H.R. 1256: Swap Jurisdiction Certainty Act

H.R. 1256

Swap Jurisdiction Certainty Act

Sponsor
Sen. Bernard Sanders

Date
June 12, 2013 (113th Congress, 1st Session)

Staff Contact
Communications

Floor Situation

On Wednesday, June 12, 2013, the House will consider H.R. 1256, the Swap Jurisdiction Certainty Act, under a closed rule.   H.R. 1256 was introduced by Representative Scott Garrett (R-NJ) and has 3 cosponsors.  H.R. 1256 was marked up by the House Committee on Financial Services on May 7, 2013 and ordered to be reported by a vote of 48-11[1] and the House Committee on Agriculture, which reported the bill by voice vote.[2]


[1] See Financial Services Committee Report 113-103 (Part 1)

[2] See Agriculture Committee Report 113-103 (Part 2)

Bill Summary

H.R. 1256 directs the Securities and Exchange Commission (SEC) and the Commodity Future Trading Commission (CFTC) to jointly issue rules related to cross-border swap transactions clarifying the Over the Counter (OTC) trading requirements set forth in Title VII of the Dodd-Frank Act.  H.R. 1256 exempts from regulation non-U.S. persons who are in compliance with the regulatory regimes set forth by the nine largest derivatives markets unless the SEC and CFTC determine that the regulatory regime is not “broadly equivalent.”  The bill requires a report to the Committees on Agriculture and Financial Services from the regulators on those regulatory regimes that are not considered “broadly equivalent.”

Background

Derivative contracts are financial products, the value of which is related to an underlying asset.[1] Swaps are a type of derivative contract in which counter parties exchange cash based on an underlying rate or index or performance of an asset.  Derivatives are used to manage risk and have their origins in agriculture.[2]  According to CRS, “since 2000, growth in derivatives markets has been explosive… . Between 2000 and the end of 2008, the volume of derivatives contracts traded on exchanges … and the notational value of total contracts traded in the OTC market grew by 475 percent and 522 percent, respectively.”[3] OTC derivatives are customized to meet the needs of the counterparties.  Market participants use OTC derivatives because exchange-listed and traded products, which are highly standardized, do not generally match the timing and amount of the hedged exposure. For example, a manufacturer will enter into an interest rate swap that  is customized to match the terms of the debt issued. The OTC product will match the currency, principal or notional amount, interest rates, and maturity dates. Standardized contracts with predetermined terms would be far less effective.

According to the Committees on Financial Services and Agriculture, Title VII of Dodd-Frank attempts to regulate the OTC derivatives market much in the same manner that equities and futures exchanges are regulated in the United States.[4]  However, because the OTC market is global, there is uncertainty as to the application of Title VII’s requirements with regard to swaps and security-based swaps outside the United States.  Despite the fact that Section 722 of Dodd-Frank makes clear that the regulations only apply to swamps in limited circumstances,[5] recent comments by U.S. regulators reveal that there will be attempts to apply Title VII more broadly.[6]  Moreover, Title VII requires both the SEC and the CFTC to promulgate regulations as it relates to the OTC abroad, creating the possibility of two sets of conflicting regulatory requirements abroad.[7]

H.R. 1256 harmonizes the cross-border approaches by requiring the CFTC and SEC to jointly issue the same rule related to the cross-border application ofthe Dodd Frank Act within 270 days of the bill's enactment. This joint rule would have to be promulgated in accordance with the Administrative Procedures Act. H.R. 1256 measure ensures that operating entities in foreign countries or administrative regions with broadly equivalent regimes for swaps will not be subject to U.S. rules. Finally, H.R. 1256 requires that the SEC and CFTC jointly provide a report to Congress if they determine that a foreign regulatory regime is not broadly equivalent to United States swap requirements.


[2] See id.

[3] See id, page 5.

[4] See Committee Report, page 1.

[5] Section 722 makes clear that the provisions relating to swaps will not apply unless the activities (1) have a direct and significant connection with activities in, or effect on, commerce of the United States or (2) contravene anti-evasion rules promulgated by the CFTC.  For more information see Committee Report, page 1.

[6] See id.

[7] See id.

Cost

CBO estimates the “costs to both agencies would be roughly equal – about $4 million each. Under current law, the SEC is authorized to collect fees sufficient to offset the cost of its annual appropriation each year. Therefore, we estimate that the net cost to the SEC would be negligible, assuming appropriation of the necessary amounts. Enacting the bill would not affect direct spending or revenues; therefore, pay-as-you go procedures do not apply.”