[Congressional Record Volume 158, Number 49 (Monday, March 26, 2012)]
[House]
[Pages H1548-H1551]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




 TREATMENT OF AFFILIATE TRANSACTIONS UNDER THE DODD-FRANK WALL STREET 
                   REFORM AND CONSUMER PROTECTION ACT

  Mr. GARRETT. Mr. Speaker, I move to suspend the rules and pass the 
bill (H.R. 2779) to exempt inter-affiliate swaps from certain 
regulatory requirements put in place by the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, as amended.
  The Clerk read the title of the bill.
  The text of the bill is as follows:

                               H.R. 2779

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. TREATMENT OF AFFILIATE TRANSACTIONS.

       (a) Commodity Exchange Act Amendments.--Section 1a(47) of 
     the Commodity Exchange Act (7 U.S.C. 1a(47)), as added by 
     section 721(a)(21) of the Dodd-Frank Wall Street Reform and 
     Consumer Protection Act, is amended by adding at the end the 
     following:
       ``(G) Treatment of affiliate transactions.--
       ``(i) In general.--For the purposes of any clearing and 
     execution requirements under section 2(h) and any applicable 
     margin and capital requirements of section 4s(e) and for 
     purposes of defining `swap dealer' or `major swap 
     participant', and reporting requirements other than those set 
     forth in clause (ii), the term `swap' does not include any 
     agreement, contract, or transaction that--

       ``(I) would otherwise be included as a `swap' under 
     subparagraph (A); and
       ``(II) is entered into by parties that report information 
     or prepare financial statements on a consolidated basis, or 
     for which a company affiliated with both parties reports 
     information or prepares financial statements on a 
     consolidated basis.

       ``(ii) Reporting.--All agreements, contracts, or 
     transactions described in clause (i) shall be reported to 
     either a swap data repository, or, if there is no swap data 
     repository that would accept such agreements, contracts, or 
     transactions, to the Commission pursuant to section 4r, or to 
     a swap data repository or to the Commission pursuant to 
     section 2(h)(5), within such time period as the Commission 
     may by rule or regulation prescribe. Nothing in this 
     subparagraph shall prohibit the Commission from establishing 
     public reporting requirements for covered transactions 
     between affiliates as described in sections 23A and 23B of 
     the Federal Reserve Act in a manner consistent with rules 
     governing the treatment of such covered transactions pursuant 
     to section 2(a)(13) of this Act.
       ``(iii) Protection of insurance funds.--Nothing in this 
     subparagraph shall be construed to prevent the regulator of a 
     Federal or State insurance fund or guaranty fund from 
     exercising its other existing authority to protect the 
     integrity of such a fund, except that such regulator shall 
     not subject agreements, contracts, or transactions described 
     in clause (i) to clearing and execution requirements under 
     section 2 of this Act, to any applicable margin and capital 
     requirements of section 4s(e) of this Act, or to reporting 
     requirements of title VII of Public Law 111-203 other than 
     those set forth in clause (ii) of this subparagraph.
       ``(iv) Preservation of federal reserve act authority.--
     Nothing in this subparagraph shall exempt a transaction 
     described in this subparagraph from sections 23A or 23B of 
     the Federal Reserve Act or implementing regulations 
     thereunder.
       ``(v) Preservation of federal and state regulatory 
     authorities.--Nothing in this subparagraph shall affect the 
     Federal banking agencies' safety-and-soundness authorities 
     over banks established in law other than title VII of Public 
     Law 111-203 or the authorities of State insurance regulators 
     over insurers, including the authority to impose capital 
     requirements with regard to swaps. For purposes of this 
     clause, the term `bank' shall be defined pursuant to section 
     3(a)(6) of the Securities Exchange Act of 1934, `insurer' 
     shall be defined pursuant to title V of Public Law 111-203, 
     and `swap' shall be defined pursuant to title VII of Public 
     Law 111-203.
       ``(vi) Prevention of evasion.--The Commission may prescribe 
     rules under this subparagraph (and issue interpretations of 
     such rules) as determined by the Commission to be necessary 
     to include in the definition of swaps under this paragraph 
     any agreement,

[[Page H1549]]

     contract, or transaction that has been structured to evade 
     the requirements of this Act applicable to swaps.''.
       (b) Securities Exchange Act of 1934 Amendments.--Section 
     3(a)(68) of the Securities Exchange Act of 1934 (15 U.S.C. 
     78c(a)(68)), as added by section 761(a)(6) of the Dodd-Frank 
     Wall Street Reform and Consumer Protection Act, is amended by 
     adding at the end the following:
       ``(F) Treatment of affiliate transactions.--
       ``(i) In general.--For the purposes of any clearing and 
     execution requirements under section 3C and any applicable 
     margin and capital requirements of section 15F(e), and for 
     purposes of defining `security-based swap dealer' or a `major 
     security-based swap participant', and reporting requirements 
     other than those set forth in clause (ii), the term 
     `security-based swap' does not include any agreement, 
     contract, or transaction that--

       ``(I) would otherwise be included as a `security-based 
     swap' under subparagraph (A); and
       ``(II) is entered into by parties that report information 
     or prepare financial statements on a consolidated basis, or 
     for which a company affiliated with both parties reports 
     information or prepares financial statements on a 
     consolidated basis.

