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K. C.
Republican TX 11

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  • Terrorism Risk Insurance Program Reauthorization Act of 2015

    by Representative K. Michael Conaway

    Posted on 2015-01-07

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    CONAWAY. Mr. Speaker, I thank Mr. Neugebauer for yielding.

    I rise today in support of H.R. 26, a bill to extend the expiration date of the Terrorism Risk Insurance Act.

    I want to thank my good friend and vice chairman of the Agriculture Committee, Randy Neugebauer, for his work in shepherding this bill to the floor again.

    I would also like to thank him and Chairman Hensarling for fighting hard to include the Business Risk Mitigation and Price Stabilization Act as title III of today's bill. The House Committee on Agriculture, along with the Financial Services Committee, has made moving this legislation a priority.

    Despite the lengthy title, the Business Risk Mitigation and Price Stabilization Act is not a complicated bill. It fulfills the promise that this body made to our farmers, ranchers, and small businesses when Dodd-Frank was drafted and signed into law that end users would not be treated as financial firms.

    {time} 1245 Yet regulators have narrowly interpreted the exemptions in the black letter of the law, forcing some businesses to leave capital idle in margin accounts, rather than investing in new production and creating jobs.

    Forcing businesses to post margin not only ties up capital, but also makes it more expensive for firms to [[Page H68]] utilize the risk management tools that they need to protect their businesses from uncertainty.

    Today's bill clarifies in statute that Congress meant what it said when it exempted end users from margin and clearing requirements. Specifically, it ensures that those businesses which are exempt from clearing their hedges are also exempt from margining those hedges.

    This well-reasoned legislation has broad bipartisan support. As a stand-alone bill, the House overwhelmingly supported it last year in June by a vote of 411-12. Since then, we have passed it four more times--and if we pass it today, a fifth time--which means we will keep doing it until we get it right.

    I am hopeful that with today's vote, we can finally offer farmers, ranchers, and businesses the relief we promised them almost 5 years ago.

    Again, I thank Chairman Hensarling and Chairman Neugebauer for including the Business Risk Mitigation and Price Stabilization Act in today's bill, and I urge my colleagues to support H.R. 26.

    House of Representatives, Committee on Agriculture, Washington, DC, January 7, 2014.

    Mr. Speaker: I am pleased to see the inclusion H.R. 634, Business Risk Mitigation and Price Stability Act, from the 113th Congress as Title III of the Terrorism Risk Insurance Program Reauthorization Act. This language, which was also included as Subtitle of Title III of H.R. 4413, Customer Protection and End-User Relief Act, from the 113th Congress provides an important protection to end-users from costly margining requirements that will divert much needed capital away from job creation.

    In support of this title, I would like to request that the pertinent portions of the Committee on Agriculture report to accompany H.R. 4413 be included in the appropriate place in the Congressional Record.

    Sincerely, K. Michael Conaway, Chairman.

    ____ Title 3--End User Relief SUBTITLE A--END-USER EXEMPTION FROM MARGIN REQUIREMENTS Section 311--End-user margin requirements Section 311 amends Section 4s(e) of the Commodity Exchange Act (CEA) as added by Section 731 of the Dodd-Frank Act to provide an explicit exemption from margin requirements for swap transactions involving end-users that qualify for the clearing exception under 2(h)(7)(A).

    ``End-users'' are thousands of companies across the United States who utilize derivatives to hedge risks associated with their day-to-day operations, such as fluctuations in the prices of raw materials. Because these businesses do not pose systemic risk, Congress intended that the Dodd-Frank Act provide certain exemptions for end-users to ensure they were not unduly burdened by new margin and capital requirements associated with their derivatives trades that would hamper their ability to expand and create jobs.

    Indeed, Title VII of the Dodd-Frank Act includes an exemption for non-financial end-users from centrally clearing their derivatives trades. This exemption permits end-users to continue trading directly with a counterparty, (also known as trading ``bilaterally,'' or over-the-counter (OTC)) which means their swaps are negotiated privately between two parties and they are not executed and cleared using an exchange or clearinghouse. Generally, it is common for non- financial end-users, such as manufacturers, to avoid posting cash margin for their OTC derivative trades. End-users generally will not post margin because they are able to negotiate such terms with their counterparties due to the strength of their own balance sheet or by posting non-cash collateral, such as physical property. End-users typically seek to preserve their cash and liquid assets for reinvestment in their businesses. In recognition of this common practice, the Dodd-Frank Act included an exemption from margin requirements for end-users for OTC trades.

