LegiStorm

Summary:

Derivatives are financial instruments that come in several different forms, including futures, options, and swaps. A derivative is a contract that derives its value from some underlying asset at a designated point in time. The derivative may be tied to a physical commodity, a stock index, an interest rate, or some other asset. Derivatives played a role in the 2008 financial crisis in a variety of ways. The unmonitored buildup of derivatives positions in the largely unregulated “over-the-counter” (OTC) market led many major financial institutions into large financial losses. Possibly the best-known example of such losses was the insurance giant American International Group (AIG), whose massive losses from selling credit-default swaps ultimately contributed to the need for government assistance. OTC derivatives, prior to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act; P.L. 111-203), were traded bilaterally rather than cleared through a clearinghouse, and no reporting trail existed, which created uncertainty during the crisis over the web of exposures to large derivatives losses. The Dodd-Frank Act aimed to address these policy concerns by bringing the swaps market into a regulatory framework based on that of the futures markets, which had long been regulated by the Commodity Futures Trading Commission (CFTC). Security-based swaps tied to equities or narrow-based credit indexes were placed under the jurisdiction of the Securities and Exchange Commission (SEC) within a similar framework. In the 114th Congress, several bills have been introduced, and two have been enacted as part of other legislation, impacting various aspects of swaps regulation largely stemming from DoddFrank. One of the provisions, originally in H.R. 1847 but enacted in P.L. 114-94/H.R. 22, removed a requirement added in Dodd-Frank that foreign regulators indemnify a U.S.-based SDR and the CFTC for any expenses arising from litigation related to a request for market data (with a parallel SEC provision). The other provision, originally in H.R. 1317 but enacted in P.L. 114- 113/H.R. 2029, created an exception for certain corporate affiliates of nonfinancial companies, dubbed “centralized treasury units,” to the clearing and exchange-trading requirements. The House has passed legislation, H.R. 2289, that would reauthorize appropriations to carry out the Commodity Exchange Act (CEA; 7 U.S.C. §§1 et seq.)—a process that historically has recurred every five years. H.R. 2289 also includes measures that would increase required costbenefit analysis by the CFTC in rulemakings and broaden the definition of bona fide hedging to allow anticipated, as well as current, risks to be hedged, likely increasing the number of swaps qualifying as hedges for position limits, registration requirements, and other purposes. H.R. 2289 also would mandate that, starting 18 months from enactment, the swaps regulatory requirements of the eight largest foreign swaps markets must be considered comparable to those of the United States—unless the CFTC were to issue a rule finding that any of those foreign jurisdictions’ requirements were not comparable to U.S. requirements. H.R. 2289 and S. 1560 also contain provisions to codify the deadline for brokers to deposit residual interest (capital from a futures broker that temporarily makes up the difference for insufficient margin in a customer’s account) as no earlier than 6:00 p.m. on the following business day.