[House Report 113-229]
[From the U.S. Government Publishing Office]
113th Congress Rept. 113-229
HOUSE OF REPRESENTATIVES
1st Session Part 2
======================================================================
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. Lucas, from the Committee on Agriculture,
submitted the following
R E P O R T
[To accompany H.R. 992]
[Including cost estimate of the Congressional Budget Office]
The Committee on Agriculture, 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.
Brief Explanation
H.R. 992 limits the application of Section 716 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (P.L. 111-
203) (Dodd-Frank Act) so that it does not apply to equity or
commodity swaps traded by a financial institution. However, the
section would continue to apply to certain structured finance
swaps that are based on an asset-backed security and force
those particular swaps to be traded in a separately capitalized
entity outside of the banking entity.
Purpose and Need
During the late stages of the Senate's consideration of its
financial reform bill in May of 2010 (prior to the Dodd-Frank
Act Conference Committee debates), Senator Blanche Lincoln
successfully added an amendment to prohibit ``federal
assistance'' to any ``swaps entity.'' That same provision would
later become Section 716 of the Dodd-Frank Act. Under the Act,
``federal assistance'' is defined to include access to the
Federal Reserve's discount lending window or Federal Deposit
Insurance Corporation (FDIC) insurance or guarantees, while
``swaps entity'' includes swap dealers, major swap
participants, securities and futures exchanges, swap-execution
facilities, and clearing organizations. In effect, Section 716
requires most major domestic and foreign banks doing business
in the United States to push certain swaps activity outside of
the bank into a separately capitalized affiliate. Therefore,
Section 716 of the Dodd-Frank Act is colloquially referred to
as the ``swaps desk push-out'' provision.
Section 716 does not cover all swaps. In fact, the
provision allows financial institutions to continue dealing in
swaps related to interest rates, foreign currency, and swaps
permitted under the National Bank Act. However, banks are
prohibited from engaging in swaps related to agricultural and
non-agricultural commodities, equities, and credit. Banks would
not be required to ``push out'' swaps used for hedging risks
associated with their banking activities, and they would not be
required to push out interest rate swaps, foreign currency
swaps, credit default swaps (CDS) on investment grade names
that are centrally cleared, or precious metal swaps. The
prohibition is limited to equity derivatives, non-investment
grade CDS and commodity swaps.
While Section 716 was supposedly intended to prevent
certain swaps activities of banks from being eligible for a
federal ``bailout'' via FDIC insurance or capital infusions
from the Federal Reserve, opponents argue that Section 716 may
actually make the U.S. financial system less stable. As Federal
Reserve Board Chairman Ben Bernanke pointed out in 2009 during
the Dodd-Frank debates, 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.''\1\
---------------------------------------------------------------------------
\1\Letter from Ben Bernanke, Chairman of the Board of Governors of
the Federal Reserve System, to Senator Chris Dodd (May 12, 2010).
---------------------------------------------------------------------------
Second, Section 716 may place U.S. financial institutions
at a significant competitive disadvantage against their foreign
counterparts because non-U.S. jurisdictions do not plan to
adopt a provision similar to Section 716. In light of potential
consequences like these, former Federal Reserve Board Chairman
Paul Volcker and former FDIC Chairman Sheila Bair expressed
serious concerns about Section 716 during the Dodd-Frank Act
conference committee's deliberations.\2\ Moreover, Congress was
not urged to adopt Section 716 as part of the Dodd-Frank Act by
any of the regulators, the Treasury Department did not include
Section 716 in its submission of draft derivatives legislative
text to the Congress in 2009, and neither the SEC nor the CFTC
provided Section 716 to the Congress during the House or Senate
deliberations on the Dodd-Frank Act.
