[Congressional Record Volume 160, Number 145 (Tuesday, December 2, 2014)]
[House]
[Pages H8240-H8244]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
COMMODITY EXCHANGE ACT AND SECURITIES EXCHANGE ACT AMENDMENTS
Mr. LUETKEMEYER. Mr. Speaker, I move to suspend the rules and pass
the bill (H.R. 5471) to amend the Commodity Exchange Act and the
Securities Exchange Act of 1934 to specify how clearing requirements
apply to certain affiliate transactions, and for other purposes.
The Clerk read the title of the bill.
The text of the bill is as follows:
H.R. 5471
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) In General.--
(1) Commodity exchange act amendment.--Section
2(h)(7)(D)(i) of the Commodity Exchange Act (7 U.S.C.
2(h)(7)(D)(i)) is amended to read as follows:
``(i) In general.--An affiliate of a person that qualifies
for an exception under subparagraph (A) (including affiliate
entities predominantly engaged in providing financing for the
purchase of the merchandise or manufactured goods of the
person) may qualify for the 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.''.
(2) Securities exchange act of 1934 amendment.--Section
3C(g)(4)(A) of the Securities Exchange Act of 1934 (15 U.S.C.
78c-3(g)(4)(A)) is amended to read as follows:
``(A) In general.--An affiliate of a person that qualifies
for an exception under paragraph (1) (including affiliate
entities predominantly engaged in providing financing for the
purchase of the merchandise or manufactured goods of the
person) may qualify for the exception only if the affiliate
enters into the security-based 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 such commercial risk is addressed by
entering into a security-based swap with a security-based
swap dealer or major security-based swap participant, an
appropriate credit support measure or other mechanism must be
utilized.''.
(b) Applicability of Credit Support Measure Requirement.--
The requirements in section 2(h)(7)(D)(i) of the Commodity
Exchange Act and section 3C(g)(4)(A) of the Securities
Exchange Act of 1934, as amended by subsection (a), requiring
that a credit support measure or other mechanism be utilized
if the transfer of commercial risk referred to in such
sections is addressed by entering into a swap with a swap
dealer or major swap participant or a security-based swap
with a security-based swap dealer or major security-based
swap participant, as appropriate, shall not apply with
respect to swaps or security-based swaps, as appropriate,
entered into before the date of the enactment of this Act.
The SPEAKER pro tempore. Pursuant to the rule, the gentleman from
Missouri (Mr. Luetkemeyer) and the gentlewoman from Wisconsin (Ms.
Moore) each will control 20 minutes.
The Chair recognizes the gentleman from Missouri.
General Leave
Mr. LUETKEMEYER. Mr. Speaker, I ask unanimous consent that all
Members have 5 legislative days within which to revise and extend their
remarks and submit extraneous materials for the Record on H.R. 5471,
currently under consideration.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Missouri?
There was no objection.
Mr. LUETKEMEYER. Mr. Speaker, I yield myself such time as I may
consume.
Hundreds of American businesses, large and small--from manufacturers,
to utilities, to agricultural businesses, to airlines--use derivatives
every day to manage their business risks and to reduce their exposure
to price fluctuations.
Without derivatives, businesses and their customers would face
increased prices for the goods and services these
[[Page H8241]]
businesses provide. The derivatives these businesses use are not risky.
They played no role in the financial crisis. Nevertheless, they were
targeted in the Dodd-Frank Act, which increased their price and
decreased their availability.
Since the beginning of the 112th Congress in 2011, the Financial
Services Committee and the Agriculture Committee have worked together
to clarify that title VII of the Dodd-Frank Act should not burden Main
Street businesses with a costly compliance regime that would stifle
growth and job creation.
These efforts have produced bipartisan bills, including many
sponsored by Democrats, that have passed the House with large
majorities. The bill under consideration is yet another.
H.R. 5471 is sponsored by my Democratic colleague on the Financial
Services Committee, Representative Gwen Moore, and is cosponsored by
another colleague, Representative Steve Stivers. The bill amends the
Securities Exchange Act of 1934 and the Commodity Exchange Act, and it
extends the Dodd-Frank Act, title VII, clearing exemption to
nonfinancial entities that use a central treasury unit to reduce risk
and net the hedging needs of affiliated businesses.
