Certainty for End-Users Act

I 116TH CONGRESS 1ST SESSION H. R. 4726 To help end-users better utilize derivatives markets by refining the definition of financial entity, clarifying how affiliates can utilize the end-user excep- tion, and harmonizing clearing and margin exemptions. IN THE HOUSE OF REPRESENTATIVES OCTOBER 17, 2019 Mr. MARSHALL introduced the following bill; which was referred to the Committee on Agriculture A BILL To help end-users better utilize derivatives markets by refin- ing the definition of financial entity, clarifying how affili- ates can utilize the end-user exception, and harmonizing clearing and margin exemptions. Be it enacted by the Senate and House of Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. SHORT TITLE. 3 This Act may be cited as the ‘‘Certainty for End- 4 Users Act’’. 5 SEC. 2. CLARIFYING THE FINANCIAL ENTITY DEFINITION. 6 (a) IN GENERAL.—Section 2(h) of the Commodity 7 Exchange Act (7 U.S.C. 2(h)) is amended— 8 VerDate Sep 11 2014 21:41 Oct 27, 2019 Jkt 099200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\H4726.IH H4726 pamtmann on DSKBC07HB2PROD with BILLS 2 •HR 4726 IH (1) by striking paragraph (1)(A) and inserting 1 the following: 2 ‘‘(A) STANDARD FOR CLEARING.—It shall 3 be unlawful for a financial entity to engage in 4 a swap with another financial entity, unless the 5 swap is submitted for clearing to a derivatives 6 clearing organization registered under this Act 7 or a derivatives clearing organization exempt 8 from registration under this Act if the swap is 9 required to be cleared.’’; and 10 (2) in paragraph (7)— 11 (A) in the paragraph heading, by striking 12 ‘‘EXCEPTIONS’’ and inserting ‘‘APPLICATION OF 13 CLEARING REQUIREMENT’’; 14 (B) by striking subparagraphs (A) and (B) 15 and redesignating subparagraph (C) as sub- 16 paragraph (A); 17 (C) in subparagraph (A) (as so redesig- 18 nated)— 19 (i) by striking clause (i) and inserting 20 the following: 21 ‘‘(i) IN GENERAL.—In this subsection, 22 the term ‘financial entity’ means the fol- 23 lowing: 24 VerDate Sep 11 2014 21:41 Oct 27, 2019 Jkt 099200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\H4726.IH H4726 pamtmann on DSKBC07HB2PROD with BILLS 3 •HR 4726 IH ‘‘(I) INSTITUTIONS NOT STATU- 1 TORILY EXEMPTED.— 2 ‘‘(aa) A financial institution. 3 ‘‘(bb) A swap dealer. 4 ‘‘(cc) A security-based swap 5 dealer. 6 ‘‘(dd) A major swap partici- 7 pant. 8 ‘‘(ee) A major security-based 9 swap participant. 10 ‘‘(ff) A commodity pool that 11 is required to be operated by a 12 commodity pool operator reg- 13 istered with the Commission, or a 14 foreign person that would be 15 such a commodity pool if the for- 16 eign person were organized under 17 the laws of the United States or 18 any State. 19 ‘‘(gg) An investment com- 20 pany (as defined in section 3 of 21 the Investment Company Act of 22 1940 (15 U.S.C. 80a–3)), or a 23 foreign person that would be 24 such an investment company if 25 VerDate Sep 11 2014 21:41 Oct 27, 2019 Jkt 099200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\H4726.IH H4726 pamtmann on DSKBC07HB2PROD with BILLS 4 •HR 4726 IH the foreign person were organized 1 under the laws of the United 2 States or any State. 3 ‘‘(II) PRIVATE FUNDS.—A pri- 4 vate fund as defined in section 202(a) 5 of the Investment Advisers Act of 6 1940 (15 U.S.C. 80–b–2(a)), or a for- 7 eign person that would be such a pri- 8 vate fund if the foreign person were 9 organized under the laws of the 10 United States or any State. 