[House Report 112-344]
[From the U.S. Government Publishing Office]
112th Congress Rept. 112-344
HOUSE OF REPRESENTATIVES
1st Session Part 1
======================================================================
TO EXEMPT INTER-AFFILIATE SWAPS FROM CERTAIN REGULATORY REQUIREMENTS
PUT IN PLACE BY THE DODD-FRANK WALL STREET REFORM AND CONSUMER
PROTECTION ACT
_______
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. 2779]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
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, having
considered the same, report favorably thereon with an amendment
and recommend that the bill as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. TREATMENT OF AFFILIATE TRANSACTIONS.
(a) Commodity Exchange Act Amendments.--Section 1a(47) of the
Commodity Exchange Act (7 U.S.C. 1(a)(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.--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 a party
that is controlling, controlled by, or
under common control with its
counterparty.
``(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 swaps, to the Commission
pursuant to section 4r within such time period
as the Commission may by rule or regulation
prescribe.''.
(b) Securities Exchange Act of 1934 Amendments.--Section 3(a)(68) of
the Securities Exchange Act of 1934 (15 U.S.C. 78c(3)(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
sections 3C and any applicable margin and
capital requirements of section 15F(e), and for
purposes of defining a 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 an affiliated
company reports information or prepares
financial statements on a consolidated
basis for both parties.
``(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 security-based swaps, 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 other than those set
forth in clause (ii).
``(v) Prevention of evasion.--The Commission
may prescribe rules under this subparagraph
(and issue interpretations of rules prescribed
under this subparagraph) 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 as an
affiliate transaction to evade the requirements
of this Act applicable to security-based
swaps.''.
Purpose and Summary
Inter-affiliate swaps are swaps and security-based swaps
executed between entities under common corporate ownership.
H.R. 2779 exempts inter-affiliate swaps and security-based swap
trades from many of the regulations in Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (PL 111-
203) that are designed to mitigate risks associated with so-
called ``market-facing trades,'' where a corporation executes a
derivatives transaction with an investment bank or other
entity, which may be either a swap dealer or security-based
swap dealer.
Under H.R. 2779, inter-affiliate swap trades must still be
reported to a swap data repository and to the appropriate
regulators. While the bill does not exempt security-based swap
trades from all of Title VII's requirements, the bill does
exempt such transactions from the margin, capital, clearing and
execution, and real-time reporting requirements of Title VII.
The bill would also prohibit affiliate transactions from being
used as a factor in defining a security-based swap dealer or
major security-based swap participant.
Background and Need for Legislation
Inter-affiliate swaps allow a company with subsidiaries and
affiliates to better manage risk by transferring the risk of
its affiliates to a single affiliate and then executing swaps
through that affiliate. Inter-affiliate swaps do not pose a
systemic risk because they do not create additional
counterparty exposures or increase the interconnectedness
between parties outside the corporate group. Currently,
companies use inter-affiliate swaps to combine positions and
centrally hedge risk. This is accomplished by executing most or
all of its external swaps or security-based swaps through a
single or limited number of affiliates.
Despite the significant differences between inter-affiliate
swaps and swaps between unrelated parties, the Dodd-Frank Act
treats these swaps the same, which needlessly increases the
cost of hedging risk for end-users.
At an October 14, 2011, hearing of the Capital Markets and
Government Sponsored Enterprises Subcommittee, Ms. Brenda
Boultwood of Constellation Energy testified on behalf of the
Coalition for Derivatives End-Users that:
Constellation Energy, like many other companies, uses
a business model through which we limit the number of
affiliates within our corporation that enters into
derivatives transactions with external and other swap
dealer counterparties. Rather than having each
corporate subsidiary transact individually with
external counterparties, a single or limited number of
corporate entities face dealers and other
counterparties in the market. This helps our company
centralize risk taking, accountability and performance
management. These entities then allocate transactions
to those affiliates seeking to mitigate the underlying
risk. This allocation is done by way of
``interaffiliate swaps''--or swaps between commonly
controlled entities. This structure allows us to more
effectively manage our corporate risk on an enterprise
basis and to secure better pricing on our derivatives
transactions. The transactions are largely
``bookkeeping'' in nature and do not create systemic
risk. Using affiliates to transact has always been a
healthy part of the way many companies internally
centralize risk and manage overall performance.
Further, Ms. Boultwood testified that H.R. 2779 ``would
exempt a category of swaps, not a particular type of entity
from regulation. That is precisely what the Administration did
in exempting foreign exchange swaps and forwards and it is the
right approach here as well.''
