[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.

           *       *       *       *       *       *       *


                                  
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