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113th Congress                                            Rept. 113-229
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     Part 2

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



 
                    SWAPS REGULATORY IMPROVEMENT ACT

                                _______
                                

 September 25, 2013.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

             Mr. Lucas, from the Committee on Agriculture, 
                        submitted the following

                              R E P O R T

                        [To accompany H.R. 992]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Agriculture, to whom was referred the bill 
(H.R. 992) to amend provisions in section 716 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act relating to 
Federal assistance for swaps entities, having considered the 
same, report favorably thereon without amendment and recommend 
that the bill do pass.

                           Brief Explanation

    H.R. 992 limits the application of Section 716 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (P.L. 111-
203) (Dodd-Frank Act) so that it does not apply to equity or 
commodity swaps traded by a financial institution. However, the 
section would continue to apply to certain structured finance 
swaps that are based on an asset-backed security and force 
those particular swaps to be traded in a separately capitalized 
entity outside of the banking entity.

                            Purpose and Need

    During the late stages of the Senate's consideration of its 
financial reform bill in May of 2010 (prior to the Dodd-Frank 
Act Conference Committee debates), Senator Blanche Lincoln 
successfully added an amendment to prohibit ``federal 
assistance'' to any ``swaps entity.'' That same provision would 
later become Section 716 of the Dodd-Frank Act. Under the Act, 
``federal assistance'' is defined to include access to the 
Federal Reserve's discount lending window or Federal Deposit 
Insurance Corporation (FDIC) insurance or guarantees, while 
``swaps entity'' includes swap dealers, major swap 
participants, securities and futures exchanges, swap-execution 
facilities, and clearing organizations. In effect, Section 716 
requires most major domestic and foreign banks doing business 
in the United States to push certain swaps activity outside of 
the bank into a separately capitalized affiliate. Therefore, 
Section 716 of the Dodd-Frank Act is colloquially referred to 
as the ``swaps desk push-out'' provision.
    Section 716 does not cover all swaps. In fact, the 
provision allows financial institutions to continue dealing in 
swaps related to interest rates, foreign currency, and swaps 
permitted under the National Bank Act. However, banks are 
prohibited from engaging in swaps related to agricultural and 
non-agricultural commodities, equities, and credit. Banks would 
not be required to ``push out'' swaps used for hedging risks 
associated with their banking activities, and they would not be 
required to push out interest rate swaps, foreign currency 
swaps, credit default swaps (CDS) on investment grade names 
that are centrally cleared, or precious metal swaps. The 
prohibition is limited to equity derivatives, non-investment 
grade CDS and commodity swaps.
    While Section 716 was supposedly intended to prevent 
certain swaps activities of banks from being eligible for a 
federal ``bailout'' via FDIC insurance or capital infusions 
from the Federal Reserve, opponents argue that Section 716 may 
actually make the U.S. financial system less stable. As Federal 
Reserve Board Chairman Ben Bernanke pointed out in 2009 during 
the Dodd-Frank debates, Section 716 ``would make the U.S. 