Hearings
On October 14, 2011, the Subcommittee on Capital Markets
and Government Sponsored Enterprises held a hearing entitled
``Legislative Proposals to Bring Certainty to the Over-the-
Counter Derivatives Market,'' to consider H.R. 2779, and four
other bills. The following witnesses testified:
Mr. Keith Bailey, Managing Director, Fixed
Income, Currencies and Commodities, Barclays Capital,
on behalf of the Institute of International Bankers
Mr. Shawn Bernardo, Senior Managing
Director, Tullett Prebon, on behalf of the Wholesale
Market Brokers' Association Americas
Ms. Brenda Boultwood, Chief Risk Officer and
Senior Vice President, CE Risk Management Division
Office, Constellation Energy, on behalf of the
Coalition of Derivatives End-Users
Mr. James Cawley, CEO, Javelin Capital
Markets LLC
Mr. Kent Mason, Davis & Harman LLP, on
behalf of the American Benefits Council and the
Committee on the Investment of Employee Benefit Assets
Mr. Conrad Voldstad, Chief Executive
Officer, International Swaps and Derivatives
Association
Committee Consideration
The Subcommittee on Capital Markets and Government
Sponsored Enterprises met in open session on November 15, 2011,
and ordered H.R. 2779 favorably reported to the full Committee
by a record vote of 23 yeas, 6 nays and 1 present (Record vote
no. CM-42).
The Committee on Financial Services met in open session on
November 30, 2011, and ordered H.R. 2779, as amended, favorably
reported to the House by a record vote of 53 yeas and 0 nays
(Record vote no. FC-53).
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. A
motion by Chairman Bachus to report the bill, as amended, to
the House with a favorable recommendation was agreed to by a
record vote of 53 yeas and 0 nays (Record vote no. FC-53). The
names of Members voting for and against follow:
RECORD VOTE NO. FC-53
----------------------------------------------------------------------------------------------------------------
Representative Aye Nay Present Representative Aye Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Bachus..................... X ........ ......... Mr. Frank (MA)... X ........ .........
Mr. Hensarling................. X ........ ......... Ms. Waters....... X ........ .........
Mr. King (NY).................. X ........ ......... Mrs. Maloney..... X ........ .........
Mr. Royce...................... X ........ ......... Mr. Gutierrez.... ........ ........ .........
Mr. Lucas...................... X ........ ......... Ms. Velazquez.... ........ ........ .........
Mr. Paul....................... ........ ........ ......... Mr. Watt......... X ........ .........
Mr. Manzullo................... X ........ ......... Mr. Ackerman..... X ........ .........
Mr. Jones...................... X ........ ......... Mr. Sherman...... X ........ .........
Mrs. Biggert................... X ........ ......... Mr. Meeks........ X ........ .........
Mr. Gary G. Miller (CA)........ X ........ ......... Mr. Capuano...... X ........ .........
Mrs. Capito.................... X ........ ......... Mr. Hinojosa..... X ........ .........
Mr. Garrett.................... X ........ ......... Mr. Clay......... X ........ .........
Mr. Neugebauer................. X ........ ......... Mrs. McCarthy X ........ .........
(NY).
Mr. McHenry.................... X ........ ......... Mr. Baca......... X ........ .........
Mr. Campbell................... X ........ ......... Mr. Lynch........ X ........ .........
Mrs. Bachmann.................. ........ ........ ......... Mr. Miller (NC).. X ........ .........
Mr. McCotter................... X ........ ......... Mr. David Scott X
(GA).
Mr. McCarthy (CA).............. X ........ ......... Mr. Al Green (TX) ........ ........ .........
Mr. Pearce..................... X ........ ......... Mr. Cleaver...... X ........ .........
Mr. Posey...................... X ........ ......... Ms. Moore........ ........ ........ .........
Mr. Fitzpatrick................ X ........ ......... Mr. Ellison...... X ........ .........
Mr. Westmoreland............... X ........ ......... Mr. Perlmutter... X ........ .........
Mr. Luetkemeyer................ X ........ ......... Mr. Donnelly..... X ........ .........
Mr. Huizenga................... X ........ ......... Mr. Carson....... ........ ........ .........
Mr. Duffy...................... X ........ ......... Mr. Himes........ X ........ .........
Ms. Hayworth................... X ........ ......... Mr. Peters....... X ........ .........
Mr. Renacci.................... X ........ ......... Mr. Carney....... ........ ........ .........
Mr. Hurt....................... X
Mr. Dold....................... X
Mr. Schweikert................. X
Mr. Grimm...................... X
Mr. Canseco.................... X
Mr. Stivers.................... X
Mr. Fincher.................... X
----------------------------------------------------------------------------------------------------------------
During the Committee consideration of H.R. 2779, the
following amendment and motion were considered:
1. An amendment offered by Ms. Moore and Mr. Stivers, no.
1, to narrow the scope of the affiliate exemption, provide a
new definition of ``affiliate,'' preserve the Federal Reserve
Act's authority, protect insurance and guaranty funds, and
allow the Securities and Exchange Commission (SEC) to prescribe
rules to prevent evasion of the requirements of the Act, was
agreed to by voice vote.
2. A motion offered by Mr. Bachus to move the previous
question on H.R. 2779 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. 2779 is to exempt inter-affiliate
swaps and security-based swap trades from the margin, clearing,
and reporting requirements of the Dodd-Frank Act. Inter-
affiliate swaps are swaps and security-based swaps executed
between entities under common corporate ownership. Inter-
affiliate swaps allow a company with subsidiaries and
affiliates to better manage risk by transferring the risk of
its affiliates to a single affiliate and then executing swaps
through that affiliate. Inter-affiliate swaps do not pose a
systemic risk because they do not create additional
counterparty exposures or increase the interconnectedness
between parties outside the corporate group. Currently,
companies use inter-affiliate swaps to combine positions and
centrally hedge risk. This is accomplished by executing most or
all of its external swaps or security-based swap trades through
a single or limited number of affiliates.