11 ‘‘(III) OTHER PERSONS.—Such 12 other persons the Commission deter- 13 mines by rule to be predominantly en- 14 gaged in activities that are financial 15 in nature. In making such a deter- 16 mination, the Commission may con- 17 sider section 4(k) of the Bank Hold- 18 ing Company Act of 1956. The Com- 19 mission shall promulgate regulations 20 to carry out this subclause.’’; 21 (ii) in clause (iii), by striking ‘‘Such 22 definition’’ and inserting ‘‘The term’’; and 23 (iii) by adding at the end the fol- 24 lowing: 25 VerDate Sep 11 2014 21:41 Oct 27, 2019 Jkt 099200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\H4726.IH H4726 pamtmann on DSKBC07HB2PROD with BILLS 5 •HR 4726 IH ‘‘(iv) DE MINIMIS EXCLUSION.— 1 ‘‘(I) AMOUNTS.—A person de- 2 scribed in subclause (III), and not 3 subclause (I) or (II), of clause (i) 4 shall not be considered a financial en- 5 tity for purposes of this subsection if 6 the total swaps activity of the person, 7 when calculated with those of all other 8 affiliated persons who are so de- 9 scribed, amount to less than— 10 ‘‘(aa) $1,000,000,000 in 11 gross notional swaps transactions 12 calculated on the basis of a roll- 13 ing 12-month period; or 14 ‘‘(bb) an alternative de mini- 15 mis amount of swaps activity, ex- 16 posure, transactions, or other 17 measurement, as determined by 18 the Commission. At least every 5 19 years, the Commission shall con- 20 sider modifying the alternative de 21 minimis amount due to inflation 22 or other market factors. 23 VerDate Sep 11 2014 21:41 Oct 27, 2019 Jkt 099200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\H4726.IH H4726 pamtmann on DSKBC07HB2PROD with BILLS 6 •HR 4726 IH ‘‘(II) CALCULATION.—The cal- 1 culation under subclause (I) shall not 2 include— 3 ‘‘(aa) swaps used to hedge 4 or mitigate risk associated with 5 an asset owned or liability in- 6 curred or reasonably likely to be 7 owned or incurred by an entity in 8 the conduct of such entity’s busi- 9 ness; or 10 ‘‘(bb) swaps used by an in- 11 surance company for asset rep- 12 lication if they are expressly per- 13 mitted by State insurance regu- 14 lators to be entered into in con- 15 junction with other investments 16 in order to replicate the invest- 17 ment characteristics of otherwise 18 permissible investments. 19 ‘‘(III) REQUIREMENTS OF ENTI- 20 TIES RELYING ON THE DE MINIMIS 21 EXCLUSION.—An entity that relies on 22 the de minimis exception in this 23 clause to avoid clearing swaps trans- 24 actions that the Commission requires 25 VerDate Sep 11 2014 21:41 Oct 27, 2019 Jkt 099200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\H4726.IH H4726 pamtmann on DSKBC07HB2PROD with BILLS 7 •HR 4726 IH a financial entity to clear pursuant to 1 paragraph (1)(A) and Commission 2 regulations shall, with respect to the 3 swaps, report or cause to be reported, 4 to a registered swap data repository 5 the reliance of the entity on the de 6 minimis exclusion.’’; and 7 (D) by inserting after subparagraph (A) 8 (as amended by the preceding provisions of this 9 paragraph) the following: 10 ‘‘(B) ADDITIONAL DEFINITIONS.—In this 11 subsection: 12 ‘‘(i) AFFILIATE STATUS.—2 entities 13 are affiliated if— 14 ‘‘(I) 1 of the entities, directly or 15 indirectly, holds a majority ownership 16 interest in the other entity; or 17 ‘‘(II) a third party, directly or in- 18 directly, holds a majority ownership 19 interest in both entities. 