[House Report 112-345]
[From the U.S. Government Publishing Office]


112th Congress  }                                      {  Rept. 112-345
  2d Session    }       HOUSE OF REPRESENTATIVES       {         Part 2
=======================================================================
 
               SWAP EXECUTION FACILITY CLARIFICATION 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

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 2586]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Agriculture, to whom was referred the bill 
(H.R. 2586) to refine the definition of swap execution facility 
in the provisions regulating swap markets added by title VII of 
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. SHORT TITLE.

  This Act may be cited as the ``Swap Execution Facility Clarification 
Act''.

SEC. 2. DEFINITION OF SWAP EXECUTION FACILITY.

  (a) Commodity Exchange Act.--Section 1a(50) of the Commodity Exchange 
Act (7 U.S.C. 1a(50)) is amended--
          (1) by striking ``The term'' and inserting the following:
                  ``(A) In general.--The term'';
          (2) by redesignating subparagraphs (A) and (B) as clauses (i) 
        and (ii), respectively, and increasing the indentation of each 
        such provision by 2 ems; and
          (3) by adding at the end the following:
                  ``(B) Interpretation.--In interpreting or further 
                defining the term `swap execution facility', the 
                Commission shall not require a swap execution facility 
                to--
                          ``(i) have a minimum number of participants 
                        receive a bid or offer or respond to any method 
                        of trading functionality;
                          ``(ii) delay bids or offers for any period of 
                        time; or
                          ``(iii) limit the means of interstate 
                        commerce utilized by market participants to 
                        enter into and execute any swap transactions on 
                        the method of trading functionality.''.
  (b) Securities Exchange Act of 1934.--Section 3(a)(77) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77)), as added by 
section 761(a)(6) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, is amended--
          (1) by striking ``The term'' and inserting the following:
                  ``(A) In general.--The term'';
          (2) by redesignating subparagraphs (A) and (B) as clauses (i) 
        and (ii), respectively, and increasing the indentation of each 
        such provision by 2 ems; and
          (3) by adding at the end the following:
                  ``(B) Interpretation.--In interpreting or further 
                defining the term `security-based swap execution 
                facility', the Commission shall not require a security-
                based swap execution facility to--
                          ``(i) have a minimum number of participants 
                        receive a bid or offer or respond to any 
                        trading system or platform functionality;
                          ``(ii) display or delay bids or offers for 
                        any period of time;
                          ``(iii) limit the means of interstate 
                        commerce utilized by market participants to 
                        enter into and execute any security-based swap 
                        transactions on the trading system or platform; 
                        or
                          ``(iv) require bids or offers on one trading 
                        system or platform operated by the swap 
                        execution facility to interact with bids or 
                        offers on another trading system or platform 
                        operated by the swap execution facility.''.

SEC. 3. 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

    The Dodd-Frank Wall Street Reform and Protection Act (P.L. 
111-203) (the Dodd-Frank Act) mandates that all swaps required 
to be cleared must also be submitted for trading on a regulated 
exchange or a ``swap execution facility'' (SEF). While Dodd-
Frank provides a statutory definition of SEF, the Commodity 
Futures Trading Commission (CFTC), and the Securities and 
Exchange Commission (SEC) with regard to security-based swap 
execution facilities, are granted authority to further define 
the term. H.R. 2586 is aimed at clarifying congressional intent 
with regard to the further definition of SEF by prohibiting the 
CFTC from: requiring a SEF to have a minimum number of 
participants receive bids or offers through a Request for Quote 
system (RFQ), requiring SEFs to delay bids or offers for a 
specific time period, and limiting the use of any means of 
interstate commerce to execute swap transactions. There are 
mirroring provisions placing prohibitions on the SEC's ability 
to further define security-based swap execution facilities.