---------------------------------------------------------------------------
\2\Letter from Former Federal Reserve Board Chairman Paul Volcker
to Senator Chris Dodd, May 6, 2010 (``The provision of derivatives by
commercial banks to their customers in the usual course of banking
relationship should not be prohibited.''); Letter from former FDIC
Chairman Sheila Bair to Senators Chris Dodd and Blanche Lincoln, April
30, 2010 (``[O]ne unintended Letter from Former Federal Reserve Board
Chairman Paul Volcker to Senator Chris Dodd, May 6, 2010 (``The
provision of derivatives by commercial banks to their customers in the
usual course of banking relationship should not be prohibited.'');
Letter from former FDIC Chairman Sheila Bair to Senators Chris Dodd and
Blanche Lincoln, April 30, 2010 (``[O]ne unintended outcome of this
provision would be weakened, not strengthened, protection of the
insured bank and the Deposit Insurance Fund.'').
---------------------------------------------------------------------------
During the Financial Services Committee consideration of
H.R. 1838 (which originally repealed Section 716) on February
16, 2012, bipartisan language was adopted to limit the
application of Section 716 so that it would not apply to equity
or commodity swaps.\3\ However, the section would continue to
apply to structured finance swaps that are based on an asset-
backed security. Retaining coverage of structured finance swaps
based on asset-backed securities was intended to address
concerns surrounding the well-known derivatives activity of
American International Group (AIG) based on mortgage-backed
securities which directly contributed to the company's
precipitous decline and Federal bailout in the fall of 2008.
H.R. 992 in the 113th Congress is substantively identical to
the language adopted in the Financial Services Committee in the
112th Congress.
---------------------------------------------------------------------------
\3\See http://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=279947
---------------------------------------------------------------------------
After passage in House Financial Services, 18 Democrats on
the Committee signed Minority views for the Committee Report,
including then-Ranking Member Barney Frank and Representative
Maxine Waters, which stated:
``Questions have been raised about this provision
[Section 716] by economists and regulators including
FDIC's Sheila Bair, who are concerned that it might
interfere with a bank's ability to use derivatives to
diminish risk. Section 716 was not part of the original
House-passed version of the financial reform law.
During the Full Committee markup, Democrats worked with
the Majority to amend H.R. 1838 to continue the
prohibition of complex swaps employed by AIG with
devastating effect. H.R. 1838, as amended, addresses
the valid criticisms of Section 716 without weakening
the financial reform law's important derivative
safeguards or prohibitions on bank proprietary
trading.''\4\
---------------------------------------------------------------------------
\4\Emphasis added. See Additional Views of the Minority, Committee
Report for H.R. 1838, House Committee on Financial Services, May 11,
2012; available at http://financialservices.house.gov/uploadedfiles/
hrpt-112-hr1838.pdf
On December 31, 2012, the Office of the Comptroller of the
Currency (OCC) issued guidance for domestic banks that extended
the application of Section 716 for two or possibly three years
from the July 2013 implementation deadline that had been set by
federal regulators.\5\ Confusingly, this implementation
extension by the OCC did not apply to some branches of foreign
banks, which are regulated by the Federal Reserve or the OCC
depending on if they are eligible for deposit insurance fund
coverage.
---------------------------------------------------------------------------
\5\See http://www.occ.gov/news-issuances/news-releases/2013/nr-occ-
2013-2.html
---------------------------------------------------------------------------
On February 26, 2013, Federal Reserve Chairman Ben Bernanke
testified before the Senate Committee on Banking, Housing, and
Urban Affairs, and stated in response to a question from
Senator Crapo about Dodd-Frank reforms that ``Dodd-Frank is a
very big, complicated piece of legislation that addresses many
different issues. And I'm sure there are many aspects of it
that could be improved in one way, or another . . . [c]larity
on what Congress would like us to do about end users, for
example. Another area, which is proving difficult is the push
out provision for derivatives.''\6\ The next day, in testimony
before the House Committee on Financial Services, Chairman
Bernanke elaborated on the need for Section 716 reform, stating
``[a]nd it's not evident why that [Section 716] makes the
company as a whole safer. And what we do see is that it will
likely increase costs of people who use the derivatives and
make it more difficult for the bank to compete with foreign
competitors who can provide a more complete set of
services.''\7\
---------------------------------------------------------------------------
\6\See http://www.banking.senate.gov/public/
index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=e758db33-806e-4e77-
887a-9b7f7db159be
\7\See http://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=320548
---------------------------------------------------------------------------
Due to numerous federal regulators and market participants
voicing concerns about the inclusion of Section 716 in the
Dodd-Frank Act since before it became law, H.R. 992 would limit
the application of Section 716 so that it does not apply to
equity or commodity swaps. However, the section would continue
to apply to certain structured finance swaps that are based on
an asset-backed security.