financial system less resilient and more susceptible to 
systemic risk'' because ``forcing [commercial and hedging 
activities] out of insured depository institutions would weaken 
both financial stability and strong prudential regulation.''\1\
---------------------------------------------------------------------------
    \1\Letter from Ben Bernanke, Chairman of the Board of Governors of 
the Federal Reserve System, to Senator Chris Dodd (May 12, 2010).
---------------------------------------------------------------------------
    Second, Section 716 may place U.S. financial institutions 
at a significant competitive disadvantage against their foreign 
counterparts because non-U.S. jurisdictions do not plan to 
adopt a provision similar to Section 716. In light of potential 
consequences like these, former Federal Reserve Board Chairman 
Paul Volcker and former FDIC Chairman Sheila Bair expressed 
serious concerns about Section 716 during the Dodd-Frank Act 
conference committee's deliberations.\2\ Moreover, Congress was 
not urged to adopt Section 716 as part of the Dodd-Frank Act by 
any of the regulators, the Treasury Department did not include 
Section 716 in its submission of draft derivatives legislative 
text to the Congress in 2009, and neither the SEC nor the CFTC 
provided Section 716 to the Congress during the House or Senate 
deliberations on the Dodd-Frank Act.
---------------------------------------------------------------------------
    \2\Letter from Former Federal Reserve Board Chairman Paul Volcker 
to Senator Chris Dodd, May 6, 2010 (``The provision of derivatives by 
commercial banks to their customers in the usual course of banking 
relationship should not be prohibited.''); Letter from former FDIC 
Chairman Sheila Bair to Senators Chris Dodd and Blanche Lincoln, April 
30, 2010 (``[O]ne unintended Letter from Former Federal Reserve Board 
Chairman Paul Volcker to Senator Chris Dodd, May 6, 2010 (``The 
provision of derivatives by commercial banks to their customers in the 
usual course of banking relationship should not be prohibited.''); 
Letter from former FDIC Chairman Sheila Bair to Senators Chris Dodd and 
Blanche Lincoln, April 30, 2010 (``[O]ne unintended outcome of this 
provision would be weakened, not strengthened, protection of the 
insured bank and the Deposit Insurance Fund.'').
---------------------------------------------------------------------------
    During the Financial Services Committee consideration of 
H.R. 1838 (which originally repealed Section 716) on February 
16, 2012, bipartisan language was adopted to limit the 
application of Section 716 so that it would not apply to equity 
or commodity swaps.\3\ However, the section would continue to 
apply to structured finance swaps that are based on an asset-
backed security. Retaining coverage of structured finance swaps 
based on asset-backed securities was intended to address 
concerns surrounding the well-known derivatives activity of 
American International Group (AIG) based on mortgage-backed 
securities which directly contributed to the company's 
precipitous decline and Federal bailout in the fall of 2008. 
H.R. 992 in the 113th Congress is substantively identical to 
the language adopted in the Financial Services Committee in the 
112th Congress.
---------------------------------------------------------------------------
    \3\See http://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=279947
---------------------------------------------------------------------------
    After passage in House Financial Services, 18 Democrats on 
the Committee signed Minority views for the Committee Report, 
including then-Ranking Member Barney Frank and Representative 
Maxine Waters, which stated:

