[House Report 113-229]
[From the U.S. Government Publishing Office]
113th Congress Rept. 113-229
HOUSE OF REPRESENTATIVES
1st Session Part 1
======================================================================
SWAPS REGULATORY IMPROVEMENT ACT
_______
September 25, 2013.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services,
submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 992]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 992) to amend provisions in section 716 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act
relating to Federal assistance for swaps entities, having
considered the same, report favorably thereon without amendment
and recommend that the bill do pass.
Purpose and Summary
H.R. 992, the Swaps Regulatory Improvement Act, amends
Section 716 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Pub. L. No. 111-203) (the ``Dodd-Frank Act'')
to allow covered depository institutions to trade swaps (other
than certain structured finance swaps) with their affiliates.
Under the legislation, the only swaps that covered depository
institutions must spin out to separately capitalized entities
are structured finance swaps unless they are undertaken for
hedging or risk management purposes or expressly permitted by
prudential regulators to take place in a covered depository
institution. The bill also ensures that uninsured U.S. branches
and agencies of foreign banks are treated the same as insured
depository institutions by defining both groups as ``covered
depository institutions.
These amendments to the Dodd-Frank Act mitigate the
potential negative impacts of Section 716. If Section 716 is
left unchanged, it could weaken the U.S. financial system and
place U.S. financial institutions at a competitive disadvantage
to their foreign counterparts.
Background and Need for Legislation
Numerous participants in a variety of markets and
industries use derivatives on a daily basis to hedge risk. Most
types of derivatives were not the cause of the financial
crisis. Swaps based on currencies, interest rates, agricultural
products and equities performed as expected. Despite the
irrelevance of most swaps to the financial crisis, Section 716
of the Dodd-Frank Act required financial institutions to
``push-out'' or ``spin-off'' all of their swaps, with
exemptions for interest rate swaps and swaps that reference
currencies, bullion metals, loans or bank-eligible debt
securities, into a separate company. This requirement is too
broad and over-inclusive. Rep. Randy Hultgren's bill, H.R. 992,
changes the law so that the spin-off requirement applies only
to the most problematic and potentially risky swaps, such as
those whose value derived from the poorly rated and
underwritten mortgages that were at the heart of the financial
crisis. This legislation ensures that the U.S. financial system
is not weakened and that U.S. financial institutions are not
placed at a competitive disadvantage against their foreign
counterparts.
Financial reform should not increase customer costs.
Manufacturers, farmers, and industrial companies--all of whom
use swaps daily in benign and economically beneficial ways--did
not cause the financial crisis. Yet the Dodd-Frank Act sweeps
in thousands of companies that had nothing to do with the
financial crisis and subjects them to increased costs and
additional layers of regulation. As currently constructed,
section 716 of the Dodd-Frank Act would limit the types of
risk-reducing products a bank could provide to a customer to
protect its business from market disruptions. If Congress does
nothing to amend section 716, customers would lose and the
banks would win. Bank customers would have to create expensive
and new business and legal relationships with a new banking
entity to conduct most of their risk-reducing activities,
thereby diverting funds that could otherwise be used to create
jobs, expand their businesses and help the economy.
Section 716 of Dodd-Frank has prompted objections from
Federal Reserve Board Chairman Ben Bernanke, former FDIC
Chairman Sheila Bair, and economists such as Mark Zandi who
said ``section 716 would create significant complications and
counter the efforts to resolve [large financial] firms in an
orderly manner.''
Left unamended, section 716 could result in at least two
negative consequences for the U.S. financial system and U.S.
financial institutions. First, section 716 may make the U.S.
financial system less stable by forcing swap trading into the
unregulated shadow banking system. As Chairman Bernanke has
pointed out, section 716 ``would make the U.S. financial system
less resilient and more susceptible to systemic risk'' because
``forcing [commercial and hedging activities] out of insured
depository institutions would weaken both financial stability
and strong prudential regulation.'' Second, section 716 may
place U.S. financial institutions at a significant competitive
disadvantage against their foreign counterparts because foreign
jurisdictions do not plan to adopt a provision similar to
section 716 in their ongoing efforts to reform the global
derivatives marketplace.
In light of the potential negative consequences, former
Federal Reserve Board Chairman Paul Volcker and Chairman Bair
both expressed reservations about section 716 during the Dodd-
Frank House-Senate Conference Committee's deliberations. Mr.
