Report text available as:

(PDF provides a complete and accurate display of this text.) Tip?


113th Congress                                            Rept. 113-105
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     Part 1

======================================================================



 
      BUSINESS RISK MITIGATION AND PRICE STABILIZATION ACT OF 2013

                                _______
                                

 June 12, 2013.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 634]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 634) to provide end user exemptions from certain 
provisions of the Commodity Exchange Act and the Securities 
Exchange Act of 1934, and for other purposes, having considered 
the same, report favorably thereon without amendment and 
recommend that the bill do pass.

                          Purpose and Summary

    ``End-users'' are companies that use derivatives to hedge 
their business risk. 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 Wall Street Reform 
and Consumer Protection Act (P.L. 111-203) (the ``Dodd-Frank 
Act'').
    Despite Congressional intent and the statute's plain 
language, some regulators have interpreted Title VII as a grant 
of new authority to impose margin requirements on end-users 
merely because they are counterparties to swaps with a 
regulated entity, such as a swap dealer or financial 
institution. H.R. 634 exempts 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.

                  Background and Need for Legislation

    During floor debate on the conference report for the Dodd-
Frank Act, two colloquies among the then-chairmen of the four 
committees with primary jurisdiction over Title VII clarified 
Congressional intent that the Dodd-Frank Act did not grant 
regulators the authority to impose margin requirements on end-
user derivatives transactions. Nevertheless, some regulators 
have interpreted Title VII as a grant of new authority to 
impose margin requirements on end-users. H.R. 634 is necessary 
to ensure that the regulators do not force end-users to post 
margin, thereby diverting much-needed capital from being used 
to fuel job creation and economic growth.
    On April 11, 2013, Mr. Thomas Deas, Vice President and 
Treasurer of FMC Corporation, on behalf of the Coalition for 
Derivatives End-Users testified, ``Adopting more conservative 
cash management practices might sound like an appropriate 
response in the wake of the financial crisis. However, end-
users did not cause the financial crisis. End-users do not 
contribute to systemic risk because their use of derivatives 
constitutes prudent, risk mitigating hedging of their 
underlying business. Forcing end-users to put up cash for 
fluctuating derivatives valuations means less funding available 
to grow their businesses and expand employment. The reality 
treasurers face is that the money to margin derivatives has to 
come from somewhere and inevitably less funding will be 
available to operate their businesses.''
    Mr. Deas further testified that FMC and other members of 
the Business Roundtable estimated that non-financial member 
companies would have to set aside on average $269 million in 
cash or immediately available bank credit to meet margin calls, 
assuming a 3 percent initial margin and no variation margin. 
``In our world of finite limits and financial constraints, this 
is a direct dollar-for-dollar subtraction from funds that we 
would otherwise use to expand our plants, build inventory to 
support higher sales, undertake research and development 
activities, and ultimately sustain and grow jobs.'' He 
continued:

    In fact, the study extrapolated the effects across the S&P; 
500, of which FMC is also a member, to predict the consequent 
loss of 100,000 to 120,000 jobs. The effect on the many 
thousands of end-users beyond the S&P; 500 would be 
proportionately greater. We would also have to make a 
considerable investment in information systems that would 
replicate much of the technology in a bank's trading room for 
marking to market and settling derivatives transactions.

    On February 15, 2011, Mr. Craig Reiners of MillerCoors LLC, 
on behalf of the Coalition for Derivatives End-Users, testified 
before the Committee, and stated that ``the prudent use of 
derivatives by end-user companies, such as MillerCoors, does 
not generate risk or instability in the financial marketplace 
and played no role in the financial crisis. On the contrary, 
these risk management tools are critical to reducing commercial 
risk and volatility in our day-to-day business operations, 
allowing us to create sustainable and prosperous businesses.'' 
Further, he testified that he believes that

a broad end-user exemption is critically important as the 
[Commodity Futures Trading Commission] promulgates final rules. 
During the regulatory process, we have sought to ensure that 
the exemption created by Congress would not be unduly narrowed. 
In particular, we have urged regulators to give thoughtful 
consideration to key definitions to ensure that end-users like 
us are not saddled with bank-like regulation. . . . The 
unintended consequence of margin requirements applied to end-
users or excessive capital requirements applied to our 
financial counterparties could be to reduce the risk management 
activity of end-users. Such a result could actually increase 
systemic risk or even push transactions offshore.

    On March 16, 2011, Mr. Luke Zubrod of Chatham Financial, on 
behalf of the Coalition for Derivatives End-Users, testified 
before the Subcommittee on Capital Markets and Government-
Sponsored Enterprises that ``[i]f capital charges are 
disproportionately increased, end users may opt out of hedging, 
which in turn would translate to increased volatility in 
consumer prices for things like airline tickets, apartment 
rents, farm equipment, various types of financing, life 
insurance contracts, and even the price of cereal.'' Further, 
he stated that ``[w]e respectfully request that this committee 
provide end users with certainty by clarifying that their 
hedges will not be subject to margin requirements. In addition 
to providing important certainty for Main Street businesses, 
such a clarification would promote international harmonization 
and minimize regulatory arbitrage.''

                                Hearings

    The Committee on Financial Services' Subcommittee on 
Capital Markets and Government Sponsored Enterprises held a 
hearing on H.R. 634 on April 11, 2013.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
May 7, 2013, and ordered H.R. 634 to be reported favorably to 
the House without amendment by a recorded vote of 59 yeas to 0 
nays (Record vote no. FC-11), a quorum being present.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole vote in committee was a motion by Chairman Hensarling to 
report the bill favorably to the House without amendment. The 
motion was agreed to by a recorded vote of 59 yeas to 0 nays 
(Record vote no. FC-11), a quorum being present.