          ``Questions have been raised about this provision 
        [Section 716] by economists and regulators including 
        FDIC's Sheila Bair, who are concerned that it might 
        interfere with a bank's ability to use derivatives to 
        diminish risk. Section 716 was not part of the original 
        House-passed version of the financial reform law. 
        During the Full Committee markup, Democrats worked with 
        the Majority to amend H.R. 1838 to continue the 
        prohibition of complex swaps employed by AIG with 
        devastating effect. H.R. 1838, as amended, addresses 
        the valid criticisms of Section 716 without weakening 
        the financial reform law's important derivative 
        safeguards or prohibitions on bank proprietary 
        trading.''\4\
---------------------------------------------------------------------------
    \4\Emphasis added. See Additional Views of the Minority, Committee 
Report for H.R. 1838, House Committee on Financial Services, May 11, 
2012; available at http://financialservices.house.gov/uploadedfiles/
hrpt-112-hr1838.pdf

    On December 31, 2012, the Office of the Comptroller of the 
Currency (OCC) issued guidance for domestic banks that extended 
the application of Section 716 for two or possibly three years 
from the July 2013 implementation deadline that had been set by 
federal regulators.\5\ Confusingly, this implementation 
extension by the OCC did not apply to some branches of foreign 
banks, which are regulated by the Federal Reserve or the OCC 
depending on if they are eligible for deposit insurance fund 
coverage.
---------------------------------------------------------------------------
    \5\See http://www.occ.gov/news-issuances/news-releases/2013/nr-occ-
2013-2.html
---------------------------------------------------------------------------
    On February 26, 2013, Federal Reserve Chairman Ben Bernanke 
testified before the Senate Committee on Banking, Housing, and 
Urban Affairs, and stated in response to a question from 
Senator Crapo about Dodd-Frank reforms that ``Dodd-Frank is a 
very big, complicated piece of legislation that addresses many 
different issues. And I'm sure there are many aspects of it 
that could be improved in one way, or another . . . [c]larity 
on what Congress would like us to do about end users, for 
example. Another area, which is proving difficult is the push 
out provision for derivatives.''\6\ The next day, in testimony 
before the House Committee on Financial Services, Chairman 
Bernanke elaborated on the need for Section 716 reform, stating 
``[a]nd it's not evident why that [Section 716] makes the 
company as a whole safer. And what we do see is that it will 
likely increase costs of people who use the derivatives and 
make it more difficult for the bank to compete with foreign 
competitors who can provide a more complete set of 
services.''\7\
---------------------------------------------------------------------------
    \6\See http://www.banking.senate.gov/public/
index.cfm?FuseAction=Hearings.Hearing&Hearing;_ID=e758db33-806e-4e77-
887a-9b7f7db159be
    \7\See http://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=320548
---------------------------------------------------------------------------
    Due to numerous federal regulators and market participants 
voicing concerns about the inclusion of Section 716 in the 
Dodd-Frank Act since before it became law, H.R. 992 would limit 
the application of Section 716 so that it does not apply to 
equity or commodity swaps. However, the section would continue 
to apply to certain structured finance swaps that are based on 
an asset-backed security.

                           Section-by-Section

    Section 1 is the short title of the bill.
    Section 2 amends section 716 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act strikes ``insured depository 
institution'' and replaces it with the term ``covered 
depository institution'' which is defined as an injured 
depository institution and a domestically located uninsured 
branch of a foreign bank.
    Section 716(d) is rewritten to exempt from the prohibition 
on swaps trading hedging and other risk mitigation activity, 
equity swaps, commodity swaps, non-structured finance swap 
activities, and certain structured finance swap activities of a 
certain credit quality and type as determined by the prudential 
banking regulators.

                        Committee Consideration


                              I. HEARINGS

    In the 113th Congress, the Full Committee held a hearing 
March 14, 2013, to examine legislative improvements to Title 
VII of the Dodd-Frank Act which included H.R. 992, the Swaps 
Regulatory Improvement Act. During the hearing, the Committee 
heard testimony from the Chairman of the U.S. Commodity Futures 
Trading Commission and six additional witnesses representing a 
broad spectrum of participants in the derivatives market. 
Included is testimony from the Honorable Kenneth E. Bentsen, 
Jr., Acting President and CEO, the Securities Industry and 
Financial Markets Association.

          ``The Swap Push-Out Rule has been opposed by senior 
        prudential regulators from the time it was first 
        considered. Ben Bernanke, Chairman of the Federal 
        Reserve, stated in a letter to Congress that `forcing 
        these activities out of insured depository institutions 
        would weaken both financial stability and strong 
        prudential regulation of derivative activities.' Sheila 
        Bair, former FDIC Chairwoman, said that `by 
        concentrating the activity in an affiliate of the 
        insured bank, we could end up with less and lower 
        quality capital, less information and oversight for the 
        FDIC, and potentially less support for the insured bank 
        in a time of crisis' and added that ``one unintended 
        outcome of this provision would be weakened, not 
        strengthened, protection of the insured bank and the 
        Deposit Insurance Fund.
          In addition to the increase in risk that would be 
        caused by the Swaps Push-Out Rule, the limitations will 
        significantly increase the cost to banks of providing 
        customers with swap products as a result of the need to 
        fragment related activities across different legal 
        entities. As a result, U.S. corporate end users and 
        farmers will face higher prices for the instruments 
        they need to hedge the risks of the items they produce. 
        Mark Zandi, Chief Economist at Moody's Analytics, 
        stated in a letter to Congressman Garrett that `Section 
        716 would create significant complications and counter 
        the efforts to resolve [large financial] firms in an 
        orderly manner.'''

        --The Honorable Kenneth E. Bentsen, Jr., Acting 
        President and CEO, the Securities Industry and 
        Financial Markets Association.