Mr. Speaker, that may sound technical, but the bill is a commonsense
measure to give regulatory certainty to Main Street businesses in
Missouri and beyond. I encourage my colleagues to support H.R. 5471.
I reserve the balance of my time.
Ms. MOORE. Mr. Speaker, I yield myself such time as I may consume.
I join my colleague, the gentleman from Missouri, in urging my
colleagues to support H.R. 5471; however, before I get into why we
should support the bill, I need to thank all of my partners in this
effort.
As has been mentioned, Mr. Stivers has been fantastic throughout this
entire process. I knew going into this that I had a great Republican
partner. I can't say enough about Representative Stivers, but time will
not allow me to do it.
I had another great bipartisan partner in Representative Gibson on
the Agriculture Committee. Of course, it is always a joy to work with a
good friend and colleague on the Ag Committee, Representative Marcia
Fudge.
Mr. Speaker, H.R. 5471 is a true ``end users'' bill. The bill is
targeted as it applies to centralized treasury centers, or CTUs, of
nonfinancial end user companies.
The CTU model enables an end user corporation to efficiently
centralize hedging risks for the entire consolidated corporate group,
and it is, in fact, a corporate best practice. It permits companies to
more efficiently hedge commercial business risk, which was always the
intent of Dodd-Frank.
The CFTC agrees with the underlying policy of the bill as they have
provided no-action relief on this point; however, H.R. 5471 is still
needed because, as a practical matter, no-action relief is no
substitute for statutory fixes as it creates legal uncertainty when
deciding how to organize your global business structure.
Corporate boards may be hesitant to approve a decision, as they are
required to do, that violates the law based only on an assurance that
CFTC staff will not recommend enforcement. H.R. 5471 fixes the quirky
result of treating companies that use a CTU model differently than
companies that do not accomplish the same result.
The bill also solves another far more technical issue with the no-
action relief that relates to CTUs issuing swaps as a principal, as
opposed to as an agent.
There is simply no good reason to not address these issues. In fact,
CTUs are considered a corporate best practice. I can offer you, Mr.
Speaker, an example of one company in my district, MillerCoors. They
summarized it best in written testimony before the House Financial
Services Committee:
Though it may be tempting to view all derivatives as risky
financial products that were central to the credit crisis, we
must remember that these are important tools upon which
thousands of companies depend to manage risks in the real
economy.
Just remember that we all have companies in our districts that use
swaps legitimately to mitigate risk. I urge all of my colleagues to
support this important legislation.
Mr. Speaker, I reserve the balance of my time.
Mr. LUETKEMEYER. Mr. Speaker, I yield 3 minutes to the gentleman from
Oklahoma (Mr. Lucas), the distinguished chairman of the Agriculture
Committee.
Mr. LUCAS. Mr. Speaker, I would like to thank the gentleman from
Missouri for yielding.
I would like to thank my colleagues from the House Agriculture
Committee, Mr. Gibson and Ms. Fudge, for their continued leadership on
this issue; also, I would like to thank Ms. Moore and Mr. Stivers for
working with my committee to introduce this compromise language as a
stand-alone bill for the House's consideration.
Almost identical language was included in the Agriculture Committee's
CFTC reauthorization bill, H.R. 4413. I am proud to say that we moved
that legislation through the Ag Committee by a voice vote and then
passed it here on the House floor with overwhelming bipartisan support
this summer. I am hopeful that this bill can receive the same strong
bipartisan support.
H.R. 5471 will provide American businesses the certainty they need to
continue managing their risk in the most efficient manner possible.
Today, businesses all over America rely on the ability to centralize
their hedging activities to reduce their counterparty credit risk, to
lower costs, and to simplify their financial dealings.
It is important to remember that these transactions between
affiliated corporate entities pose no systemic risk, and they should
not be regulated as if they do. These transactions are used to reduce
an individual firm's risk by consolidating a hedging portfolio spread
across a corporate group.
By doing this, firms can find savings with offsetting positions
between affiliates and can reduce the need for the group to seek hedges
in the wider market.
H.R. 5471 will prevent the redundant regulation of these harmless
interaffiliate transactions that would tie up the working capital
companies with no added protections for the market or benefits for the
consumers. I strongly support this bipartisan, commonsense legislation,
and I urge all of my colleagues to vote ``yes.''
Ms. MOORE. Mr. Speaker, I yield such time as she may consume to the
gentlewoman from California, Ms. Maxine Waters, the ranking member of
the committee.