       ``(ii) Reporting.--All agreements, contracts, or 
     transactions described in clause (i) shall be reported to 
     either a security-based swap data repository, or, if there is 
     no security-based swap data repository that would accept such 
     agreements, contracts, or transactions, to the Commission 
     pursuant to section 13A, within such time period as the 
     Commission may by rule or regulation prescribe.
       ``(iii) Preservation of federal reserve act authority.--
     Nothing in this subparagraph shall exempt a transaction 
     described in this subparagraph from sections 23A or 23B of 
     the Federal Reserve Act or implementing regulations 
     thereunder.
       ``(iv) Protection of insurance funds.--Nothing in this 
     subparagraph shall be construed to prevent the regulator of a 
     Federal or State insurance fund or guaranty fund from 
     exercising its other existing authority to protect the 
     integrity of such a fund, except that such regulator shall 
     not subject security-based swap transactions between 
     affiliated companies to clearing and execution requirements 
     under section 3C, to any applicable margin and capital 
     requirements of section 15F(e), or to reporting requirements 
     of title VII of Public Law 111-203 other than those set forth 
     in clause (ii).
       ``(v) Preservation of federal and state regulatory 
     authorities.--Nothing in this subparagraph shall affect the 
     Federal banking agencies' safety-and-soundness authorities 
     over banks established in law other than title VII of Public 
     Law 111-203 or the authorities of State insurance regulators 
     over insurers, including the authority to impose capital 
     requirements with regard to security-based swaps. For 
     purposes of this clause, the term `bank' shall be defined 
     pursuant to section 3(a)(6) of the Securities Exchange Act of 
     1934, `insurer' shall be defined pursuant to title V of 
     Public Law 111-203, and `security-based swap' shall be 
     defined pursuant to title VII of Public Law 111-203.
       ``(vi) Prevention of evasion.--The Commission may prescribe 
     rules under this subparagraph (and issue interpretations of 
     such rules) as determined by the Commission to be necessary 
     to include in the definition of security-based swap under 
     this paragraph any agreement, contract, or transaction that 
     has been structured to evade the requirements of this Act 
     applicable to security-based swaps.''.

     SEC. 2. IMPLEMENTATION.

       The amendments made by this Act to the Commodity Exchange 
     Act shall be implemented--
       (1) without regard to--
       (A) chapter 35 of title 44, United States Code; and
       (B) the notice and comment provisions of section 553 of 
     title 5, United States Code;
       (2) through the promulgation of an interim final rule, 
     pursuant to which public comment will be sought before a 
     final rule is issued, and
       (3) such that paragraph (1) shall apply solely to changes 
     to rules and regulations, or proposed rules and regulations, 
     that are limited to and directly a consequence of such 
     amendments.

  The SPEAKER pro tempore. Pursuant to the rule, the gentleman from New 
Jersey (Mr. Garrett) and the gentlewoman from Ohio (Ms. Fudge) each 
will control 20 minutes.
  The Chair recognizes the gentleman from New Jersey.