                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee has held hearings and 
made findings that are reflected in this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 634 
will exempt end-users of derivatives from margin requirements.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                 Congressional Budget Office Estimates

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, May 29, 2013.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 634, the Business 
Risk Mitigation and Price Stabilization Act of 2013.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                      Douglas W. Elmendorf,
                                                          Director.
    Enclosure.

H.R. 634--Business Risk Mitigation and Price Stabilization Act of 2013

    H.R. 634 would exempt nonfinancial entities that enter into 
a swap or a security-based swap transaction from meeting 
certain margin requirements when the transaction is designed to 
offset losses or gains in other investments. (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.)
    Both the Commodity Futures Trading Commission (CFTC) and 
the Securities and Exchange Commission (SEC) are developing 
regulations relating to margin requirements (minimum amounts of 
collateral that must be deposited, often with a broker or 
exchange, to cover some or all of the risk of a counterparty) 
in swap transactions as a result of the enactment of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Public 
Law 111-203). In addition, other financial regulators, 
including the Federal Reserve System, the Office of the 
Comptroller of the Currency (OCC), and the Federal Deposit 
Insurance Corporation (FDIC) among others, are also developing 
margin requirements that would apply to the entities they 
regulate. Final regulations have not been completed by any 
agency.
    Based on information from several of the affected agencies, 
CBO expects that incorporating the provisions of H.R. 634 at 
this point in the regulatory process would not require a 
significant increase in the workload of any agency. CBO 
estimates that any change in discretionary spending by the SEC 
and CFTC to implement the legislation would not be significant. 
Further, under current law, the SEC is authorized to collect 
fees sufficient to offset its appropriation each year. 
Therefore, we estimate that the net cost to the SEC would be 
negligible, assuming appropriation actions consistent with that 
authority.
    Enacting H.R. 634 would affect direct spending and 
revenues; therefore, pay-as-you-go procedures apply. CBO 
expects that workloads for affected financial regulators (the 
Federal Reserve System, FDIC, and OCC among others) would not 
be significantly affected by the new requirements, and thus, we 
estimate that the effect on direct spending and revenues would 
be insignificant.
    H.R. 634 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would impose no costs on state, local, or tribal governments.
    On April 11, 2013, CBO transmitted a cost estimate for H.R. 
634 as ordered reported by the House Committee on Agriculture 
on March 20, 2013. The two versions of the bill are identical, 
and CBO cost estimates are the same.
    The CBO staff contact for this estimate is Susan Willie. 
The estimate was approved by Theresa Gullo, Deputy Assistant 
Director for Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts 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.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  Applicability to 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 the section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    H.R. 634 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

                    Duplication of Federal Programs

    Pursuant to section 3(j) of H. Res. 5, 113th Cong. (2013), 
the Committee states that no provision of H.R. 634 establishes 
or reauthorizes 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 a program related to a program identified in the most 
recent Catalog of Federal Domestic Assistance.

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(k) of H. Res. 5, 113th Cong. (2013), 
the Committee states that H.R. 634 does not require any 
directed rulemakings.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section cites H.R. 634 as the ``Business Risk 
Mitigation and Price Stabilization Act of 2013.''

Section 2. Margin requirements

    This section amends Section 4s(e) of the Commodity Exchange 
Act as added by Section 731 of the Dodd-Frank Act governing 
margin requirements, and exempts counterparties to swap 
contracts from those requirements other than for financial 
entities as defined under the Dodd-Frank Act.
    This sections also amends Section 15F(e) of the Securities 
Exchange Act of 1934 as added by Section 764(a) of the Dodd-
Frank Act governing margin requirements and exempts 
counterparties to security-based swap contracts from those 
requirements other than for financial entities as defined under 
the Dodd-Frank Act.

Section 3. Implementation

    This section excludes the amendments made by this bill to 
the Commodity Exchange Act from the requirements of the 
Paperwork Reduction Act and from notice and comment 
requirements of the Administrative Procedure Act.

         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 (new matter is 
printed in italic and existing law in which no change is 
proposed is shown in roman):

COMMODITY EXCHANGE ACT

           *       *       *       *       *       *       *



SEC. 4S. REGISTRATION AND REGULATION OF SWAP DEALERS AND MAJOR SWAP 
                    PARTICIPANTS.

  (a) * * *

           *       *       *       *       *       *       *

  (e) Capital and Margin Requirements.--
          (1) * * *

           *       *       *       *       *       *       *

          (4) Applicability with respect to counterparties.--
        The requirements of paragraphs (2)(A)(ii) and 
        (2)(B)(ii) shall not apply to a swap in which a 
        counterparty qualifies for an exception under section 
        2(h)(7)(A) or satisfies the criteria in section 
        2(h)(7)(D).

           *       *       *       *       *       *       *

                              ----------                              


                    SECURITIES EXCHANGE ACT OF 1934

TITLE I--REGULATION OF SECURITIES EXCHANGES

           *       *       *       *       *       *       *


SEC. 15F. REGISTRATION AND REGULATION OF SECURITY-BASED SWAP DEALERS 
                    AND MAJOR SECURITY-BASED SWAP PARTICIPANTS.

  (a) * * *

           *       *       *       *       *       *       *

  (e) Capital and Margin Requirements.--
          (1) * * *

           *       *       *       *       *       *       *

          (4) Applicability with respect to counterparties.--
        The requirements of paragraphs (2)(A)(ii) and 
        (2)(B)(ii) shall not apply to a security-based swap in 
        which a counterparty qualifies for an exception under 
        section 3C(g)(1) or satisfies the criteria in section 
        3C(g)(4).

           *       *       *       *       *       *       *