Ms. WATERS. Mr. Speaker, I would first like to thank Congresswoman
Moore, as well as Congresswoman Fudge, for their efforts to craft the
text of this bill which represents a dramatic improvement from a
similar bill that was considered in the Financial Services Committee 18
months ago.
At that time, Commodity Futures Trading Commission--that is, the
CFTC--Chairman Gary Gensler warned that providing such a broad
interaffiliate exemption from the requirement to clear derivatives
could harm its efforts to regulate the market.
Since that time, however, the authors of this legislation have
significantly tailored the language, incorporating several technical
edits provided by the CFTC, and the measure now only extends the
interaffiliate exemption to instances when the commercial risk of an
exempt end user is being hedged or mitigated.
Last week, the CFTC provided the same tailored relief that this bill
would provide. I submit for the Record the CFTC's no-action letter.
U.S. Commodity Futures
Trading Commission,
Washington, DC, November 26, 2014.
Re No-Action Relief from the Clearing Requirement for Swaps
Entered into by Eligible Treasury Affiliates
The purpose of this letter is to amend the no-action relief
previously granted by the Division of Clearing and Risk
(``Division'') of the Commodity Futures Trading Commission
(``Commission'') under No-Action Letter 13-22 to address
certain challenges faced by treasury affiliates in
undertaking hedging activities on behalf of non-financial
affiliates within a corporate group. Those challenges
pertained to certain conditions in the prior relief. The
Division in this letter is altering some of those conditions
to enable additional market participants to avail themselves
of the treasury affiliate relief originally set forth in No
Action Letter 13-22.
Treasury Affiliate Exemption from Clearing
On June 4, 2013, the Division granted no-action relief from
the clearing requirement under section 2(h)(1) of the
Commodity Exchange Act (``CEA'') and part 50 of the
Commission's regulations, for swaps entered into
[[Page H8242]]
by certain affiliates acting on behalf of non-financial
affiliates within a corporate group for the purpose of
hedging or mitigating commercial risk (hereinafter referred
to as ``treasury affiliates'').
No-Action Letter 13-22 was issued based on the Division's
understanding that treasury affiliates were undertaking
hedging activities on behalf of non-financial affiliates that
were eligible to elect the end-user exception from clearing,
but were themselves ineligible to elect the exception. As
discussed further below, because treasury affiliates can act
in a wider capacity as treasury centers that provide
financial services for all or most of the affiliates within a
corporate group, including daily cash management, debt
administration, and risk hedging and mitigation, treasury
affiliates met the definition of ``financial entity'' under
section 2(h)(7)(C)(i)(VIII) of the CEA and thus could not
elect the end-user exception. As a result, the Division
granted treasury affiliates relief to continue entering into
non-cleared swaps on behalf of the non-financial affiliates,
subject to specific conditions and requirements.
The Division has since learned that there are treasury
affiliates precluded from electing the relief in No-Action
Letter 13-22 because they do not meet certain conditions
contained in the letter. As discussed below, based on input
from market participants, the Division is hereby issuing this
letter to amend some of the conditions and requirements
contained in No-Action Letter 13-22 to allow additional
treasury affiliates to rely on the relief from clearing.
Applicable Regulatory Requirements
Under section 2(h)(1)(A) of the CEA, it is unlawful for any
person to engage in a swap unless that person submits such
swap for clearing to a derivatives clearing organization
(``DCO'') that is registered under the CEA or exempt from
registration if the swap is required to be cleared. On
November 29, 2012, the Commission adopted its first clearing
requirement determination, requiring that swaps meeting
certain specifications within four classes of interest rate
swaps and two classes of credit default swaps be cleared.
Pursuant to section 2(h)(7) of the CEA and Sec. 50.50 of
the Commission's regulations, a counterparty to a swap that
is subject to the clearing requirement may elect the end-user
exception from required clearing provided that such
counterparty is not a financial entity, as defined in section
2(h)(7)(C) of the CEA, and otherwise meets the requirements
of Sec. 50.50 of the Commission's regulations. Thus, the end-
user exception from required clearing may be elected for
swaps that are entered into between two non-financial
entities, or between a non-financial entity and a financial
entity, for swaps that hedge or mitigate commercial risk.