20 ‘‘(ii) NON-FINANCIAL ENTITY.—The 21 term ‘non-financial entity’ means— 22 ‘‘(I) a person not described in 23 subparagraph (A)(i); or 24 VerDate Sep 11 2014 21:41 Oct 27, 2019 Jkt 099200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\H4726.IH H4726 pamtmann on DSKBC07HB2PROD with BILLS 8 •HR 4726 IH ‘‘(II) a person described in clause 1 (ii), (iii), or (iv) of subparagraph (A). 2 ‘‘(C) REQUIREMENTS OF NON-FINANCIAL 3 ENTITIES.—A non-financial entity that engages 4 in swaps transactions that the Commission re- 5 quires a financial entity to clear pursuant to 6 paragraph (1)(A) and Commission regulations 7 shall, with respect to the swaps, report or cause 8 to be reported, to a registered swap data reposi- 9 tory their status as a non-financial entity.’’. 10 SEC. 3. SIMPLIFYING THE END-USER AFFILIATE PROCESS. 11 Section 2(h)(7) of the Commodity Exchange Act (7 12 U.S.C. 2(h)(7)), as amended by section 2 of this Act, is 13 amended— 14 (1) by striking subparagraph (D) and inserting 15 the following: 16 ‘‘(D) RISK MANAGEMENT THROUGH AF- 17 FILIATES.— 18 ‘‘(i) EXCEPTION.—The requirements 19 of paragraph (1)(A) shall not apply to a 20 swap entered into by a risk management 21 entity if the swap is— 22 ‘‘(I) used to hedge or mitigate el- 23 igible risk originating from one or 24 VerDate Sep 11 2014 21:41 Oct 27, 2019 Jkt 099200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\H4726.IH H4726 pamtmann on DSKBC07HB2PROD with BILLS 9 •HR 4726 IH more affiliated non-financial entities; 1 and 2 ‘‘(II) not netted, combined, or 3 consolidated with any other swap to 4 which the requirements of paragraph 5 (1)(A) apply. 6 ‘‘(ii) RISK MANAGEMENT ENTITY DE- 7 FINED.—In this subparagraph, the term 8 ‘risk management entity’ means— 9 ‘‘(I) an entity described in sub- 10 clause (II), and not subclause (I), of 11 subparagraph (A)(i), that enters only 12 into transactions related to the man- 13 agement of eligible risk; 14 ‘‘(II) an entity described in only 15 subclause (III) of subparagraph 16 (A)(i); or 17 ‘‘(III) a non-financial entity. 18 ‘‘(iii) ELIGIBLE RISK DEFINED.—In 19 this subparagraph, the term ‘eligible risk’ 20 means risk that— 21 ‘‘(I) originates from a non-finan- 22 cial entity; 23 ‘‘(II) is associated with an asset 24 owned or liability incurred or reason- 25 VerDate Sep 11 2014 21:41 Oct 27, 2019 Jkt 099200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\H4726.IH H4726 pamtmann on DSKBC07HB2PROD with BILLS 10 •HR 4726 IH ably likely to be owned or incurred by 1 the non-financial entity in the conduct 2 of the business of the non-financial 3 entity; 4 ‘‘(III) is not netted, combined, or 5 consolidated with risk originating 6 from any affiliated financial entity; 7 and 8 ‘‘(IV) if transferred, is trans- 9 ferred only to or through one or more 10 affiliated risk management entities. 11 ‘‘(iv) REQUIREMENTS OF RISK MAN- 12 AGEMENT ENTITIES.—A risk management 13 entity that engages in swaps which utilize 14 the exception in this subparagraph shall— 15 ‘‘(I) notify the Commission, in a 16 manner prescribed by the Commis- 17 sion, how the risk management entity 18 generally meets the financial obliga- 19 tions of the risk management entity 20 associated with entering into non- 21 cleared swaps; 22 ‘‘(II) identify those swaps used to 23 hedge or mitigate eligible risk origi- 24 VerDate Sep 11 2014 21:41 Oct 27, 2019 Jkt 099200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\H4726.IH H4726 pamtmann on DSKBC07HB2PROD with BILLS 11 •HR 4726 IH nating from one or more affiliated 1 non-financial entities; and 2 ‘‘(III) maintain books and 3 records of the swaps which utilize the 4 exception in this subparagraph and 5 the related eligible risk in such form 6 and manner and for such period as 7 may be required by the Commission. 