Volcker stated that the ``provision of derivatives by
commercial banks to their customers in the usual course of a
banking relationship should not be prohibited.'' Chairman Bair
stated that'' by concentrating the activity in an affiliate of
the insured bank, we could end up with less and lower quality
capital, less information and oversight for the FDIC, and
potentially less support for the insured bank in a time of
crisis,'' and that ``one unintended outcome of this provision
would be weakened, not strengthened, protection of the insured
bank and the Deposit Insurance Fund.''
Hearings
The Committee on Financial Services' Subcommittee on
Capital Markets and Government Sponsored Enterprises held a
hearing on H.R. 992 on April 11, 2013.
Committee Consideration
The Committee on Financial Services met in open session on
May 7, 2013, and ordered H.R. 992 to be reported favorably to
the House by a recorded vote of 53 yeas to 6 nays (Record vote
no. FC-14), a quorum being present.
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.
1. A motion by Chairman Hensarling to report the bill (H.R.
992) to the House with a favorable recommendation was agreed to
by a record vote of 53 yeas and 6 nays (Record vote no. FC-14).
RECORD VOTE NO. FC-14
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Hensarling................. X ........ ......... Ms. Waters....... ........ X .........
Mr. Gary G. Miller (CA)........ X ........ ......... Mrs. Maloney (NY) X ........ .........
Mr. Bachus..................... X ........ ......... Ms. Velazquez.... ........ X .........
Mr. King (NY).................. X ........ ......... Mr. Watt......... X ........ .........
Mr. Royce...................... X ........ ......... Mr. Sherman...... X ........ .........
Mr. Lucas...................... X ........ ......... Mr. Meeks........ X ........ .........
Mrs. Capito.................... X ........ ......... Mr. Capuano...... ........ X .........
Mr. Garrett.................... X ........ ......... Mr. Hinojosa..... X ........ .........
Mr. Neugebauer................. X ........ ......... Mr. Clay......... X ........ .........
Mr. McHenry.................... X ........ ......... Mrs. McCarthy X ........ .........
(NY).
Mr. Campbell................... X ........ ......... Mr. Lynch........ ........ X .........
Mrs. Bachmann.................. X ........ ......... Mr. David Scott X ........ .........
(GA).
Mr. McCarthy (CA).............. X ........ ......... Mr. Al Green (TX) ........ X .........
Mr. Pearce..................... ........ ........ ......... Mr. Cleaver...... X ........ .........
Mr. Posey...................... X ........ ......... Ms. Moore........ X ........ .........
Mr. Fitzpatrick................ X ........ ......... Mr. Ellison...... ........ X .........
Mr. Westmoreland............... ........ ........ ......... Mr. Perlmutter... X ........ .........
Mr. Luetkemeyer................ X ........ ......... Mr. Himes........ X ........ .........
Mr. Huizenga (MI).............. X ........ ......... Mr. Peters (MI).. X ........ .........
Mr. Duffy...................... X ........ ......... Mr. Carney....... X ........ .........
Mr. Hurt....................... X ........ ......... Ms. Sewell (AL).. X ........ .........
Mr. Grimm...................... X ........ ......... Mr. Foster....... X ........ .........
Mr. Stivers.................... X ........ ......... Mr. Kildee....... X ........ .........
Mr. Fincher.................... X ........ ......... Mr. Murphy (FL).. X ........ .........
Mr. Stutzman................... X ........ ......... Mr. Delaney...... X ........ .........
Mr. Mulvaney................... X ........ ......... Ms. Sinema....... X ........ .........
Mr. Hultgren................... X ........ ......... Mrs. Beatty...... X ........ .........
Mr. Ross....................... X ........ ......... Mr. Heck (WA).... X ........ .........
Mr. Pittenger.................. X ........ .........
Mrs. Wagner.................... X ........ .........
Mr. Barr....................... X ........ .........
Mr. Cotton..................... X ........ .........
Mr. Rothfus.................... X ........ .........
----------------------------------------------------------------------------------------------------------------
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 states that H.R. 992
will change the types of swaps that financial institutions are
required to spin off to separately capitalized entities.
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 Estimates
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:
U.S. Congress,
Congressional Budget Office,
Washington, DC, May 20, 2013.
