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[House Report 112-345]
[From the U.S. Government Printing Office]


112th Congress                                            Rept. 112-345
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     Part 1

======================================================================



 
               SWAP EXECUTION FACILITY CLARIFICATION ACT

                                _______
                                

               December 23, 2011.--Ordered to be printed

                                _______
                                

  Mr. Bachus, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 2586]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 2586) to refine the definition of swap execution 
facility in the provisions regulating swap markets added by 
title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, having considered the same, report favorably 
thereon with an amendment and recommend that the bill as 
amended do pass.
    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Swap Execution Facility Clarification 
Act''.

SEC. 2. DEFINITION OF SWAP EXECUTION FACILITY.

  (a) Commodity Exchange Act.--Section 1a(50) of the Commodity Exchange 
Act (7 U.S.C. 1a(50)) is amended--
          (1) by striking ``The term'' and inserting the following:
                  ``(A) In general.--The term'';
          (2) by redesignating subparagraphs (A) and (B) as clauses (i) 
        and (ii), respectively (and by moving the margins 2 ems to the 
        right); and
          (3) by adding at the end the following:
                  ``(B) Interpretation.--In interpreting or further 
                defining the term `swap execution facility', the 
                Commission shall not require a swap execution facility 
                to--
                          ``(i) have a minimum number of participants 
                        receive a bid or offer or respond to any 
                        trading system or platform functionality;
                          ``(ii) display or delay bids or offers for 
                        any period of time;
                          ``(iii) limit the means of interstate 
                        commerce utilized by market participants to 
                        enter into and execute any swap transactions on 
                        the trading system or platform; or
                          ``(iv) require bids or offers on one trading 
                        system or platform operated by the swap 
                        execution facility to interact with bids or 
                        offers on another trading system or platform 
                        operated by the swap execution facility''.
  (b) Securities Exchange Act of 1934.--Section 3(a)(77) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77)) is amended--
          (1) by striking ``The term'' and inserting the following:
                  ``(A) In general.--The term'';
          (2) by redesignating subparagraphs (A) and (B) as clauses (i) 
        and (ii), respectively (and by moving the margins 2 ems to the 
        right); and
          (3) by adding at the end the following:
                  ``(B) Interpretation.--In interpreting or further 
                defining the term `security-based swap execution 
                facility', the Commission shall not require a security-
                based swap execution facility to--
                          ``(i) have a minimum number of participants 
                        receive a bid or offer or respond to any 
                        trading system or platform functionality;
                          ``(ii) display or delay bids or offers for 
                        any period of time;
                          ``(iii) limit the means of interstate 
                        commerce utilized by market participants to 
                        enter into and execute any security-based swap 
                        transactions on the `method of trading 
                        functionality; or
                          ``(iv) require bids or offers on one trading 
                        system or platform operated by the swap 
                        execution facility to interact with bids or 
                        offers on another method of trading 
                        functionality operated by the swap execution 
                        facility.''.

                          Purpose and Summary

    Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (PL 111-203) requires that cleared swaps be 
executed either on exchanges or on swap execution facilities 
(SEFs) regulated by either the Commodity Futures Trading 
Commission (CFTC) or the Securities and Exchange Commission 
(SEC). The drafters of the Dodd-Frank Act intended for SEFs to 
serve as an alternative to exchanges by providing an execution 
facility for illiquid or thinly-traded swaps. The CFTC's and 
SEC's proposed rules for SEFs, however, fail to provide the 
flexibility necessary to execute illiquid or thinly-traded 
swaps. Introduced by Representatives Garrett, Maloney, Hurt, 
and Meeks, H.R. 2586, the ``Swap Execution Facility 
Clarification Act,'' directs the CFTC and SEC to promulgate SEF 
rules that would effectuate Congress's intent that SEFs serve 
as an alternative to exchanges and provide an execution 
facility for illiquid or thinly-traded swaps.
    In order to ensure that SEFs provide a viable means of 
execution for illiquid or thinly-traded swaps, H.R. 2586 
prohibits the CFTC and the SEC from requiring a SEF to have a 
minimum number of participants receive bids or offers. The bill 
also prohibits the CFTC and the SEC from requiring that market 
participants request or receive more than one quote, and from 
requiring SEFs to display or delay bids or offers for a 
specific time period. H.R. 2586 permits market participants to 
use any means of interstate commerce to execute swap 
transactions and prohibits the CFTC or SEC from writing rules 
that allow only voice-based and hybrid trading models for the 
execution of block trades. Finally, the bill prohibits the CFTC 
and SEC from requiring SEFs that operate multiple trading 
systems to force those systems to interact with each other to 
execute swap transactions.