                         II. BUSINESS MEETINGS

    The Committee on Agriculture met, pursuant to notice, with 
a quorum present, on March 20, 2013, to consider H.R. 992, the 
Swaps Regulatory Improvement Act, and other pending business.
    H.R. 992 was placed before the Committee for consideration. 
Without objection, a first reading of the bill was waived and 
it was open for amendment at any point.
    Chairman Lucas, Mr. Peterson, Mr. David Scott and Mr. 
Hudson were recognized for statements, and Counsel was then 
recognized for a brief explanation of the bill.
    There being no amendments, Mr. Conaway was recognized to 
offer a motion that the bill H.R. 992 be reported favorably to 
the House with recommendation that it do pass. Mr. Peterson 
requested a recorded vote, and the motion was subsequently 
approved by a vote of 31 yeas, 14 nays and 1 not voting. See 
Roll Call #1.
    The Committee then continued with other pending business, 
and at the conclusion of the meeting, Chairman Lucas advised 
Members that pursuant to the rules of the House of 
Representatives Members had 2 calendar days to file any 
supplemental or minority views with the Committee.
    Without objection, staff was given permission to make any 
necessary clerical, technical or conforming changes to reflect 
the intent of the Committee. Chairman Lucas thanked all the 
Members and adjourned the meeting.

                            Committee Votes

    In compliance with clause 3(b) of rule XIII of the House of 
Representatives, the Committee sets forth the record of the 
following roll call votes taken with respect to H.R. 992.

                              ROLL CALL #1

    Summary: Motion to favorably report H.R. 992, the Swaps 
Regulatory Improvement Act, to the House with recommendation 
that it do pass.
    Offered By: Representative K. Michael Conaway
    Results: Passed by a recorded vote of 31 yeas, 14 nays, and 
1 not voting.
          YEAS                        NAYS
 1. Mr. Lucas                        1. Mr. Peterson
 2. Mr. Goodlatte                    2. Mr. Costa
 3. Mr. King                         3. Mr. Walz
 4. Mr. Neugebauer                   4. Mr. Schrader
 5. Mr. Rogers                       5. Mr. McGovern
 6. Mr. Conaway                      6. Ms. DelBene
 7. Mr. Thompson                     7. Mrs. Negrete McLeod
 8. Mr. Gibbs                        8. Mr. Vela
 9. Mr. Austin Scott                 9. Ms. Lujan Grisham
10. Mr. Tipton                      10. Mr. Nolan
11. Mr. Crawford                    11. Mr. Enyart
12. Mrs. Roby                       12. Mrs. Bustos
13. Mr. DesJarlais                  13. Mr. Courtney
14. Mr. Gibson                      14. Mr. Garamendi
15. Mrs. Hartzler
16. Mr. Ribble
17. Mrs. Noem
18. Mr. Benishek
19. Mr. Denham
20. Mr. Fincher
21. Mr. LaMalfa
22. Mr. Hudson
23. Mr. Davis
24. Mr. Collins
25. Mr. Yoho
26. Mr. McIntyre
27. Mr. David Scott
28. Ms. Kuster
29. Mr. Gallego
30. Mr. Vargas
31. Mr. Maloney

        NOT VOTING                      
 1. Ms. Fudge                         

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee on Agriculture's 
oversight findings and recommendations are reflected in the 
body of this report.

           Budget Act Compliance (Sections 308, 402, and 423)

    The provisions of clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives and section 308(a)(1) of the 
Congressional Budget Act of 1974 (relating to estimates of new 
budget authority, new spending authority, new credit authority, 
or increased or decreased revenues or tax expenditures) are not 
considered applicable. The estimate and comparison required to 
be prepared by the Director of the Congressional Budget Office 
under clause 3(c)(3) of rule XIII of the Rules of the House of 
Representatives and sections 402 and 423 of the Congressional 
Budget Act of 1974 submitted to the Committee prior to the 
filing of this report are as follows:

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, April 5, 2013.
Hon. Frank D. Lucas,
Chairman, Committee on Agriculture,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 992, the Swaps 
Regulatory Improvement Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Daniel 
Hoople and Barbara Edwards.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