                            Purpose and Need

    Section 1a(50) of the Commodity Exchange Act as amended by 
Section 721(a)(50) of Dodd-Frank defines a SEF as ``a trading 
system or platform in which multiple participants have the 
ability to execute or trade swaps by accepting bids and offers 
made by multiple market participants in the facility or system, 
through any means of interstate commerce . . .'' The CFTC is 
then given authority to further define the term and establish 
requirements for SEFs. There is a mirroring provision in 
Subtitle B of Title VII related to security-based swap 
execution facilities with authority granted to the SEC to 
further define the term.
    In the CFTC's proposed rule ``Core Principles and Other 
Requirements for Swap Execution Facilities,'' the CFTC requires 
that a SEF either execute trades on an ``order book'' or 
``Request for Quote'' system. An order book model is used by 
exchanges, where numerous bids and offers are aggregated and 
the market sees the prices at which participants are willing to 
buy and sell. An RFQ allows a customer to transmit a request 
for bids or offers to only certain market participants.
    The CFTC's rule would require that market participants 
submit an RFQ to at least 5 other market participants; the 
SEC's permits an RFQ to go to 1 or more. In addition, the CFTC 
proposed to prohibit ``voice only'' transactions--transactions 
that occur by phone before they are entered into an electronic 
system. In addition, both the SEC and CFTC require that bids 
and offers be displayed for a minimum amount of time before 
execution.
    Market participants have expressed concerns that these 
proposals will reduce liquidity in the swaps markets, by 
requiring that they make known to the market their trading 
strategies ahead of execution. This gives others in the market 
the opportunity to front run the trade, making it more 
expensive for the counterparty to lay off the risk associated 
with the transaction. They have argued for more flexibility in 
mode and method of execution, to allow SEFs to evolve 
naturally.
    The primary provisions in H.R. 2586 prohibit the regulators 
from requiring a minimum number of participants to receive or 
respond to quote requests, in line with the SEC's approach. The 
bill also prohibits the regulators from limiting the means of 
interstate commerce that market participants can use to execute 
swaps (i.e. voice only). In addition, H.R. 2586 prohibits the 
agencies from requiring a SEF to display or delay quotes for 
any specific period of time.
    While SEFs were included in Dodd-Frank as a means to 
improve the pricing that end-users and other market 
participants receive on their swap transactions by enhancing 
transparency, the rigid approach of the CFTC in mandating mode 
and method of execution will actually have the opposite effect. 
Contrary to Congress' intent, it could make swaps more 
expensive for market participants. H.R. 2586 is needed to 
ensure the regulatory agencies provide enough flexibility, 
particularly in the initial stages of developing this new 
market infrastructure, to permit SEFs to evolve naturally 
toward the best mode of execution, without imposing undue costs 
on market participants.

                           Section-by-Section

    Section 1 is the short title, ``Swap Execution Facility 
Clarification Act''
    Section 2(a) amends the Commodity Exchange Act to prohibit 
the Commodity Futures Trading Commission from defining a Swap 
Execution Facility (SEF) to require a minimum number of 
participants that receive bids or offers; place a timing 
requirement on displaying bids or offers; limit the means of 
interstate commerce used by market participants to enter into 
or execute swap transactions on the trading system or platform, 
or require bids or offers on one trading system or platform 
operated by the SEF to interact with bids and offers on another 
trading system or platform operated by the SEF.
    Section 2(b) has a similar amendment to the Securities and 
Exchange Act.
    Section 3 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. 2586. The Committee took testimony from 
witnesses that represented a broad spectrum of participants in 
the derivatives markets.
    In the following hearings, witnesses testified to the 
importance of clarifying the definition of ``swap execution 
facility'' (SEF) to allow SEFs to evolve naturally toward the 
best mode of execution, without imposing undue costs on market 
participants:

Public hearing to review implementation of title VII of the Dodd-Frank 
        Wall Street Reform and Consumer Protection Act: February 10, 
        2011

Public hearing to review implementation of title VII of the Dodd-Frank 
        Wall Street Reform and Consumer Protection Act, Part II: 
        February 15, 2011

To review legislative proposals amending Title VII of the Dodd-Frank 
        Wall Street Reform and Consumer Protection Act: October 12, 
        2011