                  Background and Need for Legislation

    The Dodd-Frank Act requires the CFTC and the SEC to draft 
rules governing SEFs. While Congress intended that SEFs would 
provide a venue for executing illiquid or thinly-traded swaps, 
market participants have pointed out that the proposed rules 
are overly prescriptive and would inhibit the execution of swap 
trades.
    Market participants have identified the following 
shortcomings in the proposed rules. First, the CFTC's proposed 
rules would require market participants to obtain at least five 
quotes through a ``request for quote'' system before entering 
into a swap transaction. This requirement forces market 
participants to reveal confidential trading strategies to at 
least five market participants. Second, the SEC's and CFTC's 
proposed rules would require a SEF to display or delay quotes 
for a specific period of time. Market participants have pointed 
out that this rule is ill-suited for the swaps market, where 
timing delays will cause confusion and poor trade execution 
because swap markets do not have the continuous pricing and 
trading that characterize equity markets. Third, the CFTC's 
rules limit the means by which market participants may execute 
non-block trades on a SEF. Finally, under the SEC's proposed 
rule, multiple trading systems would be required to interact 
with each other on the same SEF, which would force large trades 
to be broken up and prevent market participants from executing 
large trades that fall short of a block trade. H.R. 2586 
prohibits the SEC and CFTC from including these requirements in 
their SEF rules, thereby enabling market participants to more 
easily execute illiquid or thinly-traded swaps.
    At a legislative hearing on H.R. 2586 held by the 
Subcommittee on Capital Markets and Government-Sponsored 
Enterprises on October 14, 2011, Conrad Voldstad, Chief 
Executive Officer of the International Swaps and Derivatives 
Association, explained that H.R. 2586 would ``correct a number 
of flaws in the current proposed regulatory interpretation and 
better align the proposed rules with Congressional intent.'' 
Mr. Volstad also testified that the proposed SEF rules ``have 
the potential to significantly and adversely affect the 
dynamics of the swaps market by reducing liquidity and choice 
and by increasing costs and ultimately risks for OTC 
derivatives markets participants.'' During that same hearing, 
Shawn Bernardo, Chairman of the Wholesale Markets Brokers 
Association, testified that the ``SEF Clarification Act will 
provide regulators with a clear expression of Congress' 
legislative intent and ensure that the final rules remain 
within the framework of competitive OTC markets.'' Brenda 
Boultwood, Chief Risk Officer and Senior Vice President of 
Constellation Energy, testified on behalf of the Coalition of 
Derivatives End-Users at the October 14 hearing and stated that 
``we support the goals of H.R. 2586,'' which she said seeks to 
``ensure that end-users will have a variety of options for 
hedging their risk.''

                                Hearing

    On October 14, 2011, the Subcommittee on Capital Markets 
and Government-Sponsored Enterprises held a hearing entitled 
``Legislative Proposals to Bring Certainty to the Over-the-
Counter Derivatives Market,'' to consider H.R. 2586, and four 
other bills. This was a one-panel hearing, and the following 
witnesses testified:
           Mr. Keith Bailey, Managing Director, Fixed 
        Income, Currencies and Commodities, Barclays Capital, 
        on behalf of the Institute of International Bankers
           Mr. Shawn Bernardo, Senior Managing 
        Director, Tullett Prebon, on behalf of the Wholesale 
        Market Brokers' Association Americas
           Ms. Brenda Boultwood, Chief Risk Officer and 
        Senior Vice President, CE Risk Management Division 
        Office, Constellation Energy, on behalf of the 
        Coalition of Derivatives End-Users
           Mr. James Cawley, CEO, Javelin Capital 
        Markets LLC
           Mr. Kent Mason, Davis & Harman LLP, on 
        behalf of the American Benefits Council and the 
        Committee on the Investment of Employee Benefit Assets
           Mr. Conrad Voldstad, Chief Executive 
        Officer, International Swaps and Derivatives 
        Association

                        Committee Consideration

    The Subcommittee on Capital Markets and Government-
Sponsored Enterprises met in open session on November 15, 2011, 
and ordered H.R. 2586 favorably reported to the full Committee 
by voice vote.
    On November 30, 2011, the Committee on Financial Services 
met in open session and ordered H.R. 2586, as amended, 
favorably reported to the House by voice vote.

                            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. A 
motion by Chairman Bachus to report the bill, as amended, to 
the House with a favorable recommendation was agreed to by a 
voice vote.
    During consideration of H.R. 2586 by the Committee, the 
following amendments were considered:
    1. An amendment offered by Ms. Waters, no. 2, to strike all 
after the enacting clause and require, within three months, the 
SEC and CFTC to jointly establish rules to interpret and define 
the terms ``swap execution facility'' and ``security-based swap 
execution facility,'' was not agreed to by a record vote of 23 
yeas and 31 nays (Record vote no. FC-54).