                             General Leave

  Mr. GARRETT. Mr. Speaker, I ask unanimous consent that all Members 
have 5 legislative days in which to revise and extend their remarks and 
to add extraneous material on this bill.
  The SPEAKER pro tempore. Is there objection to the request of the 
gentleman from New Jersey?
  There was no objection.
  Mr. GARRETT. Mr. Speaker, I yield myself 2 minutes.
  The legislation that is before us today ensures that American 
businesses will not be needlessly forced to use up the capital that 
they need to create jobs simply to satisfy some duplicative 
regulations. Under H.R. 2779, the inter-affiliate trades would be only 
exempt from costly margin, clearing, and real-time reporting 
requirements. Swap trades facing non-affiliated counterparties would 
still be subject to all the other regulatory requirements under 
proposed agency rules. So, without this bill, companies could face 
double--yes, double--the margin and regulatory cost.
  To my point, last June the office of the OCC--that's the Comptroller 
of the Currency--estimated that margin requirements under proposed 
prudential regulator margin rules could conservatively cost over $2 
trillion, which could increase substantially if regulators force 
affiliates to post margins on trades between themselves.
  Without the relief of this bill, American companies face the prospect 
of having to post double margins on swap trades: once on a swap trade 
with themselves and secondly when they trade outside. So the Stivers-
Fudge bill provides this needed relief.
  This bill strengthens the ability of the regulators to oversee the 
affiliate swaps marketplace because those transactions must be reported 
still to a swap depository, or the CFTC or the SEC. Either way, Mr. 
Speaker, regulators will be able to monitor these transactions very 
closely. The bill also gives the SEC and CFTC the power to regulate 
swap transactions that are structured as affiliate trades only for 
purposes of evading regulation.
  To conclude, Mr. Speaker, I commend the efforts of my colleagues from 
both sides of the aisle this morning, and I urge my colleagues to 
support this bipartisan bill.
  I reserve the balance of my time.
  Ms. FUDGE. Mr. Speaker, I ask unanimous consent that 10 minutes of my 
time be controlled by Ms. Moore of the Financial Services Committee.
  The SPEAKER pro tempore. Without objection, the gentlewoman from 
Wisconsin will control 10 minutes.
  There was no objection.
  Ms. FUDGE. Mr. Speaker, I yield myself such time as I may consume.
  Today, we debate and will vote on H.R. 2779, a bill that addresses a 
critical issue facing American businesses.
  I want to thank my fellow Ohioans, Steve Stivers and Ms. Moore, and 
our collective staffs for all their hard work on this important piece 
of legislation.
  This bill that I co-introduced with my colleague Mr. Stivers will 
exempt derivatives trades between two affiliates of the same 
corporation from clearing, execution, and margin requirements. This 
legislation would prevent internal, inter-affiliate swaps from being 
subject to requirements that were designed to apply only to certain 
external swaps. These internal swaps are used by many American 
corporations in multiple sectors of our economy.
  Under the Dodd-Frank financial reform law, there is no distinction 
between inter-affiliate and external swaps. The regulation of inter-
affiliate trade should reflect the economic reality that internal 
trades do not increase systemic risk. As our Nation's economic recovery 
is getting underway, we need to ensure American businesses remain 
competitive. We all remember the financial crisis and the pain of 
recovery that is still evident today. We cannot and should not return 
to the wild days of Wall Street. That is why I voted for the Dodd-Frank 
law and why I continue to support it.
  However, we should allow American businesses acting in good faith to 
effectively manage risk. By failing to clarify these important 
distinctions within Dodd-Frank, we run the risk of stalling job growth 
and potentially passing costs on to consumers.
  Together with our colleagues in the Committee on Financial Services 
and the Committee on Agriculture, we have strengthened the language of 
the bill to ensure it cannot be used to evade other financial 
regulations. H.R. 2779 was approved by the House Financial Services 
Committee by a vote of 53 0, and the House Agriculture Committee passed 
it by unanimous voice vote.
  It is possible for Democrats and Republicans to work together on 
legislation that stands to benefit American businesses and our Nation's 
economy. I urge my colleagues to vote ``yes'' on H.R. 2779, and I 
reserve the balance of my time.
  Mr. GARRETT. Mr. Speaker, at this point, I yield 5 minutes to the 
sponsor

[[Page H1550]]

of the underlying legislation, the gentleman from Ohio (Mr. Stivers).
  Mr. STIVERS. I would like to thank the gentleman from New Jersey for 
yielding me time. I would also like to thank my fellow Ohioan, Ms. 
Fudge, for her hard work and support on this bill, and I would like to 
thank Ms. Moore from Wisconsin for her hard work as I recognize that 
she improved the bill. I would also like to thank the chairs and 
ranking members of the Financial Services and Agriculture Committees 
and their staffs for their hard work on this bill.
  Mr. Speaker, this is bipartisan legislation that clarifies the Dodd-
Frank Financial Reform Act by recognizing that there is an important 
distinction between inter-affiliate swaps and market-facing swaps. 
While market-facing swaps carry risk, inter-affiliate swaps do not. 
They're simply an accounting practice used within corporate families to 
assign the ownership of derivatives inside the corporate umbrella. 
Without providing this distinction, corporations using inter-affiliate 
swaps that manage their risk in a central way would be forced to pay up 
to three times for the way they do business. In fact, they would 
collateralize their derivatives against the market on one side and then 
on both sides of the inter-affiliate swap, so they would actually pay 
three times what you would pay if you didn't manage your risk in a 
centralized way.
  The irony of that is, in managing your risk in a centralized way, it 
actually provides better protection and allows for experts to manage 
your risk. The problem with that also is it would tie up working 
capital that could be used to create jobs here in the United States and 
get our economy moving and focusing on our recovery.
  There are important protections in this bill, as well, that the lady 
from Ohio already alluded to. We put protections in this bill to make 
sure that businesses that utilize this provision are, indeed, truly 
affiliated. We also made sure that there were reporting requirements so 
that these swaps adhere to transparency in the marketplace. We also 
made sure that it's very clear that any attempt to use these provisions 
to evade provisions under the Dodd-Frank bill for someone who is just 
trying to evade the law and does not have true inter-affiliate swaps 
would not be allowed. We also ensured that regulators keep their 
authority to manage the safety and soundness of America's financial 
institutions.
  The bottom line is we should not overcharge businesses for an 
accounting method they use that does not generate additional risk. By 
passing this legislation, we are preventing these internal transactions 
from being subject to duplicative regulations that could drive jobs 
overseas and increase costs for consumers.
  This bill was reported unanimously in the Financial Services 
Committee 53 0, and it passed by unanimous voice vote in the 
Agriculture Committee. I urge my colleagues to vote in favor of this 
legislation.