H.R. 992--Swaps Regulatory Improvement Act

    H.R. 992 would allow certain financial firms to retain 
their financial portfolios containing swaps while remaining 
eligible for assistance from the Federal Reserve and Federal 
Deposit Insurance Corporation (FDIC). A swap is a contract 
between two parties to exchange payments based on the price of 
an underlying asset or change in interest, exchange, or other 
reference rate. Swaps can be used to hedge or mitigate certain 
risks associated with a firm's traditional activities, such as 
interest rate risk, or to speculate based on expected changes 
in prices and rates.
    CBO estimates that enacting this legislation would not have 
a significant impact on the net cash flows of the Federal 
Reserve or the FDIC over the next 10 years. Enacting this 
legislation could affect direct spending and revenues; 
therefore, pay-as-you-go procedures apply. However, CBO 
estimates that any such effects would be insignificant for the 
next 10 years.
    Under current law, federal assistance is not available to 
any swap dealer or major swap participant registered with the 
Securities and Exchange Commission or the Commodity Futures 
Trading Commission. Federal assistance includes access to any 
Federal Reserve credit facility and discount window (with some 
exception) and FDIC deposit insurance and guarantees. This 
prohibition does not apply to a major swap participant that is 
an insured depository institution (IDI) or an IDI acting as a 
swaps dealer for hedging purposes or for swaps involving bank-
permissible securities. (Such swaps include those that 
reference interest rates, currencies, government securities, 
and precious metals. Examples of non-permissible swaps include 
equity swaps, commodity and agriculture swaps, energy swaps, 
and metal swaps excluding gold and silver.) Under current law, 
IDIs that do not meet these exceptions must ``push out'' their 
swaps portfolio to a separately capitalized affiliate if the 
firm is part of a financial holding company, or cease these 
activities altogether.
    Similar to the exemption currently granted to IDIs, H.R. 
992 would allow uninsured U.S. branches or agencies of a 
foreign bank to engage in certain permissible swap activities 
and to push out others to an affiliate without jeopardizing 
access to federal assistance. In addition, the legislation 
would expand permissible swap activities to exclude only swaps 
based on asset-backed securities that are unregulated or not of 
a credit quality established by regulation.
    Enacting this legislation could affect direct spending and 
revenues if a change in swaps activity affects the financial 
stability of an IDI or other entity with access to assistance 
from the Federal Reserve and the FDIC. Because current law only 
affects IDIs that are swaps dealers and a small percentage of 
swap contracts, CBO estimates that any changes to the net cash 
flows of either agency would be insignificant for the next 10 
years.
    H.R. 992 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would not affect the budgets of state, local, or tribal 
governments.
    The CBO staff contacts for this estimate are Daniel Hoople 
and Barbara Edwards. The estimate was approved by Theresa 
Gullo, Deputy Assistant Director for Budget Analysis.

                    Performance Goals and Objectives

    With respect to the requirement of clause 3(c)(4) of rule 
XIII of the Rules of the House of Representatives, the 
performance goals and objectives of this legislation are to 
limit the application of Section 716 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (P.L. 111-203) so 
that it does not apply to equity or commodity swaps traded by a 
financial institution, but does still apply to certain 
structured finance swaps based on an asset-backed security.

                        Committee Cost Estimate

    Pursuant to clause 3(d)(2) of rule XIII of the Rules of the 
House of Representatives, the Committee report incorporates the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to sections 402 and 423 of the 
Congressional Budget Act of 1974.

                      Advisory Committee Statement

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

                Applicability to the 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 section 
102(b)(3) of the Congressional Accountability Act (Public Law 
104-1).

                       Federal Mandates Statement

    The Committee adopted 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 (Public Law 104-4).

Earmark Statement Required by Clause 9 of Rule XXI of the Rules of the 
                        House of Representatives

    H.R. 992 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9(e), 9(f), or 9(g) of rule XXI of the Rules of the 
House of Representatives.

                    Duplication of Federal Programs

    H.R. 992 does not establish or reauthorize 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 any related program 
identified in the most recent Catalog of Federal Domestic 
Assistance.

                  Disclosure of Directed Rule Makings

    The Committee does not believe that the legislation directs 
an executive branch official to conduct any specific rule 
making proceedings within the meaning of 5 U.S.C. 551.