                                              RECORD VOTE NO. FC-54
----------------------------------------------------------------------------------------------------------------
         Representative             Aye       Nay     Present     Representative      Aye       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Bachus.....................  ........        X   .........  Mr. Frank (MA)...        X   ........  .........
Mr. Hensarling.................  ........        X   .........  Ms. Waters.......        X   ........  .........
Mr. King (NY)..................  ........        X   .........  Mrs. Maloney.....        X   ........  .........
Mr. Royce......................  ........        X   .........  Mr. Gutierrez....  ........  ........  .........
Mr. Lucas......................  ........        X   .........  Ms. Velazquez....  ........  ........  .........
Mr. Paul.......................  ........  ........  .........  Mr. Watt.........        X   ........  .........
Mr. Manzullo...................  ........        X   .........  Mr. Ackerman.....        X   ........  .........
Mr. Jones......................        X   ........  .........  Mr. Sherman......        X   ........  .........
Mrs. Biggert...................  ........        X   .........  Mr. Meeks........        X   ........  .........
Mr. Gary G. Miller (CA)........  ........        X   .........  Mr. Capuano......        X   ........  .........
Mrs. Capito....................  ........        X   .........  Mr. Hinojosa.....        X   ........  .........
Mr. Garrett....................  ........        X   .........  Mr. Clay.........        X   ........  .........
Mr. Neugebauer.................  ........        X   .........  Mrs. McCarthy            X   ........  .........
                                                                 (NY).
Mr. McHenry....................  ........        X   .........  Mr. Baca.........        X   ........  .........
Mr. Campbell...................  ........        X   .........  Mr. Lynch........        X   ........  .........
Mrs. Bachmann..................  ........  ........  .........   Mr. Miller (NC).        X   ........  .........
Mr. McCotter...................  ........        X   .........  Mr. David Scott          X   ........  .........
                                                                 (GA).
Mr. McCarthy (CA)..............  ........        X   .........  Mr. Al Green (TX)  ........  ........  .........
Mr. Pearce.....................  ........        X   .........  Mr. Cleaver......        X   ........  .........
Mr. Posey......................  ........        X   .........  Ms. Moore........        X   ........  .........
Mr. Fitzpatrick................  ........        X   .........  Mr. Ellison......        X   ........  .........
Mr. Westmoreland...............  ........        X   .........  Mr. Perlmutter...        X   ........  .........
Mr. Luetkemeyer................  ........        X   .........  Mr. Donnelly.....        X   ........  .........
Mr. Huizenga...................  ........        X   .........  Mr. Carson.......  ........  ........  .........
Mr. Duffy......................  ........        X   .........  Mr. Himes........        X   ........  .........
Ms. Hayworth...................  ........        X   .........  Mr. Peters.......        X   ........  .........
Mr. Renacci....................  ........        X   .........  Mr. Carney.......  ........  ........  .........
Mr. Hurt.......................  ........        X
Mr. Dold.......................  ........        X
Mr. Schweikert.................  ........        X
Mr. Grimm......................  ........        X
Mr. Canseco....................  ........        X
Mr. Stivers....................  ........        X
Mr. Fincher....................  ........        X
----------------------------------------------------------------------------------------------------------------

    The following amendment and motion were also considered by 
the Committee:
    1. An amendment offered by Mr. Garrett, no. 1, to make 
technical changes, was agreed to by voice vote.
    2. A motion offered by Mr. Hurt to move the previous 
question on H.R. 2586 was agreed to by voice vote.

                      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 establishes the 
following performance related goals and objectives for this 
legislation:
    The objective of H.R. 2586, the ``Swap Execution Facility 
Clarification Act,'' is to direct the Commodity Futures Trading 
Commission (CFTC) and Securities and Exchange Commission (SEC) 
to promulgate rules governing the operations of swap execution 
facilities (SEFs) that would effectuate Congress's intent that 
SEFs serve as an alternative to exchanges and provide an 
execution facility for illiquid or thinly-traded swaps. Title 
VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (PL 111-203) requires that cleared swaps be 
executed either on exchanges or on SEFs regulated by either the 
CFTC or the SEC. The drafters of the Dodd-Frank Act intended 
for SEFs to serve as an alternative to exchanges by providing 
an execution facility for illiquid or thinly-traded swaps. The 
CFTC's and SEC's proposed rules for SEFs, however, fail to 
provide the flexibility necessary to execute illiquid or 
thinly-traded swaps.

           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 Estimate

    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:

                                                 December 14, 2011.
Hon. Spencer Bachus,
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. 2586, the Swap 
Execution Facility Clarification Act.
    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.
    Enclosure.

