[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.
____________________