                              {time}  1510

  Ms. FUDGE. Mr. Speaker, I want to thank my friend and colleague from 
Ohio for all of his work. I think it's an excellent bill, and I'm 
certainly happy to have cosponsored it with him.
  I would now, Mr. Speaker, yield to my colleague and friend from the 
great State of Wisconsin (Ms. Moore), a member of the Financial 
Services Committee.
  Ms. MOORE. Thank you, Ms. Fudge.
  I would, first of all, like to thank Chairman Bachus and Ranking 
Member Frank and, on the subcommittee, Chairman Garrett and Ranking 
Member Waters, Mr. Stivers and Ms. Fudge from the Ag Committee, for 
their leadership that kept the bill moving; other members of the 
Financial Services Committee--Mr. Perlmutter, Mr. Himes, Mr. Miller, 
Mr. Dold, Mr. Gibson, among others--for all of their input on this 
legislation.
  This is a bill--and some people here today, Mr. Speaker, may be 
surprised to know that it enjoys bipartisan support because it ensures, 
number one, the vitality of U.S. and global commerce by exempting 
interaffiliate swaps, or those swap transactions used internally by 
companies in all our districts, from clearing, margin, and execution 
requirements. But H.R. 2779 also preserves the all-important reforms of 
the over-the-counter swap markets enacted as part of Dodd-Frank while 
providing swap end users that exemption that is responsive to their 
legitimate business needs for flexibility, risk management, and price 
stability.
  Now, in Congress, 4 years is an eternity; but I have not forgotten 
the 2008 financial crisis and the human hardship that it caused and 
continues to cause in Milwaukee and all across America. The work 
continues, and this bill is a part of that.
  I can tell you, Mr. Speaker, I was proud to be part of the effort 
that produced Dodd-Frank, legislation that will improve accountability 
and transparency in the financial markets, including the pre-Dodd-Frank 
unregulated over-the-counter derivatives markets which played a central 
role in the crisis. However, I did not vote for Dodd-Frank as 
retribution against Wall Street or for any punitive means. I voted for 
Dodd-Frank to enhance the function and transparency of markets and to 
promote prosperity for Americans going forward. For that reason, I am 
happy to support H.R. 2779.
  A little bit of background about the critical need the bill addresses 
and how bipartisan collaboration produced the final bill.
  Now, swaps are versatile financial tools that have become 
instrumental for the management of risk and for allowing companies to 
more efficiently transact in global markets. Swaps aid companies to 
hedge and to mitigate things like interest rate and currency exposure, 
but also more exotic risks associated with unique markets and 
businesses. H.R. 2779 clarifies that end users, not investors, have the 
ability to hedge risk for legitimate business purposes.
  Now, the flip side of swaps are that they may also be used to acquire 
risk by investors. In that capacity, swaps allocate risk to parties 
that want to and are able to bear the risk. However, in the unregulated 
pre-Dodd-Frank world, over-the-counter swaps and derivatives lacked 
transparency and allowed risk to pool and gather in ways that would 
eventually help drive the financial crisis and create systemic risk.
  Dodd-Frank duly addressed the lessons of the financial crisis by 
pushing as many product types as possible to be centrally cleared and 
traded on electronic exchanges or other trading facilities, subjecting 
these swap dealers and major market participants to capital and to 
margin requirements, and requiring the public reporting of transaction 
and pricing data of both cleared and uncleared swaps.
  H.R. 2779 does not disturb any of those important reforms 
accomplished in Dodd-Frank. Interaffiliate swaps are simply 
transactions within a single group of affiliated entities, in other 
words, meaning entities that prepare financial statements on a 
consolidated basis. Therefore, interaffiliated swaps do not add or 
subtract from overall systemic risk. Therefore, H.R. 2779 simply builds 
on my original intent of voting for Dodd-Frank--the promotion of U.S. 
prosperity going forward.
  Through the process of drafting the bill, a number of revisions were 
adopted, thanks to the thoughtful input of many of our colleagues. The 
definition of ``control,'' which is central to the issues of a 
legitimate interaffiliate transaction, was clarified. Anti-evasion 
measures were added so that the exemption would not lead to abuse. 
Language was adopted that made sure Fed authority over interaffiliate 
banks was preserved as was language that clearly and explicitly states 
that the bill does nothing to disturb the existing regulatory regime 
for insurance companies.
  This is a good bill, Mr. Speaker. It has the backing of Republicans, 
Democrats, and industry end users of derivatives. I urge all of my 
colleagues to back this legislation, and I yield back the balance of my 
time.
  Mr. GARRETT. Mr. Speaker, at this point, I yield 3 minutes to the 
gentleman from Texas (Mr. Conaway).
  Mr. CONAWAY. I thank the gentleman from New Jersey for yielding time.
  Mr. Speaker, I rise today to express my strong support for H.R. 2779.
  The interaffiliate swaps, those swaps occurring between entities 
within a single corporate structure, are an important tool for 
companies and to manage their risk.
  As a member of the House Agriculture Committee and the chair of the 
General Farm Commodities and Risk

