CONGRESSWOMAN ELISE STEFANIK
On Monday, November 16, 2015, the House will consider H.R. 1317, a bill to amend the Commodity Exchange Act and the Securities Exchange Act of 1934 to specify how clearing requirements apply to certain affiliate transactions, under suspension of the rules. H.R. 1317 was introduced March 4, 2015 by Rep. Gwen Moore (D-WI) and was referred to the Committee on Financial Services, and in addition, to the Committee on Agriculture. The Financial Services Committee ordered the bill reported, as amended, by a vote of 57 to 0 on July 29, 2015. The Agriculture Committee then ordered the bill reported, with an amendment, by voice vote on September 30, 2015. The House is considering the bill as reported by the Agriculture Committee.
H.R. 1317 amends the Commodity Exchange Act (CEA) to exempt certain swaps and securities-based swaps (hereafter: swaps) executed by a central treasury unit (CTU) from the clearing requirements required for financial entities when that CTU is hedging or mitigating the risk of an affiliated commercial end-user.
 A swap is a contract that calls for an exchange of cash between two participants, based on an underlying rate or index or the performance of an asset.
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Commodity Exchange Act (CEA) to establish a new regulatory framework for certain swaps. Among other things, it requires that most swaps be subject to clearing requirements, unless the swap is conducted by a commercial end-user. An end-user is an entity that is the ultimate consumer of a product.
Many commercial end users are a part of a larger parent company that has multiple affiliates within a single corporate group. Individually, these affiliates may seek to offset their business risks through swaps. However, rather than having each affiliate separately go to the market to engage in a swap with a dealer counterparty, many companies will employ a business model in which only a single or limited number of financial affiliates, such as a CTU or a treasury hedging center, face swap dealers. These designated external facing entities will then allocate the transaction and its risk mitigating benefits to the affiliate seeking to mitigate its underlying risk.
Under current law, commodity end-users who use swaps to hedge actual commodity risks are largely exempt from posting margin or centrally clearing their swaps trades. Section 723 of the Dodd-Frank Act provides an end-user clearing exemption for those CTUs which act as an agent to the end-user affiliates. However, it does not offer the same clearing exemption when the CTU acts as the principal to the trades, which is by far the most common way in which CTUs are structured.
H.R. 1317 would extend the end-user clearing relief to CTUs that are operating as principals in managing the business risks arising from business activity that would otherwise qualify for the end-user clearing exemption, if it were hedged directly into the market. H.R. 1317 ensures that the clearing relief offered to end-users of derivatives is available to all of the intended recipients.
As introduced, the legislation prohibits CTUs from hedging the risks arising from financial entities. During markup, both the House Financial Services Committee and the House Committee on Agriculture adopted amendments which provide further protections to prohibit financial entities from accessing the end-user clearing exemption.
According to Agriculture Committee Chairman Conaway, “These commercial end-users are agricultural producers and manufacturers who employ thousands of Americans and rely on the derivatives markets to manage their risks. This amendment is a common-sense clarification – language which the House has previously approved – to make sure end-users are able to qualify for the exemptions Congress intended.”
H.R. 1317 is similar to H.R. 5471, which passed the House by voice vote on December 2, 2014. The Senate did not act upon the House-passed bill in the 113th Congress.
 Clearing is “the procedure by which an organization [a clearing house, also known as a central counterparty ( CCP)], acts as an intermediary and assumes the role of a buyer and seller for transactions in order to reconcile orders between transacting parties.” Investopedia. http://www.investopedia.com/terms/c/clearing.asp
 See House Agriculture Committee Press Release, “House Agriculture Committee approves amendment to H.R. 1317,” September 30, 2015.
The Congressional Budget Office (CBO) estimates that incorporating the provisions of the bill at this point in the regulatory process would have a net discretionary cost of about $1 million, assuming appropriation of the necessary amounts, to amend the regulations that have already been finalized and to make appropriate changes in rules that are not yet final.
For questions or further information please contact John Huston with the House Republican Policy Committee by email or at 6-5539.