         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 (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT

           *       *       *       *       *       *       *


TITLE VII--WALL STREET TRANSPARENCY AND ACCOUNTABILITY

           *       *       *       *       *       *       *


        Subtitle A--Regulation of Over-the-Counter Swaps Markets

PART I--REGULATORY AUTHORITY

           *       *       *       *       *       *       *


SEC. 716. PROHIBITION AGAINST FEDERAL GOVERNMENT BAILOUTS OF SWAPS 
                    ENTITIES.

  (a) Prohibition on Federal Assistance.--Notwithstanding any 
other provision of law (including regulations), no Federal 
assistance may be provided to any swaps entity with respect to 
any swap, security-based swap, or other activity of the swaps 
entity.
  (b) Definitions.--In this section:
          (1) Federal assistance.--The term ``Federal 
        assistance'' means the use of any advances from any 
        Federal Reserve credit facility or discount window that 
        is not part of a program or facility with broad-based 
        eligibility under section 13(3)(A) of the Federal 
        Reserve Act, Federal Deposit Insurance Corporation 
        insurance or guarantees for the purpose of--
                  (A) making any loan to, or purchasing any 
                stock, equity interest, or debt obligation of, 
                any swaps entity;
                  (B) purchasing the assets of any swaps 
                entity;
                  (C) guaranteeing any loan or debt issuance of 
                any swaps entity; or
                  (D) entering into any assistance arrangement 
                (including tax breaks), loss sharing, or profit 
                sharing with any swaps entity.
          (2) Swaps entity.--
                  (A) In general.--The term ``swaps entity'' 
                means any swap dealer, security-based swap 
                dealer, major swap participant, major security-
                based swap participant, that is registered 
                under--
                          (i) the Commodity Exchange Act (7 
                        U.S.C. 1 et seq.); or
                          (ii) the Securities Exchange Act of 
                        1934 (15 U.S.C. 78a et seq.).
                  (B) Exclusion.--The term ``swaps entity'' 
                does not include any major swap participant or 
                major security-based swap participant that is 
                an [insured depository institution] covered 
                depository institution.
          (3) Covered depository institution.--The term 
        ``covered depository institution'' means--
                  (A) an insured depository institution, as 
                that term is defined in section 3 of the 
                Federal Deposit Insurance Act (12 U.S.C. 1813); 
                and
                  (B) a United States uninsured branch or 
                agency of a foreign bank.
  (c) Affiliates of [Insured] Covered Depository 
Institutions.--The prohibition on Federal assistance contained 
in subsection (a) does not apply to and shall not prevent [an 
insured] a covered depository institution from having or 
establishing an affiliate which is a swaps entity, as long as 
[such insured] such covered depository institution is part of a 
bank holding company, [or savings and loan holding company] 
savings and loan holding company, or foreign banking 
organization (as such term is defined under Regulation K of the 
Board of Governors of the Federal Reserve System (12 C.F.R. 
211.21(o))), that is supervised by the Federal Reserve and such 
swaps entity affiliate complies with sections 23A and 23B of 
the Federal Reserve Act and such other requirements as the 
Commodity Futures Trading Commission or the Securities Exchange 
Commission, as appropriate, and the Board of Governors of the 
Federal Reserve System, may determine to be necessary and 
appropriate.
  [(d) Only Bona Fide Hedging and Traditional Bank Activities 
Permitted.--The prohibition in subsection (a) shall apply to 
any insured depository institution unless the insured 
depository institution limits its swap or security-based swap 
activities to:
          [(1) Hedging and other similar risk mitigating 
        activities directly related to the insured depository 
        institution's activities.
          [(2) Acting as a swaps entity for swaps or security-
        based swaps involving rates or reference assets that 
        are permissible for investment by a national bank under 
        the paragraph designated as ``Seventh.'' of section 
        5136 of the Revised Statutes of the United States ( 12 
        U.S.C. 24), other than as described in paragraph (3).
          [(3) Limitation on credit default swaps.--Acting as a 
        swaps entity for credit default swaps, including swaps 
        or security-based swaps referencing the credit risk of 
        asset-backed securities as defined in section 3(a)(77) 
        of the Securities Exchange Act of 1934 (15 U.S.C. 
        78c(a)(77)) (as amended by this Act) shall not be 
        considered a bank permissible activity for purposes of 
        subsection (d)(2) unless such swaps or security-based 
        swaps are cleared by a derivatives clearing 