As noted above, the Division granted relief from required
clearing for treasury affiliates of non-financial companies
that fall within the definition of ``financial entity'' under
section 2(h)(7)(C)(i)(VIII) of the CEA when acting on behalf
of affiliates that otherwise would be eligible to elect the
end-user exception from required clearing.''As such, No-
Action Letter 13-22 effectively allowed treasury affiliates,
subject to certain additional requirements and conditions, to
take advantage of the end-user exception from clearing that
its non-financial affiliates in the corporate group would
otherwise have been eligible to elect had they entered into
the transactions directly.
Summary of Relief
Since the Division issued No-Action Letter 13-22, market
participants have highlighted several requirements and
conditions that make use of the relief granted thereunder
impractical for many treasury affiliates. As discussed below,
the Division is therefore amending the following requirements
and conditions.
i. The requirement that the ultimate parent of a treasury
affiliate identify all wholly- and majority-owned affiliates
and ensure a majority qualify for the end-user exception.
Market participants have expressed concerns about the
second condition for eligible treasury affiliate status in
No-Action Letter 13-22. The second condition requires that
the ultimate parent of a treasury affiliate identify all
wholly- and majority-owned affiliates within the corporate
group and ensure that a majority qualify for the end-user
exception.
Market participants have noted the ratio of the absolute
number of financial entities to nonfinancial entities does
not necessarily provide meaning-fill information about the
corporate family as a whole, and adds on-going surveillance
responsibilities and expenses for the corporate family. The
Division agrees and has removed the requirement accordingly
in the revised relief set forth herein.
ii. The requirement that the treasury affiliate is not
itself or is not affiliated with a systemically important
nonbank financial company.
Market participants have also expressed concerns about the
fourth condition for eligible treasury affiliate status in
No-Action Letter 13-22. The fourth condition prohibits the
treasury affiliate from being, or being affiliated with, a
nonbank financial company that has been designated as
systemically important by the Financial Stability Oversight
Council. As explained above, section 2(h)(7)(D) of the CEA
permits affiliates acting as an agent and on behalf of
entities eligible for the end-user exception to elect the
end-user exception themselves, unless the affiliate is one of
seven enumerated types of entities listed in section
2(h)(7)(D)(ii). Among others, these prohibited entities
include swap dealers, commodity pools, and bank holding
companies with over $50 billion in consolidated assets.
Market participants have pointed out that the fourth
condition for eligible treasury affiliate status provides a
list of entities that generally tracks the list in section
2(h)(7)(D)(ii), except for the addition of systemically
important nonbank financial companies. The Division believes
that additional restrictions relating to systemically
important nonbank financial companies are appropriate. As a
result, the Division is maintaining the requirement that the
treasury affiliate itself cannot be a systemically important
nonbank financial company. However, the Division
also recognizes that certain corporate families with
significant non-financial operations are precluded from
using the existing relief because of the affiliation with
a systemically important nonbank financial company,
regardless of the degree to which the operations of the
financial and non-financial entities are conducted
separately.
The Division believes restricting the treasury affiliate
from (i) entering into transactions with, or on behalf of, a
systemically important nonbank financial company and (ii)
providing any services, financial or otherwise, to such a
designated entity, provides sufficient protection from the
risks of systemically important affiliate, while allowing the
treasury affiliate to provide the necessary support to its
related operating entities. The Division is amending the
conditions relating to systemically important nonbank
financial companies accordingly.
iii. The requirement that treasury affiliates act only on
behalf of certain types of related affiliates.
Market participants have indicated that the definition of
``related affiliates'' under No-Action Letter 13-22
unnecessarily excludes certain entities that perform a cash
pooling function for a corporate family that includes a
financial entity. The definition of related affiliate
currently includes either: (i) a non-financial entity that
is, or is directly or indirectly wholly- or majority-owned
by, the ultimate parent; or (ii) a person that is another
eligible treasury affiliate for an entity described in (i).
Market participants claim that the limitation is
unnecessary, highlighting that the third General Condition to
the Swap Activity already precludes an eligible treasury
affiliate from entering into swaps with, and on behalf of,
its financial affiliates. The Division agrees the definition
is problematic because the collection and disbursement of
cash within the corporate family is a core function of a
treasury affiliate. Given the existing restrictions on swap
activity by the eligible treasury affiliate with or on behalf
of a financial affiliate, the Division has amended the
related affiliate definition to allow entities that provide
financial services on behalf of a financial entity to
nonetheless qualify as an eligible treasury affiliate.
iv. The requirement that treasury affiliates transfer the
risk of related affiliates through the use of swaps.