Hon. Jeb Hensarling,
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. 992, the Swaps
Regulatory Improvement Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Daniel
Hoople and Barbara Edwards.
Sincerely,
Douglas W. Elmendorf.
Enclosure.
H.R. 992--Swaps Regulatory Improvement Act
H.R. 992 would allow certain financial firms to retain
financial portfolios containing swaps while remaining eligible
for assistance from the Federal Reserve and Federal Deposit
Insurance Corporation (FDIC). A swap is a contract between two
parties to exchange payments based on the price of an
underlying asset or change in interest, exchange, or other
reference rate. Swaps can be used to hedge or mitigate certain
risks associated with a firm's traditional activities, such as
interest rate risk, or to speculate based on expected changes
in prices and rates.
Enacting this legislation could affect direct spending and
revenues; therefore, pay-as-you-go procedures apply. However,
CBO estimates that any impact on the net cash flows of the
Federal Reserve or the FDIC over the next 10 years would not be
significant.
Under current law, federal assistance is not available to
any swaps dealer or major swaps participant registered with the
Securities and Exchange Commission or the Commodity Futures
Trading Commission. Federal assistance includes access to any
Federal Reserve credit facility and discount window (with some
exceptions) and FDIC deposit insurance and guarantees. This
prohibition does not apply to a major swaps participant that is
an insured depository institution (DI) or an IDI acting as a
swaps dealer for hedging purposes or for swaps involving bank-
permissible securities. (Such swaps include those that
reference interest rates, currencies, government securities,
and precious metals. Examples of non-permissible swaps include
equity swaps, commodity and agriculture swaps, energy swaps,
and metal swaps excluding gold and silver.) Under current law,
IDIs that do not meet these exceptions must ``push out'' their
swaps portfolio to a separately capitalized affiliate if the
firm is part of a financial holding company, or cease these
activities altogether.
Similar to the exemption currently granted to IDIs, H.R.
992 would allow uninsured U.S. branches or agencies of a
foreign bank to engage in certain permissible swaps activities
and to push out others to an affiliate without jeopardizing
access to federal assistance. In addition, the legislation
would expand permissible swaps activities by excluding only
swaps based on asset-backed securities that are unregulated or
not of a credit quality established by regulation.
Enacting this legislation could affect direct spending and
revenues if a change in swaps activity affects the financial
stability of an IDI or other entity with access to assistance
from the Federal Reserve. Because current law only affects IDIs
that are swaps dealers and a small percentage of contracts, CBO
estimates that any changes to the net cash flows of either
agency would be insignificant for the next 10 years.
H.R. 992 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would not affect the budgets of state, local, or tribal
governments.
On April 5, 2013, CBO transmitted a cost estimate for H.R.
992, the Swaps Regulatory Improvement Act, as ordered reported
by the House Committee on Agriculture, on March 20, 2013. The
two versions of the legislation are identical and the CBO cost
estimates are the same.
The CBO staff contacts for this estimate are Daniel Hoople
and Barbara Edwards. 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. 992 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
Duplication of Federal Programs
Pursuant to section 3(j) of H. Res. 5, 113th Cong. (2013),
the Committee states that no provision of H.R. 992 establishes
or reauthorizes a program of the Federal Government known to be
duplicative of another Federal program, a program that was
included in any report from the Government Accountability
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most
recent Catalog of Federal Domestic Assistance.
Disclosure of Directed Rulemaking
Pursuant to section 3(k) of H. Res. 5, 113th Cong. (2013),
the Committee states that H.R. 992 requires no directed
rulemaking.
Section-by-Section Analysis of the Legislation
Section 1. Short title
The short title of the Act is the ``Swaps Regulatory
Improvement Act.''
Section 2. Reform of prohibition on swap activity assistance
This section defines a `covered depository institution' as
an insured depository institution or a United States uninsured
branch or agency of a foreign bank that has a prudential
regulator.
This section also replaces the term `insured depository
institution' in Section 716 with the term `covered depository
institution.'
This section provides that covered depository institutions
can engage in to engage in all swap and security-based swap
activities except structured finance swaps that are neither (1)
undertaken for hedging or risk management purposes nor (2)
expressly allowed by prudential regulators to take place in a
covered depository institution.