Section-by-Section
Section 1 is the short title of the bill.
Section 2 amends section 716 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act strikes ``insured depository
institution'' and replaces it with the term ``covered
depository institution'' which is defined as an injured
depository institution and a domestically located uninsured
branch of a foreign bank.
Section 716(d) is rewritten to exempt from the prohibition
on swaps trading hedging and other risk mitigation activity,
equity swaps, commodity swaps, non-structured finance swap
activities, and certain structured finance swap activities of a
certain credit quality and type as determined by the prudential
banking regulators.
Committee Consideration
I. HEARINGS
In the 113th Congress, the Full Committee held a hearing
March 14, 2013, to examine legislative improvements to Title
VII of the Dodd-Frank Act which included H.R. 992, the Swaps
Regulatory Improvement Act. During the hearing, the Committee
heard testimony from the Chairman of the U.S. Commodity Futures
Trading Commission and six additional witnesses representing a
broad spectrum of participants in the derivatives market.
Included is testimony from the Honorable Kenneth E. Bentsen,
Jr., Acting President and CEO, the Securities Industry and
Financial Markets Association.
``The Swap Push-Out Rule has been opposed by senior
prudential regulators from the time it was first
considered. Ben Bernanke, Chairman of the Federal
Reserve, stated in a letter to Congress that `forcing
these activities out of insured depository institutions
would weaken both financial stability and strong
prudential regulation of derivative activities.' Sheila
Bair, former FDIC Chairwoman, said 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 added that ``one unintended
outcome of this provision would be weakened, not
strengthened, protection of the insured bank and the
Deposit Insurance Fund.
In addition to the increase in risk that would be
caused by the Swaps Push-Out Rule, the limitations will
significantly increase the cost to banks of providing
customers with swap products as a result of the need to
fragment related activities across different legal
entities. As a result, U.S. corporate end users and
farmers will face higher prices for the instruments
they need to hedge the risks of the items they produce.
Mark Zandi, Chief Economist at Moody's Analytics,
stated in a letter to Congressman Garrett that `Section
716 would create significant complications and counter
the efforts to resolve [large financial] firms in an
orderly manner.'''
--The Honorable Kenneth E. Bentsen, Jr., Acting
President and CEO, the Securities Industry and
Financial Markets Association.
II. BUSINESS MEETINGS
The Committee on Agriculture met, pursuant to notice, with
a quorum present, on March 20, 2013, to consider H.R. 992, the
Swaps Regulatory Improvement Act, and other pending business.
H.R. 992 was placed before the Committee for consideration.
Without objection, a first reading of the bill was waived and
it was open for amendment at any point.
Chairman Lucas, Mr. Peterson, Mr. David Scott and Mr.
Hudson were recognized for statements, and Counsel was then
recognized for a brief explanation of the bill.
There being no amendments, Mr. Conaway was recognized to
offer a motion that the bill H.R. 992 be reported favorably to
the House with recommendation that it do pass. Mr. Peterson
requested a recorded vote, and the motion was subsequently
approved by a vote of 31 yeas, 14 nays and 1 not voting. See
Roll Call #1.
The Committee then continued with other pending business,
and at the conclusion of the meeting, Chairman Lucas advised
Members that pursuant to the rules of the House of
Representatives Members had 2 calendar days to file any
supplemental or minority 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.
Committee Votes
In compliance with clause 3(b) of rule XIII of the House of
Representatives, the Committee sets forth the record of the
following roll call votes taken with respect to H.R. 992.
ROLL CALL #1
Summary: Motion to favorably report H.R. 992, the Swaps
Regulatory Improvement Act, to the House with recommendation
that it do pass.
Offered By: Representative K. Michael Conaway
Results: Passed by a recorded vote of 31 yeas, 14 nays, and
1 not voting.