Market participants have expressed concern with the first
General Condition to Swap Activity in No-Action Letter 13-22.
The condition requires the eligible treasury affiliate enter
into the exempted swap for the sole purpose of hedging or
mitigating the commercial risk of one or more related
affiliates that was transferred to the eligible treasury
affiliate by operation of one or more swaps with such related
affiliates.
According to market participants, there are a number of
ways for commercial risk to be transferred between
affiliates, and that the risk that a treasury affiliate may
have been seeking to hedge or mitigate would not necessarily
be transferred from the operating affiliate to the treasury
affiliate by way of a swap transaction as required by No-
Action Letter 13-22. The method by which the risk is
transferred can be dependent on the type of risk being
hedged. For example, it may be more common for foreign
exchange risk to be transferred between affiliates through
the use of book-entry transfers, as opposed to interest rate
risk, where the use of back-to-back swaps may be more
prevalent. The Division agrees that this limitation is
unnecessarily strict and is revising the condition
accordingly. However, as the transfer of risk from the
related affiliate to the treasury affiliate will no longer be
evinced by back-to-back swaps, the Division will require that
the treasury affiliate be able to identify the related
affiliate or affiliates on whose behalf the swap was entered
into by the treasury affiliate.
v. The requirement that treasury affiliates do not enter
into swaps other than for hedging or mitigating the
commercial risk of one or more related affiliates.
Market participants have questioned whether an eligible
treasury affiliate would lose its status if the entity
entered into hedging transactions that were mitigating a
commercial risk of the treasury affiliate itself. The second
General Condition to the Swap Activity states that the
eligible treasury affiliate cannot enter into swaps with
related affiliates or unaffiliated counterparties other than
for the purposes of hedging or mitigating the commercial risk
of one or more related affiliates.
The Division agrees that a treasury affiliate should not
lose its status as an eligible treasury affiliate simply
because it entered into a hedging transaction on its own
behalf.
[[Page H8243]]
The Division is therefore amending the language in the second
condition to allow an eligible treasury affiliate to enter
into its own hedging transactions. However, the Division
notes that such transactions entered into by the eligible
treasury affiliate on its own behalf would not be ``exempted
swaps'' as defined below, and may be required to be cleared
if subject to the Commission's clearing requirement and no
other exception or exemption to clearing applied. Further,
the Division notes that treasury affiliates entering into any
speculative transaction, on its own behalf or otherwise,
would not be consistent with this condition.
vi. The requirement that related affiliates entering into
swaps with the treasury affiliate, or the treasury affiliate
itself, may not enter into swaps with or on behalf of any
affiliate that is a financial entity.
Market participants have expressed confusion as to whether
a related affiliate can enter into transactions with multiple
eligible treasury affiliates under the third General
Condition to the Swap Activity in No-Action Letter 13-22. The
third condition states that neither any related affiliate
that enters into swaps with the eligible treasury affiliate
nor the eligible treasury affiliate, may enter into swaps
with or on behalf of any affiliate that is a financial entity
(a ``financial affiliate''), or otherwise assumes, nets,
combines, or consolidates the risk of swaps entered into by
any financial affiliate.
Ms. WATERS. After conversations with CFTC Chairman Massad and
following this action by the regulator, I felt comfortable having H.R.
5471 be considered under a suspension of the House rules.
Now, I have heard from several companies that, while the CFTC's
actions are welcome, they still need the legal certainty that only H.R.
5471 could provide.
On the other side, of course, I have heard concerns that if we pass
this bill we may be binding the CFTC's hands to deal with a problem
that could arise in the future.
I believe that people on both sides of this issue are working in good
faith and want to help rebuild our economy. Again, I applaud
Congresswoman Moore's efforts to improve this bill.
{time} 1400
Mr. LUETKEMEYER. Mr. Speaker, I yield 5 minutes to the gentleman from
Ohio (Mr. Stivers), who is the lead cosponsor of this legislation.
Mr. STIVERS. Mr. Speaker, I would like to thank the gentleman from
Missouri for yielding me time.