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):
DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT
* * * * * * *
TITLE VII--WALL STREET TRANSPARENCY AND ACCOUNTABILITY
* * * * * * *
Subtitle A--Regulation of Over-the-Counter Swaps Markets
PART I--REGULATORY AUTHORITY
* * * * * * *
SEC. 716. PROHIBITION AGAINST FEDERAL GOVERNMENT BAILOUTS OF SWAPS
ENTITIES.
(a) * * *
(b) Definitions.--In this section:
(1) * * *
(2) Swaps entity.--
(A) * * *
(B) Exclusion.--The term ``swaps entity''
does not include any major swap participant or
major security-based swap participant that is
an [insured depository institution] covered
depository institution.
(3) Covered depository institution.--The term
``covered depository institution'' means--
(A) an insured depository institution, as
that term is defined in section 3 of the
Federal Deposit Insurance Act (12 U.S.C. 1813);
and
(B) a United States uninsured branch or
agency of a foreign bank.
(c) Affiliates of [Insured] Covered Depository
Institutions.--The prohibition on Federal assistance contained
in subsection (a) does not apply to and shall not prevent [an
insured] a covered depository institution from having or
establishing an affiliate which is a swaps entity, as long as
[such insured] such covered depository institution is part of a
bank holding company, [or savings and loan holding company]
savings and loan holding company, or foreign banking
organization (as such term is defined under Regulation K of the
Board of Governors of the Federal Reserve System (12 C.F.R.
211.21(o))), that is supervised by the Federal Reserve and such
swaps entity affiliate complies with sections 23A and 23B of
the Federal Reserve Act and such other requirements as the
Commodity Futures Trading Commission or the Securities Exchange
Commission, as appropriate, and the Board of Governors of the
Federal Reserve System, may determine to be necessary and
appropriate.
[(d) Only Bona Fide Hedging and Traditional Bank Activities
Permitted.--The prohibition in subsection (a) shall apply to
any insured depository institution unless the insured
depository institution limits its swap or security-based swap
activities to:
[(1) Hedging and other similar risk mitigating
activities directly related to the insured depository
institution's activities.
[(2) Acting as a swaps entity for swaps or security-
based swaps involving rates or reference assets that
are permissible for investment by a national bank under
the paragraph designated as ``Seventh.'' of section
5136 of the Revised Statutes of the United States (12
U.S.C. 24), other than as described in paragraph (3).
[(3) Limitation on credit default swaps.--Acting as a
swaps entity for credit default swaps, including swaps
or security-based swaps referencing the credit risk of
asset-backed securities as defined in section 3(a)(77)
of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(77)) (as amended by this Act) shall not be
considered a bank permissible activity for purposes of
subsection (d)(2) unless such swaps or security-based
swaps are cleared by a derivatives clearing
organization (as such term is defined in section la of
the Commodity Exchange Act (7 U.S.C. la)) or a clearing
agency (as such term is defined in section 3 of the
Securities Exchange Act (15 U.S.C. 78c)) that is
registered, or exempt from registration, as a
derivatives clearing organization under the Commodity
Exchange Act or as a clearing agency under the
Securities Exchange Act, respectively.]
(d) Only Bona Fide Hedging and Traditional Bank Activities
Permitted.--
(1) In general.--The prohibition in subsection (a)
shall not apply to any covered depository institution
that limits its swap and security-based swap activities
to the following:
(A) Hedging and other similar risk mitigation
activities.--Hedging and other similar risk
mitigating activities directly related to the
covered depository institution's activities.
(B) Non-structured finance swap activities.--
Acting as a swaps entity for swaps or security-
based swaps other than a structured finance
swap.
(C) Certain structured finance swap
activities.--Acting as a swaps entity for swaps
or security-based swaps that are structured
finance swaps, if--
(i) such structured finance swaps are
undertaken for hedging or risk
management purposes; or
(ii) each asset-backed security
underlying such structured finance
swaps is of a credit quality and of a
type or category with respect to which
the prudential regulators have jointly
adopted rules authorizing swap or
security-based swap activity by covered
depository institutions.
(2) Definitions.--For purposes of this subsection:
(A) Structured finance swap.--The term
``structured finance swap'' means a swap or
security-based swap based on an asset-backed
security (or group or index primarily comprised
of asset-backed securities).
(B) Asset-backed security.--The term ``asset-
backed security'' has the meaning given such
term under section 3(a) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)).