YEAS NAYS
1. Mr. Lucas 1. Mr. Peterson
2. Mr. Goodlatte 2. Mr. Costa
3. Mr. King 3. Mr. Walz
4. Mr. Neugebauer 4. Mr. Schrader
5. Mr. Rogers 5. Mr. McGovern
6. Mr. Conaway 6. Ms. DelBene
7. Mr. Thompson 7. Mrs. Negrete McLeod
8. Mr. Gibbs 8. Mr. Vela
9. Mr. Austin Scott 9. Ms. Lujan Grisham
10. Mr. Tipton 10. Mr. Nolan
11. Mr. Crawford 11. Mr. Enyart
12. Mrs. Roby 12. Mrs. Bustos
13. Mr. DesJarlais 13. Mr. Courtney
14. Mr. Gibson 14. Mr. Garamendi
15. Mrs. Hartzler
16. Mr. Ribble
17. Mrs. Noem
18. Mr. Benishek
19. Mr. Denham
20. Mr. Fincher
21. Mr. LaMalfa
22. Mr. Hudson
23. Mr. Davis
24. Mr. Collins
25. Mr. Yoho
26. Mr. McIntyre
27. Mr. David Scott
28. Ms. Kuster
29. Mr. Gallego
30. Mr. Vargas
31. Mr. Maloney
NOT VOTING
1. Ms. Fudge
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:
U.S. Congress,
Congressional Budget Office,
Washington, DC, April 5, 2013.
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. 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
their 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.
CBO estimates that enacting this legislation would not have
a significant impact on the net cash flows of the Federal
Reserve or the FDIC over the next 10 years. Enacting this
legislation could affect direct spending and revenues;
therefore, pay-as-you-go procedures apply. However, CBO
estimates that any such effects would be insignificant for the
next 10 years.
Under current law, federal assistance is not available to
any swap dealer or major swap 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
exception) and FDIC deposit insurance and guarantees. This
prohibition does not apply to a major swap participant that is
an insured depository institution (IDI) 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 swap activities
and to push out others to an affiliate without jeopardizing
access to federal assistance. In addition, the legislation
would expand permissible swap activities to exclude 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 and the FDIC. Because current law only
affects IDIs that are swaps dealers and a small percentage of
swap 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.
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.
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
limit the application of Section 716 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (P.L. 111-203) so
that it does not apply to equity or commodity swaps traded by a
financial institution, but does still apply to certain
structured finance swaps based on an asset-backed security.
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. 992 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.
Duplication of Federal Programs
H.R. 992 does not establish or reauthorize 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 any related program
identified in the most recent Catalog of Federal Domestic
Assistance.
Disclosure of Directed Rule Makings
The Committee does not believe that the legislation directs
an executive branch official to conduct any specific rule
making proceedings within the meaning of 5 U.S.C. 551.
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) Prohibition on Federal Assistance.--Notwithstanding any
other provision of law (including regulations), no Federal
assistance may be provided to any swaps entity with respect to
any swap, security-based swap, or other activity of the swaps
entity.
(b) Definitions.--In this section:
(1) Federal assistance.--The term ``Federal
assistance'' means the use of any advances from any
Federal Reserve credit facility or discount window that
is not part of a program or facility with broad-based
eligibility under section 13(3)(A) of the Federal
Reserve Act, Federal Deposit Insurance Corporation
insurance or guarantees for the purpose of--
(A) making any loan to, or purchasing any
stock, equity interest, or debt obligation of,
any swaps entity;
(B) purchasing the assets of any swaps
entity;
(C) guaranteeing any loan or debt issuance of
any swaps entity; or
(D) entering into any assistance arrangement
(including tax breaks), loss sharing, or profit
sharing with any swaps entity.
(2) Swaps entity.--
(A) In general.--The term ``swaps entity''
means any swap dealer, security-based swap
dealer, major swap participant, major security-
based swap participant, that is registered
under--
(i) the Commodity Exchange Act (7
U.S.C. 1 et seq.); or
(ii) the Securities Exchange Act of
1934 (15 U.S.C. 78a et seq.).
(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.