I also would like to thank the gentlelady from Wisconsin (Ms. Moore)
for all her work on this bill. She has been dedicated and engaged and
hardworking and willing to compromise to move this effort forward to
help a lot of Main Street businesses that are in my district, her
district, and that dot the map of America.
I also want to thank Ms. Fudge and Mr. Gibson for their collaborative
efforts and their work through the Agriculture Committee on this bill
as well.
Mr. Speaker, this bill is the culmination of over 2\1/2\ years' work.
In 2012, Ms. Moore, Ms. Fudge, Mr. Gibson, and I joined together to
introduce legislation that clarified rules under the Dodd-Frank Act
with regard to margin clearing and reporting requirements of
interaffiliate transactions. What that means is a lot of Main Street
businesses in various industries, from agriculture to consumer
products, that work across international boundaries use this central
treasury unit structure to offset competing or offsetting risks, and
that way they can decide what their total aggregate risk is and then
make it much more affordable for a corporation.
Unfortunately, under the Dodd-Frank Act and the way the rules were
interpreted by the Commodity Futures Trading Commission, these
companies were being charged double or triple the cost by imposing
these central clearing unit ways of managing risk. It just didn't make
sense, and it actually cost them more money. These companies did not
add systemic risk, and that is what the rules on swaps were all about
is to make sure we reduce systemic risk. These companies are using
these swaps to offset risk to their company and their operating risks,
and so this is a commonsense piece of legislation. In fact, Barney
Frank, the author of the Dodd-Frank legislation, spoke in favor of this
when he was the ranking member in the last Congress.
Unfortunately, there was no activity on the bill in the last
Congress, and over the last 2 years both the Securities and Exchange
Commission and the CFTC have worked with us--with Ms. Moore and me--on
these rules. They have done a pretty good job in that regard, but there
is more to be done because their rules left out the folks that use
these centralized treasury units as a specific business model. Just
last month, in fact, the CFTC published a no-action letter that Ms.
Moore referred to; but a no-action letter means that it is still part
of the law, we are just not going to enforce the law.
What we need to do is fix the law. It is really common sense. So this
bill that Ms. Moore introduced fixes the law for that centralized
treasury unit way of doing business. It makes sense. It does not add
any risk to the system, and it allows these companies that are all over
America to manage their risk in a smarter way without being charged two
or three times as much and without risking that they are violating the
law, even though it is not going to be enforced.
So I applaud the gentlelady from Wisconsin for changing the law,
fixing the law, and making it work for a lot of small, medium, and even
large businesses across America so they can use their cash to hire
Americans in this tough time, and hire more Americans and not waste it
on unneeded cost that does not provide any safety to anyone.
I want to thank the gentlelady from Wisconsin as well as the
gentleman from New York and the gentlelady from Ohio for all their
work, and I was proud to be a small part of this.
I would urge my colleagues to support this bill.
Ms. MOORE. Mr. Speaker, I am so delighted to yield 2 minutes to the
gentleman from Minnesota (Mr. Peterson), the ranking member of the Ag
Committee.
Mr. PETERSON. Mr. Speaker, I thank the gentlewoman from Wisconsin and
the others for their work on this legislation.
H.R. 5471 provides further clarity to those using the derivatives
market to hedge against risk and builds upon language in H.R. 4413,
legislation approved by the House last summer to reauthorize the CFTC.
The bill before us today makes it clear that if an affiliate of a
company already exempted from clearing engages in a swap with a swap
dealer or major swap participant in order to hedge or mitigate
commercial risk, those swaps would also be exempt from the clearing
requirement as long as they use an appropriate credit support measure.
While it is my understanding that the CFTC would prefer to address
this issue through agency action, I also believe that they are
supportive of this language. Because H.R. 5471 improves the work
already done by the House, I urge my colleagues to support this bill.
Mr. LUETKEMEYER. Mr. Speaker, I am prepared to close whenever the
gentlewoman from Wisconsin is ready.
Ms. MOORE. Mr. Speaker, I would now like to place the second half of
the CFTC letter into the Record.
No-Action Letter 13-22 contemplated the use of multiple
eligible treasury affiliates within a corporate family, but
the Division agrees with market participants that the third
condition does not accurately reflect this. The Division is
accordingly amending the third condition to clarify that the
restriction on related affiliates and eligible treasury
affiliates from entering into swap transactions with
financial entity affiliates does not preclude the
circumstance where the financial entity affiliate is an
eligible treasury affiliate.
vii. The requirement for the payment obligations of the
treasury affiliate to be guaranteed.