    For example, on October 12, Mr. Chris Giancarlo of GFI 
Group, on behalf of the Wholesale Markets Brokers Association, 
Americas testified:

          ``Mr. Chairman, introduction, consideration, and 
        passage of the SEF Clarification Act will provide 
        regulators with a clear expression of Congress' 
        legislative intent and ensure that the final rules 
        remain within the framework of competitive OTC markets. 
        The WMBAA remains concerned, as it has expressed in its 
        comment letters to the SEC and the CFTC, that 
        limitations on permitted modes of trade execution or 
        requirements to display or delay quotes will cause 
        significant disruptions to OTC swaps markets with the 
        potential to drive trading offshore. We question what 
        substantive analysis has been done on the economic 
        effects of the CFTC proposed rule, which could run up 
        transaction costs in the U.S. swaps markets.''

                           II. FULL COMMITTEE

    The Committee on Agriculture met, pursuant to notice, with 
a quorum present, on January 25, 2012, to consider H.R. 2586, 
to refine the definition of swap execution facility in the 
provisions regulating swap markets added by title VII of 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.
    By unanimous consent, the Subcommittee on General Farm 
Commodities and Risk Management was discharged from further 
consideration and the bill, H.R. 2586 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 and modifies 
the applicable to the CFTC in interpreting or further defining 
the term ``swap execution facility''. 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. 
2586, 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.
    Chairman Lucas then 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 Rules of 
the House of Representatives, H.R. 2586 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. 2586, the Swap 
Execution Facility Clarification 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. 2586--Swap Execution Facility Clarification Act

    The Dodd-Frank Wall Street Reform and Consumer Protection 
Act established entities known as swap execution facilities 
(SEFs) where multiple parties are able to trade swaps. (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.)
    H.R. 2586 would amend the definition of an SEF to prevent 
the regulatory agencies--the Commodity Futures Trading 
Commission (CFTC) and the Securities and Exchange Commission 
(SEC)--from imposing certain requirements on such facilities. 
Specifically, the bill would prevent the agencies from 
developing regulations that require an SEF to follow certain 
business practices, such as setting a minimum number of 
participants to receive a bid.
    Neither the CFTC nor the SEC has finalized regulations 
regarding swap execution facilities. Based on information from 
the two agencies, CBO expects that incorporating the provisions 
of H.R. 2586 at this point in the regulatory process would not 
have a significant effect on 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. 
2586 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 impose no costs on state, local, or tribal governments.
    On December 14, 2011, CBO transmitted an estimate for H.R. 
2586, the Swap Execution Facility Clarification Act, as ordered 
reported by the House Committee on Financial Services on 
November 30, 2011. The earlier bill would make similar changes 
in the definition of a swap execution facility. CBO estimates 
that enacting either version of the legislation would have an 
insignificant cost.
    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 
refine the definition of swap execution facility in the 
provisions regulating swap markets added by title VII of 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. 2586 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 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 (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

                         COMMODITY EXCHANGE ACT




           *       *       *       *       *       *       *
SEC. 1A. DEFINITIONS.

  As used in this Act:
          (1) * * *

           *       *       *       *       *       *       *

          (50) Swap execution facility.--[The term]
                  (A) In general.--The term ``swap execution 
                facility'' means a trading system or platform 
                in which multiple participants have the ability 
                to execute or trade swaps by accepting bids and 
                offers made by multiple participants in the 
                facility or system, through any means of 
                interstate commerce, including any trading 
                facility, that--
                          [(A)] (i) facilitates the execution 
                        of swaps between persons; and
                          [(B)] (ii) is not a designated 
                        contract market.
                  (B) Interpretation.--In interpreting or 
                further defining the term ``swap execution 
                facility'', the Commission shall not require a 
                swap execution facility to--
                          (i) have a minimum number of 
                        participants receive a bid or offer or 
                        respond to any method of trading 
                        functionality;
                          (ii) delay bids or offers for any 
                        period of time; or
                          (iii) limit the means of interstate 
                        commerce utilized by market 
                        participants to enter into and execute 
                        any swap transactions on the method of 
                        trading functionality.

