CONGRESSWOMAN ELISE STEFANIK
On Monday, March 26, 2012, the House is scheduled to consider H.R. 2682, the Business Risk Mitigation and Price Stabilization Act of 2011, under a suspension of the rules, requiring a two-thirds majority vote for passage. The bill was introduced by Rep. Michael Grimm (R-NY) on July 28, 2011, and referred to the Committees on Financial Services and Agriculture. Both committees held mark-up sessions and ordered the legislation to be reported by voice vote.
H.R. 2682 would exempt end-users from the margin and capital requirements under Title VII of the Dodd-Frank Act for swaps and security-based swap transactions that are not made with financial entities as defined under the Dodd-Frank Act.
Both the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are developing regulations relating to margin requirements in swap transactions as the result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. (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).
“End-users” are companies that use derivatives to hedge their business risk associated with their day-to-day operations. Because end-users' swap and security-based swap transactions do not pose a systemic risk to the financial system, Congress did not intend that end-user derivatives transactions would be subject to the margin and capital requirements of Title VII of the Dodd-Frank Act. Despite Congressional intent and the statute's plain language, it is clear in the prudential regulators' joint rule proposal that their interpretation of Title VII of the Dodd-Frank Act requires that they impose margin on end-users, and that the requirement is the reason for proposing that non-financial end-users post margin to their bank swap counterparties.
According to the H. Rept. 112-343, following passage of the Dodd-Frank Act, various observers expressed concerns regarding whether sections 731 and 764 of the Act authorize or require the CFTC, SEC, and Agencies to establish margin requirements with respect to transactions between a covered swap entity and a “commercial end user” (i.e. a nonfinancial counterparty that engages in derivatives activities to hedge commercial risk), and have argued that swap and security-based swap transactions with these types of counterparties should be excluded from the scope of margin requirements imposed under sections 731 and 764 because commercial firms engaged in hedging activities pose a reduced risk to their counterparties and the stability of the U.S. financial system. In addition, statements in the legislative history of sections 731 and 764 suggest that Congress did not intend, in enacting these sections, to impose margin requirements on nonfinancial end users engaged in hedging activities, even in cases where they entered into swaps or security-based swaps with swap entities.
In formulating the proposed rule, the Agencies have carefully considered these concerns and statements. The plain language of sections 731 and 764 provides that the Agencies adopt rules for covered swap entities imposing margin requirements on all non-cleared swaps. Those sections do not, by their terms, exclude a swap with a counterparty that is a commercial end-user.
By the agencies' own terms, their proposal to require margin stems directly from what they view to be a legal obligation under Title VII. Therefore, by providing an explicit exemption under Title VII through enactment of HR 2682, the agencies will no longer have a legal obligation, and congressional intent as they acknowledge in the proposed rule will be implemented.
According to the Congressional Budget Office (CBO), “neither the CFTC nor the SEC has finalized regulations regarding margin requirements. Based on information from the two agencies, CBO expects that incorporating the provisions of H.R. 2682 at this point in the regulatory process would not require a significant increase in 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. Enacting H.R. 2682 would not affect direct spending or revenues; therefore, pay-as-you-go procedures do not apply.”