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[House Report 112-476]
[From the U.S. Government Printing Office]


112th Congress                                            Rept. 112-476
                        HOUSE OF REPRESENTATIVES
 2d Session                                                      Part 1

======================================================================



 
                      SWAPS BAILOUT PREVENTION ACT

                                _______


                  May 11, 2012.--Ordered to be printed

                                _______


  Mr. Bachus, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 1838]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 1838) to repeal a provision of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act prohibiting any 
Federal bailout of swap dealers or participants, having 
considered the same, report favorably thereon with amendments 
and recommend that the bill as amended do pass.
    The amendments are as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Swaps Bailout Prevention Act''.

SEC. 2. REFORM OF PROHIBITION ON SWAP ACTIVITY ASSISTANCE.

  Section 716 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (15 U.S.C. 8305) is amended--
          (1) in subsection (b), by adding at the end the following:
          ``(3) Covered depository institution.--The term `covered 
        depository institution' means--
                  ``(A) an insured depository institution; and
                  ``(B) a United States uninsured branch or agency of a 
                foreign bank that has a prudential regulator.'';
          (2) in subsection (c)--
                  (A) in the heading for such subsection, by striking 
                ``Insured'' and inserting ``Covered'';
                  (B) by striking ``an insured'' and inserting ``a 
                covered'';
                  (C) by striking ``such insured'' and inserting ``such 
                covered''; and
                  (D) by striking ``or savings and loan holding 
                company'' and inserting ``savings and loan holding 
                company, or foreign banking organization (as such term 
                is defined under Regulation K (12 C.F.R. 211.21(o)))'';
          (3) by amending subsection (d) to read as follows:
  ``(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)).'';
          (4) in subsection (e), by striking ``an insured'' and 
        inserting ``a covered'';
          (5) in subsection (f)--
                  (A) by striking ``an insured'' and inserting ``a 
                covered''; and
                  (B) by striking ``the insured'' each place such term 
                appears and inserting ``the covered'';
          (6) in subsection (g), by striking ``insured'' and inserting 
        ``covered'';
          (7) in subsection (m), by striking ``An insured'' and 
        inserting ``A covered''; and
          (8) by adding at the end the following:
  ``(n) Foreign Swap Activity.--
          ``(1) In general.--This section shall not apply to swap or 
        security-based swap activity conducted outside the United 
        States with a non-U.S. counterparty by a non-U.S. swaps entity.
          ``(2) Definitions.--For purposes of this subsection, the 
        terms `non-U.S. swaps entity' and `non-U.S. counterparty' mean 
        a swaps entity or counterparty, respectively, that is licensed, 
        in the case of a foreign branch of a United States depository 
        institution, or organized under the laws of a jurisdiction 
        outside the United States.''.

    Amend the title so as to read:

      A bill to amend provisions in section 716 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act relating 
to Federal assistance for swaps entities.

                          Purpose and Summary

    H.R. 1838, the ``Swaps Bailout Prevention Act,'' amends 
Section 716 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (P.L. 111-203) in order to allow covered 
depository institutions to trade swaps with their affiliates, 
except for certain structured finance swaps. Under the 
legislation, the only swaps that covered depository 
institutions must spin out to separately capitalized entities 
are structured finance swaps, unless they are (1) undertaken 
for hedging or risk management purposes or (2) expressly 
permitted by prudential regulators to take place in a covered 
depository institution. The bill also ensures that uninsured 
U.S. branches and agencies of foreign banks are treated the 
same as insured depository institutions by defining both groups 
as ``covered depository institutions.'' These amendments to the 
Dodd-Frank Act mitigate the potential negative impacts of 
Section 716; if Section 716 is left unchanged, it could weaken 
the U.S. financial system and place U.S. financial institutions 
at a competitive disadvantage against their foreign 
counterparts.