Market participants expressed concern with respect to the
fifth General Condition to the Swap Activity in No-Action
Letter 13-22. The fifth condition states that the payment
obligations of the eligible treasury affiliate on the
exempted swap must be guaranteed by: (i) its non-financial
parent; (ii) an entity that wholly-owns or is wholly-owned by
its non-financial parent; or (iii) the related affiliates for
which the swap hedges or mitigates commercial risk.
Market participants have explained that corporate parents
and structures may avail themselves of other types of support
arrangements, such as keepwell agreements, letters of credit,
or revolving credit facilities for example, which would not
satisfy the requirements of No-Action Letter 13-22. As a
result, the Division is removing the condition to accommodate
the additional support arrangements that may exist with
regard to the eligible treasury affiliate's payment
obligations.
Division No-Action Position
The Division recognizes the benefits that arise from the
use of treasury affiliates within corporate groups and has
determined to provide the following no-action relief;
described below.
[[Page H8244]]
For purposes of this no-action letter only, the following
definitions shall apply:
Eligible treasury affiliate means a person that meets each
of the following qualifications:
(i) The person is (A) directly, wholly-owned by a non-
financial entity or another eligible treasury affiliate (its
``non-financial parent''), and (B) is not indirectly
majority-owned by a financial entity, as defined in section
2(h)(7)(C)(i) of the CEA;
(ii) The person's ultimate parent is not a financial entity
as defined in section 2(h)(7)(C)(i) of the CEA;
(iii) The person is a financial entity as defined in
section 2(h)(7)(C)(i)(VIII) of the CEA solely as a result of
acting as principal to swaps with, or on behalf of, one or
more of its related affiliates, or providing other services
that are financial in nature to such related affiliates;
(iv) The person is not, and is not affiliated with, any of
the following:
(A) a swap dealer;
(B) a major swap participant;
(C) a security-based swap dealer; or
(D) a major security-based swap participant.
(v) The person is not any of the following:
(A) a private fund as defined in section 202(a) of the
Investment Advisors Act of 1940 (15 U.S.C. Sec. 80-b-2(a));
(B) a commodity pool;
(C) an employee benefit plan as defined in paragraphs (3)
and (32) of section 3 of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. Sec. 1002);
(D) a bank holding company;
(E) an insured depository institution;
(F) a farm credit system institution;
(G) a credit union;
(H) a nonbank financial company that has been designated as
systemically important by the Financial Stability Oversight
Council; or
(I) an entity engaged in the business of insurance and
subject to capital requirements established by an insurance
governmental authority of a State, a territory of the United
States, the District of Columbia, a country other than the
United States, or a political subdivision of a country other
than the United States that is engaged in the supervision of
insurance companies under insurance law.
(vi) The person does not provide any services, financial or
otherwise, to any affiliate that is a nonbank financial
company that has been designated as systemically important by
the Financial Stability Oversight Council.
Non-financial entity means a person that is not a financial
entity as defined in section 2(h)(7)(C)(i) of the CEA.
Related affiliate means with respect to an eligible
treasury affiliate:
(i) A non-financial entity that is, or is directly or
indirectly wholly- or majority-owned by, the ultimate parent;
or
(ii) A person that is another eligible treasury affiliate.
The Division will not recommend that the Commission
commence an enforcement action against an eligible treasury
affiliate for its failure to comply with the requirements
under section 2(h)(1)(A) of the CEA and part 50 of the
Commission's regulations to clear a swap with an unaffiliated
counterparty or another eligible treasury affiliate (the
``exempted swap'') that is subject to required clearing
pursuant to Sec. 50.4 of the Commission's regulations,
subject to the following conditions:
General Conditions to the Swap Activity
(i) The eligible treasury affiliate enters into the
exempted swap for the sole purpose of hedging or mitigating
the commercial risk of one or more related affiliates that
was transferred to the eligible treasury affiliate;
(ii) The eligible treasury affiliate does not enter into
swaps with its related affiliates or unaffiliated
counterparties other than for the purpose of hedging or
mitigating its own commercial risk or the commercial risk of
one or more related affiliates;
(iii) Neither any related affiliate that enters into swaps
with the eligible treasury affiliate nor the eligible
treasury affiliate, enters into swaps with or on behalf of
any affiliate that is a financial entity (``financial
affiliate''), or otherwise assumes, nets, combines, or
consolidates the risk of swaps entered into by any financial
affiliate, except in the case of financial affiliates that
qualify as eligible treasury affiliates under this letter;
and
(iv) Each swap entered into by the eligible treasury
affiliate is subject to a centralized risk management program
that is reasonably designed (A) to monitor and manage the
risks associated with the swap, and (B) to identify the
related affiliate or affiliates on whose behalf each exempted
swap has been entered into by the eligible treasury
affiliate.