(g) Excluded Entities.--For purposes of this section, the
term ``swaps entity'' shall not include any insured depository
institution under the Federal Deposit Insurance Act or a
covered financial company under title II which is in a
conservatorship, receivership, or a bridge bank operated by the
Federal Deposit Insurance Corporation.
(h) Effective Date.--The prohibition in subsection (a) shall
be effective 2 years following the date on which this Act is
effective.
(i) Liquidation Required.--
(1) In general.--
(A) FDIC insured institutions.--All swaps
entities that are FDIC insured institutions
that are put into receivership or declared
insolvent as a result of swap or security-based
swap activity of the swaps entities shall be
subject to the termination or transfer of that
swap or security-based swap activity in
accordance with applicable law prescribing the
treatment of those contracts. No taxpayer funds
shall be used to prevent the receivership of
any swap entity resulting from swap or
security-based swap activity of the swaps
entity.
(B) Institutions that pose a systemic risk
and are subject to heightened prudential
supervision as regulated under section 113.--
All swaps entities that are institutions that
pose a systemic risk and are subject to
heightened prudential supervision as regulated
under section 113, that are put into
receivership or declared insolvent as a result
of swap or security-based swap activity of the
swaps entities shall be subject to the
termination or transfer of that swap or
security-based swap activity in accordance with
applicable law prescribing the treatment of
those contracts. No taxpayer funds shall be
used to prevent the receivership of any swap
entity resulting from swap or security-based
swap activity of the swaps entity.
(C) Non-FDIC insured, non-systemically
significant institutions not subject to
heightened prudential supervision as regulated
under section 113.--No taxpayer resources shall
be used for the orderly liquidation of any
swaps entities that are non-FDIC insured, non-
systemically significant institutions not
subject to heightened prudential supervision as
regulated under section 113.
(2) Recovery of funds.--All funds expended on the
termination or transfer of the swap or security-based
swap activity of the swaps entity shall be recovered in
accordance with applicable law from the disposition of
assets of such swap entity or through assessments,
including on the financial sector as provided under
applicable law.
(3) No losses to taxpayers.--Taxpayers shall bear no
losses from the exercise of any authority under this
title.
(j) Prohibition on Unregulated Combination of Swaps Entities
and Banking.--At no time following adoption of the rules in
subsection (k) may a bank or bank holding company be permitted
to be or become a swap entity unless it conducts its swap or
security-based swap activity in compliance with such minimum
standards set by its prudential regulator as are reasonably
calculated to permit the swaps entity to conduct its swap or
security-based swap activities in a safe and sound manner and
mitigate systemic risk.
(k) Rules.--In prescribing rules, the prudential regulator
for a swaps entity shall consider the following factors:
(1) The expertise and managerial strength of the
swaps entity, including systems for effective
oversight.
(2) The financial strength of the swaps entity.
(3) Systems for identifying, measuring and
controlling risks arising from the swaps entity's
operations.
(4) Systems for identifying, measuring and
controlling the swaps entity's participation in
existing markets.
(5) Systems for controlling the swaps entity's
participation or entry into in new markets and
products.
(l) Authority of the Financial Stability Oversight Council.--
The Financial Stability Oversight Council may determine that,
when other provisions established by this Act are insufficient
to effectively mitigate systemic risk and protect taxpayers,
that swaps entities may no longer access Federal assistance
with respect to any swap, security-based swap, or other
activity of the swaps entity. Any such determination by the
Financial Stability Oversight Council of a prohibition of
federal assistance shall be made on an institution-by-
institution basis, and shall require the vote of not fewer than
two-thirds of the members of the Financial Stability Oversight
Council, which must include the vote by the Chairman of the
Council, the Chairman of the Board of Governors of the Federal
Reserve System, and the Chairperson of the Federal Deposit
Insurance Corporation. Notice and hearing requirements for such
determinations shall be consistent with the standards provided
in title I.
(m) Ban on Proprietary Trading in Derivatives.--An insured
depository institution shall comply with the prohibition on
proprietary trading in derivatives as required by section 619
of the Dodd-Frank Wall Street Reform and Consumer Protection
Act.
* * * * * * *