like MillerCoors," he said. A representative of beer maker MillerCoors testified at the hearing.

Speaking to Gensler, committee Chairman Spencer Bachus (R-AL) said, "If I heard you correctly...all end-users would be exempt from CFTC clearing and margin requirements." Republicans believe it is "critically important" that the CFTC not impose margin and clearing requirements on non-financial end-users, he said.

Bachus asked Gensler if the agency needed legislative language to clarify that the over-the-counter swaps used by end-users for hedging will not be subject to margin and clearing requirements. "We at the CFTC believe that is well written and that it gives us sufficient authority to ensure that margin requirements from a swap dealer [do] not cover the non-financial end-user," he said.

Daniel K. Tarullo, a member of the Federal Reserve Board of Governors, said, "We will create these thresholds under which margins would not be required for end-users."

Rep. Edward Royce (R-CA) expressed concern that the CFTC Dodd-Frank rules could spell the end of the derivatives market in the United States. "When you look at this freight train of rulemaking that is [running] down the track to a July deadline, I think not enough alarm has been raised over the potential devastating impact that this rulemaking may have on the U.S.-based derivatives marketplace," he said.

Royce said some market participants have told him that if CFTC rulemakings were to be implemented in their current form, they "could literally spell the end of [the] U.S.-based derivatives market." There would be a "hemorrhage of high-paying jobs" to other parts of the world, he said.

Rep. Frank Lucas (R-OK) said he had some misgivings about the tight timeline that the CFTC and SEC were under to issue new rules under Dodd-Frank.

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