Reporting Conditions
With respect to each swap that an eligible treasury
affiliate (``electing counterparty'') elects not to clear in
reliance on the relief provided in this letter, the reporting
counterparty, as determined in accordance with Sec. 45.8 of
the Commission's regulations, shall provide or cause to be
provided the following information to a registered swap data
repository or, if no registered swap data repository is
available to receive the information from the reporting
counterparty, to the Commission, in the form and manner
specified by the Commission:
(i) Notice of the election of the relief and confirmation
that the electing counterparty satisfies the General
Conditions to the Swap Activity of this no-action relief
specified above;
(ii) How the electing counterparty generally meets its
financial obligations associated with entering into non-
cleared swaps by identifying one or more of the following
categories, as applicable:
(A) A written credit support agreement;
(B) Pledged or segregated assets (including posting or
receiving margin pursuant to a credit support agreement or
otherwise);
(C) A written guarantee from another party;
(D) The electing counterparty's available financial
resources; or
(E) Means other than those described in (A)-(D); and
(iii) If the electing counterparty is an entity that is an
issuer of securities registered under section 12 of, or is
required to file reports under section 15(d) of, the
Securities Exchange Act of 1934:
(A) The relevant SEC Central Index Key number for such
counterparty; and
(B) Acknowledgment that an appropriate committee of the
board of directors (or equivalent body) of the electing
counterparty has reviewed and approved the decision to enter
into swaps that are exempt from the requirements of section
2(h)(1), and if applicable, section 2(h)(8) of the CEA.
(iv) If there is more than one electing counterparty to a
swap, the information specified in the Reporting Conditions
of this no-action relief specified above shall be provided
with respect to each of the electing counterparties.
(v) An entity that qualifies for the relief provided in
this no-action letter may report the information listed in
paragraphs (ii) and (iii) above, annually in anticipation of
electing the relief for one or more swaps. Any such reporting
under this paragraph will be effective for purposes of
paragraphs (ii) and (iii) above for 365 days following the
date of such reporting. During the 365-day period, the entity
shall amend the report as necessary to reflect any material
changes to the information reported.
(vi) Each reporting counterparty shall have a reasonable
basis to believe that the electing counterparty meets the
General Conditions to the Swap Activity for the no-action
relief specified above.
This no-action letter, and the positions taken herein,
represent the view of the Division only, and do not
necessarily represent the position or view of the Commission
or of any other office or division of the Commission. The
relief issued by this letter does not excuse the affected
persons from compliance with any other applicable
requirements contained in the CEA or in the Commission's
regulations issued thereunder. Further, this letter, and the
relief contained herein, is based upon the information
available to the Division. Any different or changed material
facts or circumstances might render this letter void. As with
all no-action letters, the Division retains the authority to,
in its discretion, further condition, modify, suspend,
terminate or otherwise restrict the terms of the no-action
relief provided herein. This letter supersedes No-Action
Letter 13-22.
Sincerely,
Phyllis Dietz,
Acting Director.
Ms. MOORE. Mr. Speaker, I have no further requests for time.
Again, I just want to thank everyone who was involved in this
process. This is something that is going to protect thousands of jobs
across our country. People often criticize us for not doing things in a
bipartisan manner, but I think this is exemplary of what we can do when
we really work at it, even though it has taken a couple of years.
I yield back the balance of my time.
Mr. LUETKEMEYER. I yield back the balance of my time.
The SPEAKER pro tempore. The question is on the motion offered by the
gentleman from Missouri (Mr. Luetkemeyer) that the House suspend the
rules and pass the bill, H.R. 5471.
The question was taken; and (two-thirds being in the affirmative) the
rules were suspended and the bill was passed.
A motion to reconsider was laid on the table.
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