[House Report 112-343]
[From the U.S. Government Publishing Office]


112th Congress                                            Rept. 112-343
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     Part 1

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      BUSINESS RISK MITIGATION AND PRICE STABILIZATION ACT OF 2011

                                _______
                                

               December 23, 2011.--Ordered to be printed

                                _______
                                

  Mr. Bachus, from the Committee on Financial Services, submitted the 
                               following,

                              R E P O R T

                        [To accompany H.R. 2682]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 2682) to provide end user exemptions from 
certain provisions of the Commodity Exchange Act and the 
Securities Exchange Act of 1934, and for other purposes, having 
considered the same, report favorably thereon without amendment 
and recommend that the bill do pass.

                          Purpose and Summary

    ``End-users'' are companies that use derivatives to hedge 
their business risk. Because end-users' swap and security-based 
swap transactions do not pose a systemic risk to the financial 
system, Congress did not intend that end-user derivatives 
transactions would be subject to the margin and capital 
requirements of Title VII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (P.L. 111-203) (the Dodd-Frank 
Act). Despite Congressional intent and the statute's plain 
language, some regulators have interpreted Title VII as a grant 
of new authority to impose margin requirements on end-users 
merely because they are counterparties to swaps with a 
regulated entity, such as a swap dealer or financial 
institution. H.R. 2682 would exempt end-users from the margin 
and capital requirements under Title VII of the Dodd-Frank Act 
for swaps and security-based swap transactions that are not 
made with financial entities as defined under the Dodd-Frank 
Act.

                  Background and Need for Legislation

    During floor debate on the conference report for the Dodd-
Frank Act, two colloquies among the then-chairmen of the four 
committees with primary jurisdiction over Title VII clarified 
Congressional intent that the Dodd-Frank Act did not grant 
regulators the authority to impose margin requirements on end-
user derivatives transactions. Nevertheless, some regulators 
have interpreted Title VII as a grant of new authority to 
impose margin requirements on end-users. Accordingly, H.R. 2682 
is necessary to ensure that the regulators do not force end-
users to post margin, thereby diverting much-needed capital 
from being used to fuel job creation and economic growth.
    On February 15, 2011, Mr. Craig Reiners of MillerCoors LLC, 
on behalf of the Coalition for Derivatives End-Users, testified 
before the Committee, and stated that ``the prudent use of 
derivatives by end-user companies, such as MillerCoors, does 
not generate risk or instability in the financial marketplace 
and played no role in the financial crisis. On the contrary, 
these risk management tools are critical to reducing commercial 
risk and volatility in our day-to-day business operations, 
allowing us to create sustainable and prosperous businesses.'' 
Further, he testified that ``we believe that a broad end-user 
exemption is critically important as the [Commodity Futures 
Trading Commission] promulgates final rules. During the 
regulatory process, we have sought to ensure that the exemption 
created by Congress would not be unduly narrowed. In 
particular, we have urged regulators to give thoughtful 
consideration to key definitions to ensure that end-users like 
us are not saddled with bank-like regulation. . . . The 
unintended consequence of margin requirements applied to end-
users or excessive capital requirements applied to our 
financial counterparties could be to reduce the risk management 
activity of end-users. Such a result could actually increase 
systemic risk or even push transactions offshore.''
    On March 16, 2011, Mr. Luke Zubrod of Chatham Financial, on 
behalf of the Coalition for Derivatives End-Users, testified 
before the Subcommittee on Capital Markets and Government-
Sponsored Enterprises, and stated that ``[i]f capital charges 
are disproportionately increased, end users may opt out of 
hedging, which in turn would translate to increased volatility 
in consumer prices for things like airline tickets, apartment 
rents, farm equipment, various types of financing, life 
insurance contracts, and even the price of cereal.'' Further, 
he stated that ``[w]e respectfully request that this committee 
provide end users with certainty by clarifying that their 
hedges will not be subject to margin requirements. In addition 
to providing important certainty for Main Street businesses, 
such a clarification would promote international harmonization 
and minimize regulatory arbitrage.''
    On July 28, 2011, Representatives Michael Grimm, Gary 
Peters, Austin Scott, and Bill Owens introduced H.R. 2682, 
which would exempt end-users from the margin requirements under 
Title VII of the Dodd-Frank Act. Representative Grimm 
originally introduced an end-user exemption bill on April 15, 
2011. That bill--H.R. 1610, Business Risk Mitigation and Price 
Stabilization Act of 2011--was discussed at a legislative 
hearing on March 16, 2011. On May 3, 2011, the Subcommittee on 
Capital Markets and Government-Sponsored Enterprises met in 
open session to consider H.R. 1610. Following the Subcommittee 
markup, Representatives Grimm, Peters, Scott, and Owens reached 
a compromise on the language for an end-user exemption, and 
introduced a new bill, H.R. 2682.