        organization (as such term is defined in section la of 
        the Commodity Exchange Act (7 U.S.C. la)) or a clearing 
        agency (as such term is defined in section 3 of the 
        Securities Exchange Act (15 U.S.C. 78c)) that is 
        registered, or exempt from registration, as a 
        derivatives clearing organization under the Commodity 
        Exchange Act or as a clearing agency under the 
        Securities Exchange Act, respectively.]
  (d) Only Bona Fide Hedging and Traditional Bank Activities 
Permitted.--
          (1) In general.--The prohibition in subsection (a) 
        shall not apply to any covered depository institution 
        that limits its swap and security-based swap activities 
        to the following:
                  (A) Hedging and other similar risk mitigation 
                activities.--Hedging and other similar risk 
                mitigating activities directly related to the 
                covered depository institution's activities.
                  (B) Non-structured finance swap activities.--
                Acting as a swaps entity for swaps or security-
                based swaps other than a structured finance 
                swap.
                  (C) Certain structured finance swap 
                activities.--Acting as a swaps entity for swaps 
                or security-based swaps that are structured 
                finance swaps, if--
                          (i) such structured finance swaps are 
                        undertaken for hedging or risk 
                        management purposes; or
                          (ii) each asset-backed security 
                        underlying such structured finance 
                        swaps is of a credit quality and of a 
                        type or category with respect to which 
                        the prudential regulators have jointly 
                        adopted rules authorizing swap or 
                        security-based swap activity by covered 
                        depository institutions.
          (2) Definitions.--For purposes of this subsection:
                  (A) Structured finance swap.--The term 
                ``structured finance swap'' means a swap or 
                security-based swap based on an asset-backed 
                security (or group or index primarily comprised 
                of asset-backed securities).
                  (B) Asset-backed security.--The term ``asset-
                backed security'' has the meaning given such 
                term under section 3(a) of the Securities 
                Exchange Act of 1934 (15 U.S.C. 78c(a)).
  (e) Existing Swaps and Security-based Swaps.--The prohibition 
in subsection (a) shall only apply to swaps or security-based 
swaps entered into by [an insured] a covered depository 
institution after the end of the transition period described in 
subsection (f).
  (f) Transition Period.--To the extent [an insured depository] 
a covered depository institution qualifies as a ``swaps 
entity'' and would be subject to the Federal assistance 
prohibition in subsection (a), the appropriate Federal banking 
agency, after consulting with and considering the views of the 
Commodity Futures Trading Commission or the Securities Exchange 
Commission, as appropriate, shall permit [the insured 
depository] the covered depository institution up to 24 months 
to divest the swaps entity or cease the activities that require 
registration as a swaps entity. In establishing the appropriate 
transition period to effect such divestiture or cessation of 
activities, which may include making the swaps entity an 
affiliate of [the insured depository] the covered depository 
institution, the appropriate Federal banking agency shall take 
into account and make written findings regarding the potential 
impact of such divestiture or cessation of activities on [the 
insured depository] the covered depository institution's (1) 
mortgage lending, (2) small business lending, (3) job creation, 
and (4) capital formation versus the potential negative impact 
on insured depositors and the Deposit Insurance Fund of the 
Federal Deposit Insurance Corporation. The appropriate Federal 
banking agency may consider such other factors as may be 
appropriate. The appropriate Federal banking agency may place 
such conditions on [the insured depository] the covered 
depository institution's divestiture or ceasing of activities 
of the swaps entity as it deems necessary and appropriate. The 
transition period under this subsection may be extended by the 
appropriate Federal banking agency, after consultation with the 
Commodity Futures Trading Commission and the Securities and 
Exchange Commission, for a period of up to 1 additional year.
  (g) Excluded Entities.--For purposes of this section, the 
term ``swaps entity'' shall not include any insured depository 
institution under the Federal Deposit Insurance Act or a 
covered financial company under title II which is in a 
conservatorship, receivership, or a bridge bank operated by the 
Federal Deposit Insurance Corporation.
  (h) Effective Date.--The prohibition in subsection (a) shall 
be effective 2 years following the date on which this Act is 
effective.
  (i) Liquidation Required.--
          (1) In general.--