    Section 731 of the Dodd-Frank Act (and Section 764 with respect to security-based swaps) requires margin requirements be applied to swap dealers and major swap participants for swaps that are not centrally cleared. For swap dealers and major swap participants that are banks, the prudential banking regulators (such as the Federal Reserve or Federal Deposit Insurance Corporation) are required to set the margin requirements. For swap dealers and major swap participants that are not banks, the CFTC is required to set the margin requirements. Both the CFTC and the banking regulators have issued their own rule proposals establishing margin requirements pursuant to Section 731.

    Following the enactment of the Dodd-Frank Act in July of 2010, uncertainty arose regarding whether this provision permitted the regulators to impose margin requirements on swap dealers when they trade with end-users, which could then result in either a direct or indirect margin requirement on end-users. Subsequently, Senators Blanche Lincoln and Chris Dodd sent a letter to then-Chairmen Barney Frank and Collin Peterson on June 30, 2010, to set forth and clarify congressional intent, stating: The legislation does not authorize the regulators to impose margin on end-users, those exempt entities that use swaps to hedge or mitigate commercial risk. If regulators raise the costs of end-user transactions, they may create more risk. It is imperative that the regulators do not unnecessarily divert working capital from our economy into margin accounts, in a way that would discourage hedging by end-users or impair economic growth.

    In addition, statements in the legislative history of section 731 (and Section 764) suggests that Congress did not intend, in enacting this section, to impose margin requirements on nonfinancial end-users engaged in hedging activities, even in cases where they entered into swaps with swap entities.

    In the CFTC's proposed rule on margin, it does not require margin for uncleared swaps when non-bank swap dealers transact with non-financial end-users. However, the prudential banking regulators proposed rules would require margin be posted by non-financial end-users above certain established thresholds when they trade with swap dealers that are banks. Many of end-users' transactions occur with swap dealers that are banks, so the banking regulators' proposed rule is most relevant, and therefore of most concern, to end- users.

    By the prudential banking regulators' own terms, their proposal to require margin stems directly from what they view to be a legal obligation under Title VII. The plain language of section 731 provides that the Agencies adopt rules for covered swap entities imposing margin requirements on all non-cleared swaps. Despite clear congressional intent, those sections do not, by their terms, exclude a swap with a counterparty that is a commercial end-user. By providing an explicit exemption under Title VII through enactment of this provision, the prudential regulators will no longer have a perceived legal obligation and the congressional intent they acknowledge in their proposed rule will be implemented.

    The Committee notes that in September of 2013, the International Organization of Securities Commissions (IOSCO) and the Bank of International Settlements published their final recommendations for margin requirements for uncleared derivatives. Representatives from a number of U.S. regulators, including the CFTC and the Board of Governors of the Federal Reserve participated in the development of those margin requirements, which are intended to set baseline international standards for margin requirements. It is the intent of the Committee that any margin requirements promulgated under the authority provided in Section 4s of the Commodity Exchange Act should be generally consistent with the international margin standards established by IOSCO.

    On March 14, 2013, at a hearing entitled ``Examining Legislative Improvements to Title VII of the Dodd-Frank Act,'' the following testimony was provided to the Committee with respect to provisions included in Section 311: In approving the Dodd-Frank Act, Congress made clear that end-users were not to be subject to margin requirements. Nonetheless, regulations proposed by the Prudential Banking Regulators could require end-users to post margin. This stems directly from what they view to be a legal obligation under Title VII. While the regulations proposed by the CFTC are preferable, they do not provide end-users with the certainty that legislation offers. According to a Coalition for Derivatives End-Users survey, a 3% initial margin requirement could reduce capital spending by as much as $5.1 to $6.7 billion among S&P 500 companies alone and cost 100,000 to 130,000 jobs. To shed some light on Honeywell's potential exposure to margin requirements, we had approximately $2 billion of hedging contracts outstanding at year-end that would be defined as a swap under Dodd-Frank. Applying 3% initial margin and 10% variation margin implies a potential margin requirement of $260 million. Cash deposited in a margin account cannot be productively deployed in our businesses and therefore detracts from Honeywell's financial performance and ability to promote economic growth and protect American jobs.--Mr. James E. Colby, Assistant Treasurer, Honeywell International Inc.