                                Hearings

    On March 16, 2011, the Subcommittee on Capital Markets and 
Government-Sponsored Enterprises held a hearing on a draft 
version of H.R. 1610 entitled ``Legislative Proposals to 
Promote Job Creation, Capital Formation, and Market 
Certainty.'' The following witnesses testified:
           Mr. Kenneth A. Bertsch, President and CEO, 
        Society of Corporate Secretaries & Governance 
        Professionals
           Mr. Tom Deutsch, Executive Director, 
        American Securitization Forum
           Ms. Pam Hendrickson, Chief Operating 
        Officer, The Riverside Company
           Mr. David Weild, Senior Advisor, Grant 
        Thornton, LLP
           Mr. Luke Zubrod, Director, Chatham Financial
           Mr. Damon Silvers, Policy Director and 
        Special Counsel, AFL-CIO

                        Committee Consideration

    On May 3, 2011, the Subcommittee on Capital Markets and 
Government-Sponsored Enterprises met in open session and 
ordered H.R. 1610 favorably reported to the full Committee by a 
record vote of 19 yeas and 13 nays. (Record vote no. CM-30)
    On November 30, 2011, the Committee on Financial Services 
met in open session and ordered H.R. 2682 favorably reported to 
the House by voice vote.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. 
There were no record votes taken on amendments or in connection 
with ordering H.R. 2682 reported to the House. A motion by 
Chairman Bachus to report the bill to the House with a 
favorable recommendation was agreed to by voice vote.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee has held hearings and 
made findings that are reflected in this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee establishes the 
following performance related goals and objectives for this 
legislation:
    The objective of H.R. 2682 is to exempt end-users from the 
margin and capital requirements under Title VII of the Dodd-
Frank Act for swaps and security-based swap transactions that 
are not made with financial entities as defined under the Dodd-
Frank Act. Because end-users' swap and security-based swap 
transactions do not pose a systemic risk to the financial 
system, Congress did not intend that end-user derivatives 
transactions would be subject to the margin and capital 
requirements of Title VII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (P.L. 111-203). Despite 
Congressional intent and the statute's plain language, some 
regulators have interpreted Title VII as a grant of new 
authority to impose margin requirements on end-users merely 
because they are counterparties to swaps with a regulated 
entity, such as a swap dealer or financial institution.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                  Congressional Budget Office Estimate

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                                 December 14, 2011.
Hon. Spencer Bachus,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2682, the Business 
Risk Mitigation and Price Stabilization Act of 2011.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

H.R. 2682--Business Risk Mitigation and Price Stabilization Act of 2011

    H.R. 2682 would allow certain nonfinancial entities that 
are counterparties in swap or security-based swap transactions 
to be exempted from provisions in current law that require such 
entities to meet certain margin requirements. (A swap is a 
contract that calls for an exchange of cash between two 
participants based on an underlying rate or index or on the 
performance of an asset). Both the Commodity Futures Trading 
Commission (CFTC) and the Securities and Exchange Commission 
(SEC) are developing regulations relating to margin 
requirements in swap transactions as the result of the 
enactment of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Public Law 111-203).
    Neither the CFTC nor the SEC has finalized regulations 
regarding margin requirements. Based on information from the 
two agencies, CBO expects that incorporating the provisions of 
H.R. 2682 at this point in the regulatory process would not 
require a significant increase in the workload of either 
agency. Therefore, CBO estimates that any change in 
discretionary spending to implement the legislation, which 
would be subject to the availability of appropriated funds, 
would not be significant. Enacting H.R. 2682 would not affect 
direct spending or revenues; therefore, pay-as-you-go 
procedures do not apply.
    H.R. 2586 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would not affect the budgets of state, local, or tribal 
governments.
    The CBO staff contact for this estimate is Susan Willie. 
The estimate was approved by Theresa Gullo, Deputy Assistant 
Director for Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    H.R. 2682 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section cites H.R. 2682 as the ``Business Risk 
Mitigation and Price Stabilization Act of 2011.''

Section 2. Margin requirements

    This section amends Section 4(s)(e) of the Commodity 
Exchange Act as added by Section 731 of the Dodd-Frank Act 
governing margin requirements, and exempts counterparties to 
swap contracts from those requirements other than for financial 
entities as defined under the Dodd-Frank Act.
    This sections amends Section 15F(e) of the Securities 
Exchange Act of 1934 as added by Section 764(a) of the Dodd-
Frank Act governing margin requirements and exempts 
counterparties to security-based swap contracts from those 
requirements other than for financial entities as defined under 
the Dodd-Frank Act

         Changes in Existing Law Made by the Bill, as Reported

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (new matter is 
printed in italic and existing law in which no change is 
proposed is shown in roman):

COMMODITY EXCHANGE ACT

           *       *       *       *       *       *       *


SEC. 4S. REGISTRATION AND REGULATION OF SWAP DEALERS AND MAJOR SWAP 
                    PARTICIPANTS.

  (a) * * *

           *       *       *       *       *       *       *

  (e) Capital and Margin Requirements.--
          (1) * * *

           *       *       *       *       *       *       *

          (4) Applicability with respect to counterparties.--
        The requirements of paragraphs (2)(A)(ii) and 
        (2)(B)(ii) shall not apply to a swap in which one of 
        the counterparties to the swap is not a financial 
        entity as described in section 2(h)(7)(C), and such 
        counterparty is eligible for the exception under 
        section 2(h)(7)(A).

           *       *       *       *       *       *       *

                              ----------                              


           SECTION 15F OF THE SECURITIES EXCHANGE ACT OF 1934

SEC. 15F. REGISTRATION AND REGULATION OF SECURITY-BASED SWAP DEALERS 
                    AND MAJOR SECURITY-BASED SWAP PARTICIPANTS.

  (a) * * *

           *       *       *       *       *       *       *

  (e) Capital and Margin Requirements.--
          (1) * * *

           *       *       *       *       *       *       *

          (4) Applicability with respect to counterparties.--
        The requirements of paragraphs (2)(A)(ii) and 
        (2)(B)(ii) shall not apply to a security-based swap in 
        which one of the counterparties to the security-based 
        swap is not a financial entity as described in section 
        3C(g)(3), and such counterparty is eligible for the 
        exception under section 3C(g)(1).

           *       *       *       *       *       *       *


                                  
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