[House Report 112-344]
[From the U.S. Government Publishing Office]
112th Congress Rept. 112-344
HOUSE OF REPRESENTATIVES
2d Session Part 2
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TO EXEMPT INTER-AFFILIATE SWAPS FROM CERTAIN REGULATORY REQUIREMENTS
PUT IN PLACE BY THE DODD-FRANK WALL STREET REFORM AND CONSUMER
PROTECTION ACT
_______
February 8, 2012.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Lucas, from the Committee on Agriculture, 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 Agriculture, 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. 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 a swap dealer or a 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 an affiliated
company 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 a swap data
repository from publically reporting the
information submitted pursuant to this clause.
``(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 between affiliated
companies to clearing and execution
requirements under section 2, to any applicable
margin and capital requirements of section
4s(e), or to reporting requirements of the Wall
Street Transparency and Accountability Act of
2010 other than those set forth in clause (ii).
``(iv) Preservation of federal banking
agencies' authority.--Nothing in this section
shall affect the Federal banking agencies'
safety-and-soundness authorities established in
law other than title VII of P.L. 111-203,
including with respect to the authority of the
agencies to impose capital requirements on a
bank with regard to swaps. For purposes of this
clause, the term `bank' shall be defined
pursuant to section 3(6) of the Securities
Exchange Act of 1934, and the term `swap' shall
be defined pursuant to title VII of P.L. 111-
203.''.
(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.--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 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 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.''.
SEC. 2. IMPLEMENTATION.
The amendments made by this 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; and
(2) through the promulgation of an interim final rule.
Brief Explanation
Inter-affiliate swaps are swaps that are executed between
entities that are under common corporate ownership. H.R. 2779
amends the Commodity Exchange Act to provide an exemption for
inter-affiliate swaps from the clearing and execution
requirements, margin and capital requirements, real time
reporting requirements and from consideration with regard to
whether entities are swap dealers or major swap participants
under Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (P.L. 111-203) (the Dodd-Frank Act).
H.R. 2779 does provide, however, that inter-affiliate swaps
must be reported to a swap data repository, and therefore be
transparent to regulators. The bill provides mirroring
exemptions for inter-affiliate security-based swaps under the
Securities Exchange Act of 1934.
Purpose and Need
A common corporate structure is for a parent company to
have multiple affiliates within a single corporate group.
Individually, these affiliates may seek to offset their
business risks through swaps. However, rather than having each
affiliate go directly to the market to engage in a swap with a
dealer counterparty individually, many companies will employ a
business model in which only a single or limited number of
corporate entities within the group face dealers. These
designated external facing entities will then allocate the
transaction and its risk mitigating benefits to the affiliate
seeking to mitigate its underlying risk. These transactions are
known as ``inter-affiliate swaps.''
Companies that use this business model argue that it
reduces the overall credit risk a corporate group poses to the
market because they can net their positions across affiliates,
reducing the number of external facing transactions overall. In
addition, it permits a company to enhance its efficiency by
centralizing its risk management expertise in a single or
limited number of affiliates.
Dodd-Frank is largely silent on the regulatory treatment of
inter-affiliate swaps, and the regulators have not provided any
further guidance. Should these inter-affiliate transactions be
treated as all other swaps, they could be subject to clearing,
execution and margin requirements. Companies that use inter-
affiliate swaps are concerned that this could substantially
increase their costs, without any real reduction in risk in
light of the fact that these swaps are purely for internal use.
For example, these swaps could be ``double-margined''--when the
centralized entity faces an external swap dealer, and then
again when the same transaction is allocated internally to the
affiliate that sought to hedge the risk.
The uncertainty that exists regarding the treatment of
inter-affiliate swaps spans multiple rulemakings that have been
proposed or that will be proposed pursuant to the Dodd-Frank
Act. H.R. 2779 provides certainty and clarification that inter-
affiliate transactions, when the parties to the transaction are
under common control, are not to be regulated as swaps. The
bill does, however, require that all affiliate transactions be
reported to a swap data repository to provide transparency to
regulators with regard to this activity within corporate
groups.
Section-by-Section
Section 1(a) amends the Commodity Exchange act to exclude
from the definition of the term ``swap'' swap transactions
involving a party that is controlling, controlled by or under
common control with its counterparty. These transactions must
be reported to a swap data repository or to the CFTC.
Section 1(b) is a similar amendment to the Securities
Exchange Act's definition of a security-based swap.
Section 2 excludes the amendments made by this bill from
the requirements of the Paperwork Reduction Act and from notice
and comment requirements of the Administrative Procedure Act.
Committee Consideration
I. HEARINGS
In the 112th Congress, the Committee has held seven
hearings, four Full Committee and two General Farm Commodities
and Risk Management Subcommittee hearings to examine the
implementation of Title VII of the Dodd-Frank Act and one Full
Committee hearing to examine legislative proposals related
thereto, including H.R. 2779. The Committee took testimony from
witnesses that represented a broad spectrum of participants in
the derivatives markets.
For example, on October 12, 2011, in the hearing ``To
review legislative proposals amending Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act'' Ms.
Brenda Boultwood, witness for Constellation Energy on behalf of
the Coalition for Derivatives End-users testified:
``We strongly support the Stivers-Fudge bill, which
recognizes that inter-affiliate swaps do not create
systemic risk and that consequently, as a category,
inter-affiliate swaps should be subject to regulation
as if they were outward-facing. The Stivers-Fudge bill
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.''
II. FULL COMMITTEE
The Committee on Agriculture met, pursuant to notice, with
a quorum present, on January 25, 2012, to consider 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, and other pending business.