                  Background and Need for Legislation

    Section 716 prohibits ``federal assistance''--defined as 
``the use of any advances from any Federal Reserve credit 
facility or discount window . . . [or] Federal Deposit 
Insurance Corporation insurance or guarantees''--to ``swaps 
entities,'' which include swap dealers, security-based swap 
dealers, major swap participants, and major security-based swap 
participants. Section 716 is known as the swap desk ``push 
out'' or ``spin off'' provision, because it will force 
financial institutions that have swap desks to move them out of 
the financial institution and into an affiliate in order for 
that institution to maintain its access to Federal Reserve 
credit facilities and federal deposit insurance. Section 716 
allows insured depository institutions to continue dealing in 
swaps related to interest rates, foreign currency, and swaps 
permitted under the National Bank Act; however, it prohibits 
insured depository institutions from engaging in swaps related 
to commodities, equities, and credit. Section 716 also 
prohibits the uninsured U.S. branches and agencies of foreign 
institutions from engaging in swaps if those foreign 
institutions retain access to federal assistance.
    Section 716 could result in two negative consequences for 
the U.S. financial system and U.S. financial institutions. 
First, Section 716 may make the U.S. financial system less 
stable by forcing swap trading into the unregulated shadow 
banking system. As Federal Reserve Board Chairman Ben Bernanke 
has pointed out, 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.'' Second, Section 
716 may place U.S. financial institutions at a significant 
competitive disadvantage against their foreign counterparts 
because foreign jurisdictions do not plan to adopt a provision 
similar to Section 716 in their ongoing efforts to reform the 
global derivatives marketplace.
    In light of the potential negative consequences, former 
Federal Reserve Board Chairman Paul Volcker and former Federal 
Deposit Insurance Corporation Chairman Sheila Bair both 
expressed serious concerns about Section 716 during the Dodd-
Frank House-Senate Conference Committee deliberations. Mr. 
Volcker stated that the ``provision of derivatives by 
commercial banks to their customers in the usual course of a 
banking relationship should not be prohibited.'' Ms. Bair 
stated that ``one unintended outcome of this provision would be 
weakened, not strengthened, protection of the insured bank and 
the Deposit Insurance Fund.'' To ensure that the U.S. financial 
system is not weakened and that U.S. financial institutions are 
not placed at a competitive disadvantage against their foreign 
counterparts, Representative Nan Hayworth introduced H.R. 1838 
on May 11, 2011.
    The Subcommittee on Capital Markets and Government 
Sponsored Enterprises held a legislative hearing on H.R. 1838 
on October 14, 2011. During that hearing, the Subcommittee 
received testimony from a variety of financial market 
participants, many of whom expressed concerns about Section 716 
and support for H.R. 1838. For example, Conrad Voldstad, Chief 
Executive Officer of the International Swaps and Derivatives 
Association, testified that ``Section 716 brings no real risk-
reducing benefits'' and that it will place U.S. financial 
institutions ``at a competitive disadvantage to their non-U.S. 
counterparts,'' which will lead to ``American customers of 
these firms'' having ``higher costs.'' Keith Bailey, Managing 
Director of Barclays Capital, testified on behalf of the 
Institute of International Bankers, and spoke about the 
negative effects of the differential treatment of uninsured 
U.S. branches and agencies of foreign banks, which he stated 
would ``significantly reduce competition and worsen pricing in 
the U.S. swaps market, especially given that 8 of the 14 
largest global derivatives dealers are foreign banks.''
    Moreover, on November 14, 2011, economist Mark Zandi wrote 
to Chairman Bachus to express concerns similar to those raised 
by Mr. Bernanke, Mr. Volcker, and Ms. Bair. Mr. Zandi explained 
that he has ``significant concerns with [Section 716] because 
of its potential to increase systemic risk, create major 
inefficiencies in markets, and likely have a major impact on 
U.S. competitiveness.''

                                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. 1838, and three 
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. 1838, as amended, favorably reported to the 
full Committee by a record vote of 21 yeas and 12 nays (Record 
vote No. CM-44).
    The Committee on Financial Services met in open session on 
February 16, 2012, and ordered H.R. 1838, as amended, favorably 
reported to the House by voice vote.

                             Committee Vote

    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. 
There were no record votes taken on amendments or in connection 
with ordering H.R. 1838, as amended, reported to the House.
    During consideration of H.R. 1838 by the Committee, the 
following amendment was considered:
    1. An amendment offered by Mr. Himes, Mrs. Maloney, and Ms. 
Hayworth, No. 1, to ensure that U.S. operations of foreign 
financial institutions are treated the same as U.S. financial 
institutions; clarify the extraterritorial reach of section 716 
of the Dodd-Frank Act; and require structured finance swaps to 
be pushed out to a separate entity, 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 a hearing 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. 1838, the ``Swaps Bailout Prevention 
Act'' is to amend Section 716 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Public Law 111-203) to 
require financial institutions to trade certain structured 
finance swaps in a separately capitalized entity, which cannot 
receive Federal financial assistance. H.R. 1838 prohibits all 
structured finance swaps from taking place in the financial 
institution except structured finance swaps (1) that are 
undertaken for hedging or risk management purposes or (2) that 
the prudential regulators have expressly allowed covered 
depository institutions to undertake. The bill also ensures 
that uninsured U.S. branches and agencies of foreign banks are 
treated the same as insured depository institutions. These 
amendments will mitigate the potential negative impacts of 
Section 716, which, if left unchanged, could weaken the U.S. 
financial system and place U.S. financial institutions at a 
competitive disadvantage against their foreign counterparts.