                  (A) FDIC insured institutions.--All swaps 
                entities that are FDIC insured institutions 
                that are put into receivership or declared 
                insolvent as a result of swap or security-based 
                swap activity of the swaps entities shall be 
                subject to the termination or transfer of that 
                swap or security-based swap activity in 
                accordance with applicable law prescribing the 
                treatment of those contracts. No taxpayer funds 
                shall be used to prevent the receivership of 
                any swap entity resulting from swap or 
                security-based swap activity of the swaps 
                entity.
                  (B) Institutions that pose a systemic risk 
                and are subject to heightened prudential 
                supervision as regulated under section 113.--
                All swaps entities that are institutions that 
                pose a systemic risk and are subject to 
                heightened prudential supervision as regulated 
                under section 113, that are put into 
                receivership or declared insolvent as a result 
                of swap or security-based swap activity of the 
                swaps entities shall be subject to the 
                termination or transfer of that swap or 
                security-based swap activity in accordance with 
                applicable law prescribing the treatment of 
                those contracts. No taxpayer funds shall be 
                used to prevent the receivership of any swap 
                entity resulting from swap or security-based 
                swap activity of the swaps entity.
                  (C) Non-FDIC insured, non-systemically 
                significant institutions not subject to 
                heightened prudential supervision as regulated 
                under section 113.--No taxpayer resources shall 
                be used for the orderly liquidation of any 
                swaps entities that are non-FDIC insured, non-
                systemically significant institutions not 
                subject to heightened prudential supervision as 
                regulated under section 113.
          (2) Recovery of funds.--All funds expended on the 
        termination or transfer of the swap or security-based 
        swap activity of the swaps entity shall be recovered in 
        accordance with applicable law from the disposition of 
        assets of such swap entity or through assessments, 
        including on the financial sector as provided under 
        applicable law.
          (3) No losses to taxpayers.--Taxpayers shall bear no 
        losses from the exercise of any authority under this 
        title.
  (j) Prohibition on Unregulated Combination of Swaps Entities 
and Banking.--At no time following adoption of the rules in 
subsection (k) may a bank or bank holding company be permitted 
to be or become a swap entity unless it conducts its swap or 
security-based swap activity in compliance with such minimum 
standards set by its prudential regulator as are reasonably 
calculated to permit the swaps entity to conduct its swap or 
security-based swap activities in a safe and sound manner and 
mitigate systemic risk.
  (k) Rules.--In prescribing rules, the prudential regulator 
for a swaps entity shall consider the following factors:
          (1) The expertise and managerial strength of the 
        swaps entity, including systems for effective 
        oversight.
          (2) The financial strength of the swaps entity.
          (3) Systems for identifying, measuring and 
        controlling risks arising from the swaps entity's 
        operations.
          (4) Systems for identifying, measuring and 
        controlling the swaps entity's participation in 
        existing markets.
          (5) Systems for controlling the swaps entity's 
        participation or entry into in new markets and 
        products.
  (l) Authority of the Financial Stability Oversight Council.--
The Financial Stability Oversight Council may determine that, 
when other provisions established by this Act are insufficient 
to effectively mitigate systemic risk and protect taxpayers, 
that swaps entities may no longer access Federal assistance 
with respect to any swap, security-based swap, or other 
activity of the swaps entity. Any such determination by the 
Financial Stability Oversight Council of a prohibition of 
federal assistance shall be made on an institution-by-
institution basis, and shall require the vote of not fewer than 
two-thirds of the members of the Financial Stability Oversight 
Council, which must include the vote by the Chairman of the 
Council, the Chairman of the Board of Governors of the Federal 
Reserve System, and the Chairperson of the Federal Deposit 
Insurance Corporation. Notice and hearing requirements for such 
determinations shall be consistent with the standards provided 
in title I.
  (m) Ban on Proprietary Trading in Derivatives.--An insured 
depository institution shall comply with the prohibition on 
proprietary trading in derivatives as required by section 619 
of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act.

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