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. 2779, a bill to
exempt inter-affiliate swaps from certain regulatory
requirements put in place by the Dodd-Frank Wall Street Reform
and Consumer Protection Act.
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. 2779--A bill to exempt inter-affiliate swaps from certain
regulatory requirements put in place by the Dodd-Frank Wall
Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection
Act (Public Law 111-203) requires that participants in swap
transactions meet certain clearing, reporting, and margin
requirements as well as certain business conduct standards. (A
swap is a contract that calls for an exchange of cash between
two participants, based on an underlying rate or index or the
performance of an asset). H.R. 2779 would exempt from the
definition of a swap those transactions in which the parties
are affiliates as defined in the bill; thus, affiliated parties
that enter into swap transactions would be exempt from those
clearing, reporting, margin and business conduct requirements.
Neither the Commodity Futures Trading Commission nor the
Securities and Exchange Commission (the agencies required to
develop and enforce regulations related to swap transactions)
has finalized regulations related to swap transactions. Based
on information from the two agencies, CBO expects that
incorporating the provisions of H.R. 2779 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.
2779 would not affect direct spending or revenues; therefore,
pay-as-you-go procedures do not apply.
H.R. 2779 would impose an intergovernmental mandate as
defined in the Unfunded Mandates Reform Act (UMRA) by
prohibiting state regulators from requiring insurance companies
to report their holdings of inter-affiliate swaps on their
annual statements. Because the limit on state authority would
not require the expenditure of funds, CBO estimates that the
bill would impose no costs on state, local, or tribal
governments.
The bill contains no private-sector mandates as defined in
UMRA.
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 the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
H.R. 2779 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. Treatment of affiliate transactions
This section amends Section 1(a)(47) of the Commodity
Exchange Act, as added by Section 721(a)(21) of the Dodd-Frank
Act, by stating that the term ``swap'' is not considered a
``swap'' as defined under Dodd-Frank so long as the transaction
is between a party that is controlling, controlled by, or under
common control with its counterparty. This section also
requires that all swaps defined under the section shall be
reported to a swap data repository, or if one does not exist,
to the Commodity Futures Trading Commission within a time
period to be prescribed by the Commission.
This section also amends Section 3(a)(68) of the Securities
Exchange Act of 1934, as added by Section 761(a)(6) of the
Dodd-Frank Act, by stating that the term ``security-based
swap'' is not considered a ``security-based swap'' for purposes
of clearing and execution requirements; any applicable margin
and capital requirements; defining a security-based swap dealer
or a major security-based swap participant; and reporting
requirements other than the requirement that all transactions
be reported to a security-based swap data repository or to the
Securities and Exchange Commission within a time period to be
prescribed by the Commission.
This section also preserves the power to regulate security-
based swap transactions under Sections 23A and 23B of the
Federal Reserve Act. This section also provides for protection
of federal and state regulators of insurance and guaranty funds
to exercise their existing authority to protect the integrity
of a fund, except that such regulator shall not have the
ability to subject security-based swaps to clearing and
execution requirements, any applicable margin and capital
requirements, or any reporting requirements established under
the Dodd-Frank Act other than the reporting requirements
already set forth in this section. Additionally, this section
allows the SEC to prescribe rules to govern security-based
swaps to prevent transactions from being structured as an
affiliate transaction for the purposes of avoiding regulation
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. 1A. DEFINITIONS.
As used in this Act:
(1) * * *
* * * * * * *
(47) Swap.--
(A) * * *
* * * * * * *
(G) Treatment of affiliate transactions.--
(i) In general.--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 a
party that is controlling,
controlled by, or under common
control with its counterparty.
(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 swaps, to the Commission
pursuant to section 4r within such time
period as the Commission may by rule or
regulation prescribe.
* * * * * * *
----------
SECURITIES EXCHANGE ACT OF 1934
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
DEFINITIONS AND APPLICATION OF TITLE
Sec. 3. (a) When used in this title, unless the context
otherwise requires--
(1) * * *
* * * * * * *
(68) Security-based swap.--
(A) * * *
* * * * * * *
(F) Treatment of affiliate transactions.--
(i) In general.--For the purposes of
any clearing and execution requirements
under sections 3C and any applicable
margin and capital requirements of
section 15F(e), and for purposes of
defining a 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 an affiliated company
reports information or prepares
financial statements on a
consolidated basis for both
parties.
(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
security-based swaps, 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 other than those set forth
in clause (ii).
(v) Prevention of evasion.--The
Commission may prescribe rules under
this subparagraph (and issue
interpretations of rules prescribed
under this subparagraph) 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 as an
affiliate transaction to evade the
requirements of this Act applicable to
security-based swaps.
* * * * * * *