   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:

                                                       May 4, 2012.
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. 1838, the Swaps 
Bailout Prevention 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. 1838--Swaps Bailout Prevention Act

    H.R. 1838 would allow certain financial firms to retain 
their financial portfolios containing swaps and remain eligible 
for assistance from the Federal Reserve and the 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 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 over the 
next 10 years.
    H.R. 1838 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.
    Section 716 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act denies federal assistance from the 
Federal Reserve (with some exception) and the FDIC to any swap 
dealer or major swap participant registered with the Securities 
and Exchange Commission or the Commodity Futures Trading 
Commission. 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. (Bank-permissible 
swaps include those that reference interest rates, currencies, 
government securities, and precious metals but not other 
commodities or equities.) Under current law, IDIs must divest 
of swaps that do not fall into those categories to an affiliate 
if the firm is part of a financial holding company or cease 
those activities altogether. (Commercial banks with retail 
operations in the United States are required to be federally 
insured; thus, losing access to FDIC assistance is not an 
option for those institutions.)
    Similar to the exemption granted to IDIs, H.R. 1838 would 
allow an uninsured U.S. branch or agency of a foreign bank to 
engage in certain permissible swap activities and to divest of 
others to an affiliate without jeopardizing access to federal 
assistance. In addition, the legislation would expand 
permissible swap activities to only exclude swaps based on 
asset-backed securities that are unregulated or not of a credit 
quality established by regulation. Finally, H.R. 1838 would 
exempt swap activities of foreign entities conducted outside of 
the United States with non-U.S. counterparties.
    CBO expects that enacting this legislation would have no 
measurable impact on advances made by the Federal Reserve or on 
the future cost of efforts by the FDIC to resolve failed IDIs. 
As such, CBO estimates no significant change in the net cash 
flows of either entity, resulting in no significant net effect 
on the federal budget over the next 10 years.
    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.

                       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. 1838 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

    The short title of the Act is the ``Swaps Bailout 
Prevention Act.''

Section 2. Reform of prohibition on swap activity assistance

    This section defines a ``covered depository institution'' 
as an insured depository institution or a United States 
uninsured branch or agency of a foreign bank that has a 
prudential regulator.
    This section also replaces the term ``insured depository 
institution'' in Section 716 with the term ``covered depository 
institution.''
    This section provides that covered depository institutions 
can engage in to engage in all swap and security-based swap 
activities except structured finance swaps that are neither (1) 
undertaken for hedging or risk management purposes nor (2) 
expressly allowed by prudential regulators to take place in a 
covered depository institution.
    This section defines ``structured finance swap'' as a swap 
or security-based swap based on an asset-backed security (or 
group or index primarily comprised of asset-backed securities.
    This section also defines ``asset-backed security'' to have 
the same meaning it has under Section 3(a) of the Securities 
Exchange Act of 1934.
    This section also clarifies that Section 716 does not apply 
to swaps or security-based swap activities conducted outside 
the United States with a non-U.S. counterparty by a non-U.S. 
swaps entity.
    This section also defines ``non-U.S. swaps entity'' and 
``non-U.S. counterparty'' as a swaps entity or counterparty 
licensed or organized under the laws of a jurisdiction outside 
the United States.

         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) * * *
  (b) Definitions.--In this section:
          (1) * * *

           *       *       *       *       *       *       *

          (3) Covered depository institution.--The term 
        ``covered depository institution'' means--
                  (A) an insured depository institution; and
                  (B) a United States uninsured branch or 
                agency of a foreign bank that has a prudential 
                regulator.
  (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 (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] 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] 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] 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] 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] 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] covered 
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.

           *       *       *       *       *       *       *

  (m) Ban on Proprietary Trading in Derivatives.--[An insured] 
A covered 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.
  (n) Foreign Swap Activity.--
          (1) In general.--This section shall not apply to swap 
        or security-based swap activity conducted outside the 
        United States with a non-U.S. counterparty by a non-
        U.S. swaps entity.
          (2) Definitions.--For purposes of this subsection, 
        the terms ``non-U.S. swaps entity'' and ``non-U.S. 
        counterparty'' mean a swaps entity or counterparty, 
        respectively, that is licensed, in the case of a 
        foreign branch of a United States depository 
        institution, or organized under the laws of a 
        jurisdiction outside the United States.

           *       *       *       *       *       *       *


                             MINORITY VIEWS

    The Wall Street Reform and Consumer Protection Act 
requires, for the first time, the regulation of over-the-
counter derivatives, previously opaque transactions that helped 
bring our financial system to the brink of disaster. The vast 
majority of derivatives must now be centrally cleared and 
publicly reported, and be backed by margin and capital to 
ensure that swap dealers and major swap users can honor their 
commitments. In addition, the reform law also prohibits banks 
from placing bets with federally insured deposits through the 
``Volcker Rule''. Both measures serve as important safeguards 
as we rebuild trust in our financial system.
    As amended, H.R. 1838 would repeal portions of Section 716 
of the financial reform law, also known as the ``push-out 
provision.'' Section 716 prohibits banks from engaging in 
several types of derivatives. Questions have been raised about 
this provision 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.

                                   Barney Frank.
                                   Wm. Lacy Clay.
                                   Gwen Moore.
                                   James A. Himes.
                                   Ruben Hinojosa.
                                   Andre Carson.
                                   Gary L. Ackerman.
                                   Al Green.
                                   Stephen F. Lynch.
                                   David Scott.
                                   Maxine Waters.
                                   Carolyn B. Maloney.
                                   Melvin L. Watt.
                                   Luis V. Gutierrez.
                                   Gary C. Peters.
                                   Ed Perlmutter.
                                   Michael E. Capuano.
                                   Gregory W. Meeks.

                                  
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