H.R. 2586--Swap Execution Facility Clarification Act

    The Dodd-Frank Wall Street Reform and Consumer Protection 
Act established entities known as swap execution facilities 
(SEFs) where multiple parties are able to trade swaps. (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).
    H.R. 2586 would amend the definition of an SEF to prevent 
the regulatory agencies--the Commodity Futures Trading 
Commission (CFTC) and the Securities and Exchange Commission 
(SEC)--from imposing certain requirements on such facilities. 
The bill would prevent the agencies from developing regulations 
that require an SEF to follow certain business practices, such 
as setting a minimum number of participants to receive a bid.
    Neither the CFTC nor the SEC has finalized regulations 
regarding swap execution facilities. Based on information from 
the two agencies, CBO expects that incorporating the provisions 
of H.R. 2586 at this point in the regulatory process would not 
have a significant effect on 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. 2586 would not affect direct 
spending or revenues; therefore, pay-as-you-go procedures do 
not apply.
    H.R. 2586 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.
    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. 2586 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section provides a short title to the bill by citing 
it as the ``Swap Execution Facility Clarification Act.''

Section 2. Definition of swap execution facility

    This section amends the definition of a ``swap execution 
facility'' in Section 1(a)(50) of the Commodity Exchange Act, 
and the definition of a ``security-based swap execution 
facility'' in Section 3(a)(77) of the Securities and Exchange 
Act of 1934, by prohibiting the Commodity Futures Trading 
Commission and the Securities Exchange Commission from 
requiring a swap execution facility or a securities-based swap 
execution facility to (i) have a minimum number of participants 
receive a bid or offer or respond to any trading system or 
platform functionality; (ii) display or delay bids or offers 
for any period of time; (iii) limit the means of interstate 
commerce utilized by market participants to enter into and 
execute any swap transactions on the trading system or 
platform; or (iv) require bids or offers on one trading system 
or platform operated by the swap execution facility to interact 
with bids or offers on another trading system or platform 
operated by the swap execution facility.

         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):

                         COMMODITY EXCHANGE ACT




           *       *       *       *       *       *       *
SEC. 1A. DEFINITIONS.

  As used in this Act:
          (1) * * *

           *       *       *       *       *       *       *

          (50) Swap execution facility.--[The term]
                  (A) In general.--The term  ``swap execution 
                facility'' means a trading system or platform 
                in which multiple participants have the ability 
                to execute or trade swaps by accepting bids and 
                offers made by multiple participants in the 
                facility or system, through any means of 
                interstate commerce, including any trading 
                facility, that--
                          [(A)] (i) facilitates the execution 
                        of swaps between persons; and
                          [(B)] (ii) is not a designated 
                        contract market.
                  (B) Interpretation.--In interpreting or 
                further defining the term ``swap execution 
                facility'', the Commission shall not require a 
                swap execution facility to--
                          (i) have a minimum number of 
                        participants receive a bid or offer or 
                        respond to any trading system or 
                        platform functionality;
                          (ii) display or delay bids or offers 
                        for any period of time;
                          (iii) limit the means of interstate 
                        commerce utilized by market 
                        participants to enter into and execute 
                        any swap transactions on the trading 
                        system or platform; or
                          (iv) require bids or offers on one 
                        trading system or platform operated by 
                        the swap execution facility to interact 
                        with bids or offers on another trading 
                        system or platform operated by the swap 
                        execution facility

           *       *       *       *       *       *       *

                              ----------                              


                    SECURITIES EXCHANGE ACT OF 1934

TITLE I--REGULATION OF SECURITIES EXCHANGES

           *       *       *       *       *       *       *


                  DEFINITIONS AND APPLICATION OF TITLE

  Sec. 3. (a) When used in this title, unless the context 
otherwise requires--
          (1) * * *

           *       *       *       *       *       *       *

          (77) Security-based swap execution facility.--[The 
        term]
                  (A) In general.--The term ``security-based 
                swap execution facility'' means a trading 
                system or platform in which multiple 
                participants have the ability to execute or 
                trade security-based swaps by accepting bids 
                and offers made by multiple participants in the 
                facility or system, through any means of 
                interstate commerce, including any trading 
                facility, that--
                          [(A)] (i) facilitates the execution 
                        of security-based swaps between 
                        persons; and
                          [(B)] (ii) is not a national 
                        securities exchange.
                  (B) Interpretation.--In interpreting or 
                further defining the term ``security-based swap 
                execution facility'', the Commission shall not 
                require a security-based swap execution 
                facility to--
                          (i) have a minimum number of 
                        participants receive a bid or offer or 
                        respond to any trading system or 
                        platform functionality;
                          (ii) display or delay bids or offers 
                        for any period of time;
                          (iii) limit the means of interstate 
                        commerce utilized by market 
                        participants to enter into and execute 
                        any security-based swap transactions on 
                        the `method of trading functionality; 
                        or
                          (iv) require bids or offers on one 
                        trading system or platform operated by 
                        the swap execution facility to interact 
                        with bids or offers on another method 
                        of trading functionality operated by 
                        the swap execution facility.

           *       *       *       *       *       *       *


                                  
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