           *       *       *       *       *       *       *

                              ----------                              


                    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) * * *

           *       *       *       *       *       *       *

          (77) Security-based swap execution facility.--[The 
        term]
                  (A) In general.--The term ``security-based 
                swap execution facility'' means a trading 
                system or platform in which multiple 
                participants have the ability to execute or 
                trade security-based swaps by accepting bids 
                and offers made by multiple participants in the 
                facility or system, through any means of 
                interstate commerce, including any trading 
                facility, that--
                          [(A)] (i) facilitates the execution 
                        of security-based swaps between 
                        persons; and
                          [(B)] (ii) is not a national 
                        securities exchange.
                  (B) Interpretation.--In interpreting or 
                further defining the term ``security-based swap 
                execution facility'', the Commission shall not 
                require a security-based swap execution 
                facility to--
                          (i) have a minimum number of 
                        participants receive a bid or offer or 
                        respond to any trading system or 
                        platform functionality;
                          (ii) display or delay bids or offers 
                        for any period of time;
                          (iii) limit the means of interstate 
                        commerce utilized by market 
                        participants to enter into and execute 
                        any security-based swap transactions on 
                        the trading system or platform; or
                          (iv) require bids or offers on one 
                        trading system or platform operated by 
                        the swap execution facility to interact 
                        with bids or offers on another trading 
                        system or platform operated by the swap 
                        execution facility.

           *       *       *       *       *       *       *


                            ADDITIONAL VIEWS

    For the past year, our Committee has held several hearings 
and listened to a host of stakeholders who are concerned about 
how the Dodd-Frank Act is being implemented with regard to 
improving oversight and accountability in derivative markets. I 
recommended patience and caution for those seeking to change 
the law. It is premature to move on legislation until we see 
the final rules. Looking at the Dodd-Frank rules that have 
already been finalized by the CFTC, it is safe to say that, so 
far, the CFTC has done a pretty good job.
    The battle over H.R. 2586 is primarily a Wall Street 
battle. It is between those who currently do most of the swap 
business--the major banks--and those that wish to challenge 
them for that business. The CFTC has proposed rules to help 
open up this market, provide greater pre-trade transparency and 
lead to greater competition.
    Some are concerned that parts of the CFTC's proposed rules 
governing swap execution facilities (SEFs) are arbitrary or 
prohibit certain means of swap trading. Others support many 
aspects of the proposed rule as positive steps toward ensuring 
these new swaps marketplaces benefit all market participants, 
not just a few. Attached to these additional views are two 
letters, one from the Swaps and Derivatives Markets Association 
and another from the Industrial Energy Consumers of America. 
Both organizations oppose H.R. 2586. All members should review 
these letters because their concerns merit our attention. These 
SEFs must be open, transparent marketplaces where competition 
governs.
    To that end, the Peterson Amendment was offered to H.R. 
2586. It removed provisions of H.R. 2586 that limit the CFTC's 
ability to bring transparency to these new markets. The 
Peterson amendment does not satisfy the objections of those who 
oppose H.R. 2586 but it does take a step in the right 
direction.
    Finally, as part of the Peterson Amendment, the Committee 
approved language that should look very familiar to Farm Bill 
veterans. It is the exact same provisions that we incorporate 
in each Farm Bill for implementation of the Title I commodity 
programs. In that context, it exempts USDA from provisions of 
the Paperwork Reduction Act and notice and comment provisions 
of the Administrative Procedures Act.
    With this change, comments can still be sent to the CFTC. 
Anyone would still be able to meet with CFTC officials to share 
their thoughts on how these bills should be implemented. Farm 
groups certainly did not have any trouble sharing their views 
on Farm Bill implementation. Given the openness the CFTC has 
already demonstrated, this provision will not hurt anyone's 
ability to provide input to the CFTC.
                                   Collin C. Peterson.
                                   Joe Courtney.
                                   James P. McGovern.
                                   Chellie Pingree.
                                   Timothy J. Walz.
                                   Jim Costa.
                                   Peter Welch.

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