Chairman Lucas offered an opening statement, as did Ranking
Member Peterson and Ms. Fudge.
By unanimous consent, the Subcommittee on General Farm
Commodities and Risk Management was discharged from further
consideration and the bill, H.R. 2779 was placed before the
Committee for consideration and without objection a first
reading of the bill was waived and it was opened for amendment
at any point. The Chairman offered an Amendment in the Nature
of a Substitute to the bill, and counsel provided a brief
explanation of the amendment.
Mr. Peterson was recognized to offer and explain an
amendment to expedite implementation by excluding the
amendments made by the bill from the requirements of the
Paperwork Reduction Act and from notice and comment
requirements of the Administrative Procedure Act. By a voice
vote the Peterson amendment was adopted.
There being no further amendments, the Peterson motion to
approve the Amendment in the Nature of a Substitute to H.R.
2779, as amended was adopted by a voice vote.
By a voice vote, the Peterson motion to report the bill
favorably to the House with the recommendation that it do pass
was adopted.
The Committee then moved onto other pending business, where
at the conclusion of the meeting, Chairman Lucas advised
Members that pursuant to the rules of the House of
Representatives that Members have 2 calendar days to file such
views with the Committee.
Without objection, staff was given permission to make any
necessary clerical, technical or conforming changes to reflect
the intent of the Committee.
Chairman Lucas thanked all the Members and adjourned the
meeting.
Reporting the Bill--Roll Call Votes
In compliance with clause 3(b) of rule XIII of the House of
Representatives, H.R. 2779 was reported by voice vote with a
majority quorum present. There was no request for a recorded
vote.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee on Agriculture's
oversight findings and recommendations are reflected in the
body of this report.
Budget Act Compliance (Sections 308, 402, and 423)
The provisions of clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives and section 308(a)(1) of the
Congressional Budget Act of 1974 (relating to estimates of new
budget authority, new spending authority, new credit authority,
or increased or decreased revenues or tax expenditures) are not
considered applicable. The estimate and comparison required to
be prepared by the Director of the Congressional Budget Office
under clause 3(c)(3) of rule XIII of the Rules of the House of
Representatives and sections 402 and 423 of the Congressional
Budget Act of 1974 submitted to the Committee prior to the
filing of this report are as follows:
February 6, 2012.
Hon. Frank D. Lucas,
Chairman, Committee on Agriculture,
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 standards of business conduct.
(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 (SEC)--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.
Further, under current law, the SEC is authorized to collect
fees sufficient to offset its appropriation each year; CBO
expects that the agency would set fee rates each year to offset
amounts provided in appropriation acts. Enacting H.R. 2779
would not affect direct spending or revenues; therefore, pay-
as-you-go procedures do not apply.
H.R. 2779 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would not affect the budgets of state, local, and tribal
governments.
On December 14, 2011, CBO transmitted an 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, as ordered reported
by the House Committee on Financial Services on November 30,
2011. The Financial Services Committee version of the bill
would make similar changes in regulatory requirements for swaps
entered into between affiliated parties. CBO estimates that the
cost to implement either version of the legislation would be
insignificant.
The CBO staff contact for this estimate is Susan Willie.
The estimate was approved by Theresa Gullo, Deputy Assistant
Director for Budget Analysis.
Performance Goals and Objectives
With respect to the requirement of clause 3(c)(4) of rule
XIII of the Rules of the House of Representatives, the
performance goals and objectives of this legislation are to
exempt inter-affiliate swaps from certain regulatory
requirements puts in place by the Dodd-Frank Wall Street Reform
and Consumer Protection Act.
Constitutional Authority Statement
The Committee finds the constitutional authority for this
legislation in Article I, section 8, clause 18, that grants
Congress the power to make all laws necessary and proper for
carrying out the powers vested in Congress by the Constitution
of the United States or in any department or officer thereof.
Committee Cost Estimate
Pursuant to clause 3(d)(2) of rule XIII of the Rules of the
House of Representatives, the Committee report incorporates the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to sections 402 and 423 of the
Congressional Budget Act of 1974.
Advisory Committee Statement
No advisory committee within the meaning of section 5(b) of
the Federal Advisory Committee Act was created by this
legislation.
Applicability to the 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 (Public Law
104-1).
Federal Mandates Statement
The Committee adopted 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 (Public Law 104-4).
Earmark Statement Required by Clause 9 of Rule XXI of the Rules of the
House of Representatives
H.R. 2779 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9(e), 9(f), or 9(g) of rule XXI of the Rules of the
House of Representatives.
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.--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 a swap dealer or a 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 an affiliated company
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 a
swap data repository from publically
reporting the information submitted
pursuant to this clause.
(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 between affiliated
companies to clearing and execution
requirements under section 2, to any
applicable margin and capital
requirements of section 4s(e), or to
reporting requirements of the Wall
Street Transparency and Accountability
Act of 2010 other than those set forth
in clause (ii).
(iv) Preservation of federal banking
agencies' authority.--Nothing in this
section shall affect the Federal
banking agencies' safety-and-soundness
authorities established in law other
than title VII of P.L. 111-203,
including with respect to the authority
of the agencies to impose capital
requirements on a bank with regard to
swaps. For purposes of this clause, the
term ``bank'' shall be defined pursuant
to section 3(6) of the Securities
Exchange Act of 1934, and the term
``swap'' shall be defined pursuant to
title VII of P.L. 111-203.
* * * * * * *
----------
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.--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 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 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.
* * * * * * *