| Sponsor | Rep. Stivers, Steve |
| Date | March 26, 2012 (112th Congress, 2nd Session) |
| Staff Contact | Jon Hiler |
On Monday, March 26, 2012, the House is scheduled to consider H.R. 2779, a bill to exempt inter-affiliate swaps from certain regulatory requirements put in place by the Dodd-Frank Wall Street Reform and Consumer Protection Act, under a suspension of the rules, requiring a two-thirds majority vote for passage. The bill was introduced by Rep. Steve Stivers (R-OH) on August 1, 2011, and referred to the Committees on Financial Services and Agriculture. Both committees held mark-up sessions and was ordered to be reported by a vote of 53-0 in the Financial Services Committee and by voice vote in the Agriculture Committee.
H.R. 2779 would amend the Commodity Exchange Act to exclude from the definition of the term “swap” swap transactions involving a party that is controlling, controlled by, or under common control with its counterparty.
The bill would exempt inter-affiliate swaps and security-based swap trades from many of the regulations in Title VII of the Dodd-Frank Act that are designed to mitigate risks associated with so-called “market-facing trades,” where a corporation executes a derivatives transaction with an investment bank or other entity, which may be either a swap dealer or security-based swap dealer.
The bill would also direct that inter-affiliate swap trades must still be reported to a swap data repository and to the appropriate regulators, providing the necessary transparency. While the bill would not exempt security-based swap trades from all of Title VII's requirements, the bill would exempt such transactions from the margin, capital, clearing and execution, and real-time reporting requirements of Title VII. The bill would also prohibit affiliate transactions from being used as a factor in defining a security-based swap dealer or major security-based swap participant.
H.R. 2779 would amend the Commodity Exchange Act to exclude from the definition of the term “swap” swap transactions involving a party that is controlling, controlled by, or under common control with its counterparty.
The bill would exempt inter-affiliate swaps and security-based swap trades from many of the regulations in Title VII of the Dodd-Frank Act that are designed to mitigate risks associated with so-called “market-facing trades,” where a corporation executes a derivatives transaction with an investment bank or other entity, which may be either a swap dealer or security-based swap dealer.
The bill would also direct that inter-affiliate swap trades must still be reported to a swap data repository and to the appropriate regulators, providing the necessary transparency. While the bill would not exempt security-based swap trades from all of Title VII's requirements, the bill would exempt such transactions from the margin, capital, clearing and execution, and real-time reporting requirements of Title VII. The bill would also prohibit affiliate transactions from being used as a factor in defining a security-based swap dealer or major security-based swap participant.
A common corporate structure is for a parent company to have 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 go directly to the market to engage in a swap with a dealer counterparty individually, many companies will employ a business model in which only a single or limited number of corporate entities within the group face 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. These transactions are known as “inter-affiliate swaps”—swaps and security-based swaps executed between entities under common corporate ownership, which allow a company with subsidiaries and affiliates to better manage risk by transferring the risk of its affiliates to a single affiliate and then executing swaps through that affiliate.
Inter-affiliate swaps do not pose a systemic risk because they do not create additional counterparty exposures or increase the interconnectedness between parties outside the corporate group.
Companies that use this business model argue that it reduces the overall credit risk a corporate group poses to the market because they can net their positions across affiliates, reducing the number of external facing transactions overall. In addition, it permits a company to enhance its efficiency by centralizing its risk management expertise in a single or limited number of affiliates.
According to H. Rept. 112-344, the Dodd-Frank Act is largely silent on the regulatory treatment of inter-affiliate swaps, and the regulators have not provided any further guidance. Should these inter-affiliate transactions be treated as all other swaps, they could be subject to clearing, execution and margin requirements. Companies that use inter-affiliate swaps are concerned that this could substantially increase their costs, without any real reduction in risk in light of the fact that these swaps are purely for internal use. For example, these swaps could be “double-margined”—when the centralized entity faces an external swap dealer, and then again when the same transaction is allocated internally to the affiliate that sought to hedge the risk.
The uncertainty that exists regarding the treatment of inter-affiliate swaps spans multiple rulemakings that have been proposed or that will be proposed pursuant to the Dodd-Frank Act. H.R. 2779 provides certainty and clarification that inter-affiliate transactions, when the parties to the transaction are under common control, are not to be regulated as swaps.
According to the Congressional Budget Office (CBO), “Neither the Commodity Futures Trading Commission nor the Securities and Exchange Commission (the agencies required to develop and enforce regulations related to swap transactions) has finalized regulations related to swap transactions. Based on information from the two agencies, CBO expects that incorporating the provisions of H.R. 2779 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. 2779 would not affect direct spending or revenues; therefore, pay-as-you-go procedures do not apply.”