(e) Existing Swaps and Security-based Swaps.--The prohibition
in subsection (a) shall only apply to swaps or security-based
swaps entered into by [an insured] a covered depository
institution after the end of the transition period described in
subsection (f).
(f) Transition Period.--To the extent [an insured depository]
a covered depository institution qualifies as a ``swaps
entity'' and would be subject to the Federal assistance
prohibition in subsection (a), the appropriate Federal banking
agency, after consulting with and considering the views of the
Commodity Futures Trading Commission or the Securities Exchange
Commission, as appropriate, shall permit [the insured
depository] the covered depository institution up to 24 months
to divest the swaps entity or cease the activities that require
registration as a swaps entity. In establishing the appropriate
transition period to effect such divestiture or cessation of
activities, which may include making the swaps entity an
affiliate of [the insured depository] the covered depository
institution, the appropriate Federal banking agency shall take
into account and make written findings regarding the potential
impact of such divestiture or cessation of activities on [the
insured depository] the covered depository institution's (1)
mortgage lending, (2) small business lending, (3) job creation,
and (4) capital formation versus the potential negative impact
on insured depositors and the Deposit Insurance Fund of the
Federal Deposit Insurance Corporation. The appropriate Federal
banking agency may consider such other factors as may be
appropriate. The appropriate Federal banking agency may place
such conditions on [the insured depository] the covered
depository institution's divestiture or ceasing of activities
of the swaps entity as it deems necessary and appropriate. The
transition period under this subsection may be extended by the
appropriate Federal banking agency, after consultation with the
Commodity Futures Trading Commission and the Securities and
Exchange Commission, for a period of up to 1 additional year.
* * * * * * *
MINORITY VIEWS
Nearly three years after the adoption of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010,
adoption of the derivatives and banking rules seems to have
stalled. The so-called ``push-out rule,'' as section 716 of the
Dodd-Frank Act is called, does not itself need implementing
rules. Other rules under the Dodd-Frank Act, however, are very
important to lowering the risks of bank derivatives and trading
activities, particularly the ``Volcker Rule.'' The Volcker Rule
is intended to draw a line between hedging and market making,
on the one hand, and proprietary trading, on the other, and
prohibits banks from engaging in proprietary trading. That rule
remains stalled between the agencies, which has important
implications for the activities that remain within a bank.
A workable final version of the Volcker Rule will ensure
that the regulators have the tools necessary to adequately
oversee and examine the trading activities of banks and their
affiliates. As we have seen from the delays in the finalization
of the Volcker Rule, it is difficult to distinguish between
hedging or market-making as opposed to proprietary trading. We
are not comfortable expanding the kinds of swap activities that
are permitted within depository institutions, including swaps
related to commodities, equities, and certain structured
finance swaps used for what we know to be the currently ill-
defined exception of ``hedging,'' when we still don't know the
scope of the market-making and hedging exemptions that will be
provided under the Volcker Rule.
We saw the importance of this very clearly in JPMorgan
Chase's ``London Whale,'' in which the bank lost more than $6
billion in short order when its Chief Investment Office put on
a large position in risky derivatives that was purportedly for
the purpose of ``hedging,'' but that focused foremost on profit
and would best be described as proprietary.
Allowing commodity, equity, and certain other types of
swaps to remain in banks, without knowing that those activities
will be subject to adequate monitoring and oversight, is not
something that we believe is appropriate at the present time.
For that reason, until we see a final version of the Volcker
Rule that allows the regulators to adequately monitor the
trading of the banks and their affiliates, we will not support
this bill.
We are sensitive to the concern that under Section 716,
foreign banks are not afforded the same hedging and market-
making exemptions that U.S. institutions receive, but this is
something we believe that the Federal Reserve has the authority
to address. It is important to ensure that we have a complete
set of workable rules before we reverse some of the pieces that
were done as part of the Dodd-Frank Act. While some supporters
claim that H.R. 992 protects taxpayers by maintaining the push-
out for the riskiest swaps, obviously even these supporters see
some benefit to continuing to push out at least some
transactions.
We also note that the Secretary of the Treasury has opposed
this and other derivatives bills as the agencies continue to
work on completing the rules required under the Dodd-Frank Act.
For these reasons, we oppose H.R. 992.
Maxine Waters.
Ruben Hinojosa.
Keith Ellison.
Stephen F. Lynch.
Michael E. Capuano.