8 ‘‘(v) NO EFFECT ON NON-FINANCIAL 9 ENTITIES.—Nothing in this subparagraph 10 shall be interpreted to limit the ability of 11 any non-financial entity to engage in a 12 swap to which the requirements of para- 13 graph (1)(A) do not apply.’’; and 14 (2) by striking subparagraph (F) and inserting 15 the following: 16 ‘‘(F) ABUSE OF EXCEPTION.—The Com- 17 mission may prescribe such rules or issue such 18 interpretations of the rules as the Commission 19 determines to be necessary to prevent abuse of 20 the exceptions described in this paragraph. The 21 Commission may request information from a 22 person claiming to be a non-financial entity as 23 necessary to prevent evasion of the rules or 24 VerDate Sep 11 2014 21:41 Oct 27, 2019 Jkt 099200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\H4726.IH H4726 pamtmann on DSKBC07HB2PROD with BILLS 12 •HR 4726 IH abuse of the exceptions described in this para- 1 graph.’’. 2 SEC. 4. ALIGNMENT OF MARGIN REQUIREMENTS. 3 Section 4s(e)(4) of the Commodity Exchange Act (7 4 U.S.C. 6s(e)(4)) is amended to read as follows: 5 ‘‘(4) EXCEPTIONS TO MARGIN REQUIRE- 6 MENTS.— 7 ‘‘(A) IN GENERAL.—Paragraphs (2)(A)(ii) 8 and (2)(B)(ii), including the initial and vari- 9 ation margin requirements imposed under such 10 paragraphs, shall not apply to a swap— 11 ‘‘(i) in which a counterparty is a non- 12 financial entity (as defined in section 13 2(h)(7)(B)(ii)), regardless of whether the 14 swap is required to be cleared; 15 ‘‘(ii) that qualifies for the exception 16 provided in subparagraph (D) of section 17 2(h)(7), or that would so qualify if the 18 swap were required to be cleared; or 19 ‘‘(iii) that qualifies for an exception or 20 exemption from the requirements of section 21 2(h)(1)(A) pursuant to any Commission 22 rule, regulation, or order. 23 ‘‘(B) PRESERVATION OF VARIATION MAR- 24 GIN EXCHANGE REQUIREMENT APPLICABLE TO 25 VerDate Sep 11 2014 21:41 Oct 27, 2019 Jkt 099200 PO 00000 Frm 00012 Fmt 6652 Sfmt 6201 E:\BILLS\H4726.IH H4726 pamtmann on DSKBC07HB2PROD with BILLS 13 •HR 4726 IH CERTAIN INSURANCE COMPANIES.—Notwith- 1 standing subparagraph (A) of this paragraph, if 2 an insurance company would be a financial en- 3 tity for purposes of section 2(h) if the swaps 4 described in section 2(h)(7)(A)(iv)(II)(bb) of 5 the insurance company were not excluded from 6 the de minimis calculation under section 7 2(h)(7)(A)(iv), then all swaps of the insurance 8 company shall be subject to the variation mar- 9 gin requirements of paragraphs (2)(A)(ii) and 10 (2)(B)(ii) of this subsection.’’. 11 SEC. 5. MODIFICATION OF DEFINITION OF MAJOR SWAP 12 PARTICIPANT. 13 Section 1a(33)(A)(iii)(I) of the Commodity Exchange 14 Act (7 U.S.C. 1a(33)(A)(iii)(I)) is amended by inserting 15 ‘‘, or a non-financial entity that would be considered to 16 be a financial entity for purposes of section 2(h) but for 17 the application of the de minimis exclusion provided for 18 in section 2(h)(7)(A)(iv),’’ before ‘‘that is highly’’. 19 Æ VerDate Sep 11 2014 21:41 Oct 27, 2019 Jkt 099200 PO 00000 Frm 00013 Fmt 6652 Sfmt 6301 E:\BILLS\H4726.IH H4726 pamtmann on DSKBC07HB2PROD with BILLS