    On May 21, 2013, at a hearing entitled ``The Future of the CFTC: Market Perspectives,'' Mr. Stephen O'Connor, Chairman, ISDA, provided the following testimony with respect to provisions included in Section 311: Perhaps most importantly, we do not believe that initial margin will contribute to the shared goal of reducing systemic risk and increasing systemic resilience. When robust variation margin practices are employed, the additional step of imposing initial margin imposes an extremely high cost on both market participants and on systemic resilience with very little countervailing benefit. The Lehman and AIG situations highlight the importance of variation margin. AIG did not follow sound variation margin practices, which resulted in dangerous levels of credit risk building up, ultimately leading to its bailout. Lehman, on the other hand, posted daily variation margin, and while its failure caused shocks in many markets, the variation margin prevented outsized losses in the OTC derivatives markets. While industry and regulators agree on a robust variation margin regime including all [[Page H69]] appropriate products and counterparties, the further step of moving to mandatory IM [initial margin] does not stand up to any rigorous cost-benefit analysis.

    Based on the extensive background that accompanies the statutory change provided explicitly in Section 311, the Committee intends that initial and variation margin requirements cannot be imposed on uncleared swaps entered into by cooperative entities if they similarly qualify for the CFTC's cooperative exemption with respect to cleared swaps. Cooperative entities did not cause the financial crisis and should not be required to incur substantial new costs associated with posting initial and variation margin to counterparties. In the end, these costs will be borne by their members in the form of higher prices and more limited access to credit, especially in underserved markets, such as in rural America. Therefore, the Committee's clear intent when drafting Section 311 was to prohibit the CFTC and prudential regulators, including the Farm Credit Administration, from imposing margin requirements on cooperative entities.

    Mrs. CAROLYN B. MALONEY of New York. Mr. Speaker, I yield 3 minutes to the gentleman from the great State of Georgia (Mr. Scott).

    Mr. DAVID SCOTT of Georgia. Mr. Speaker, I certainly want to recognize and appreciate the gentlewoman from Manhattan for the excellent leadership job that she is doing on this.

    Mr. Speaker, this bill, TRIA, is so important. It is very important to note that it hasn't cost the taxpayers anything, and it has been very successful where needed; but, Mr. Speaker, this bill contains another very important piece: we affectionately call it NARAB, which is the National Association of Registered Agents and Brokers--just think if TRIA and the NARAB portion of this bill had been in place in 1999, before we had the terrorism risk, before we had the terrorist strikes of 9/11, and other terrorist attacks.

    But in the middle of all of that, even with the downturn of the economic calamity, standing in the middle of this storm were our insurance agents, the lifeline of the American people. What NARAB is doing here is making sure that we streamline the process and make sure that our insurance agents are able to operate across State lines.

    Mr. Speaker, we all realize that insurance is a State-licensed, State-authorized operation. NARAB does not interfere with that. As a matter of fact, all 50 of the insurance agents of our States have all agreed with NARAB.

    This is an important bill because our insurance agents, our small businesses, are the lifeline in tragedy and distress. We live in a highly mobile society now. It is very important for our agents to be able to go across State lines with one licensing procedure that is held to the highest standard while at the same time being licensed in their own State.

    We have had great cooperation from all of our insurance agents, including the insurance agents' association. Our financial advisers and our brokers all agree.

    The other thing, Mr. Speaker, is that many of us on the Financial Services Committee have been working on this measure for 10 years. For 10 years, we have been toiling in the vineyards on this and so have others in the Senate.

    Now is the time to give our insurance agents the respect and the nobility of purpose of their very fine profession and at the same time reach our primary goal, which is to give the American insurance consumers the choice, the competition, and the benefits that they need.

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