[[Page H1551]]

Management Subcommittee, I want to commend Mr. Stivers and Ms. Fudge 
for putting together a commonsense bill that will offer our businesses 
and agriculture firms certainty about a small but important aspect of 
the overall Dodd-Frank rulemaking.
  Centralizing a large organization's risk mitigation efforts can yield 
substantial economic benefits and reduce a firm's overall credit risk. 
In addition to creating operating savings through economies of scale, 
these companies can also reduce the number of external-facing 
transactions altogether.
  By looking at a firm's entire risk portfolio, it's possible to find 
places where risks overlap and offset one another, reducing the need 
for entering the market. Fewer swaps mean less money tied up in margin, 
clearing, and execution and more money being spent on hiring Americans, 
buying supplies, and funding innovation.
  Unfortunately, ambiguity in the Dodd-Frank law could undo this 
innovative risk management strategy. If interaffiliate swaps are 
treated the same as other swaps, end users could wind up posting margin 
for the same swap twice: once for the public trade and once for the 
internal trade that assigns the swap to the appropriate business unit. 
Needless to say, posting margin for the same transaction twice means 
that companies are likely to abandon the use of interaffiliate swaps 
altogether and, with it, the efficiencies that made the strategy 
attractive in the first place, thereby driving up their business costs 
and overall risks.
  It's important to note that this legislation simply clarifies the 
intent of Congress. It does not repeal any of the market protections in 
Dodd-Frank. These internal swaps do not create risk and do not pose a 
systemic threat to financial markets. Instead, it protects an important 
tool American companies use to unlock the value of their unlimited 
resources.
  I want to thank both Mr. Stivers and Ms. Fudge for bringing forward 
this legislation, and Chairman Lucas and Chairman Bachus for 
shepherding it through both committees in a timely fashion.
  Ms. FUDGE. I continue to reserve, Mr. Speaker. I have no further 
speakers.
  Mr. GARRETT. Mr. Speaker, I was hoping the gentlelady had one more 
speaker. I was going to reserve, as we had one other speaker on the 
way, but let me just check.
  Without seeing him here, Mr. Speaker, I yield back the balance of my 
time.
  Ms. FUDGE. Mr. Speaker, I just, again, want to thank everyone 
involved in this bill and ask my colleagues to please support it.
  I yield back the balance of my time.

                              {time}  1520

  The SPEAKER pro tempore. The question is on the motion offered by the 
gentleman from New Jersey (Mr. Garrett) that the House suspend the 
rules and pass the bill, H.R. 2779, as amended.
  The question was taken.
  The SPEAKER pro tempore. In the opinion of the Chair, two-thirds 
being in the affirmative, the ayes have it.
  Mr. GARRETT. Mr. Speaker, on that I demand the yeas and nays.
  The yeas and nays were ordered.
  The SPEAKER pro tempore. Pursuant to clause 8 of rule XX, further 
proceedings on this question will be postponed.

                          ____________________