S. 1650 (112th): Dodd-Frank Improvement Act of 2011

112th Congress, 2011–2013. Text as of Oct 04, 2011 (Introduced).

Status & Summary | PDF | Source: GPO

II

112th CONGRESS

1st Session

S. 1650

IN THE SENATE OF THE UNITED STATES

October 4, 2011

(for himself, Mr. Johanns, Mr. Shelby, Mr. Vitter, Mr. Toomey, Mr. Moran, and Mr. Kirk) introduced the following bill; which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs

A BILL

To provide for the orderly implementation of the provisions of title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and for other purposes.

1.

Short title

This Act may be cited as the Dodd-Frank Improvement Act of 2011.

2.

Dodd-Frank improvements regarding regulation of derivatives

(a)

Establishment

Section 4 of the Securities Exchange Act of 1934 (15 U.S.C. 78d) is amended by adding at the end the following:

(j)

Office of derivatives

(1)

Office established

There is established within the Commission the Office of Derivatives (referred to in this subsection as the Office)—

(A)

to administer the rules of the Commission with respect to security-based swaps and, as necessary, to make recommendations to the Commission for new rules or changes to existing rules with respect to security-based swaps;

(B)

to coordinate oversight of the market for swaps and security-based swaps, participants in that market, and infrastructure providers for that market with other relevant domestic and international regulators; and

(C)

to monitor developments in the market for swaps and security-based swaps.

(2)

Director of the office

The head of the Office shall be the Director, who shall report to the Director of the Division of Trading and Markets and the Director of Risk, Strategy, and Financial Innovation.

(3)

Staffing

(A)

In general

The Office shall be staffed by persons transferred in accordance with subparagraph (B), including persons having knowledge of and expertise in the uses for, trading in, execution of, and clearing of swaps and security-based swaps.

(B)

Transfers

The Director of the Office of Derivatives, the Director of the Division of Trading and Markets, the Director of Risk, Strategy, and Financial Innovation, and the Director of the Office of Compliance, Inspections, and Examinations shall jointly identify employees to be transferred from the Division of Trading and Markets, the Division of Risk, Strategy, and Financial Innovation, and the Office of Compliance, Inspections, and Examinations, respectively, to the Office of Derivatives, in numbers sufficient to carry out fully the requirements of this subsection.

(4)

Enforcement

The Division of Enforcement shall consult with the Office before presenting a recommendation with respect to security-based swaps to the Commission.

(5)

Inspections and examinations

A representative of the Office shall be afforded the opportunity to participate in any inspection or examination of a security-based swap dealer, major security-based swap participant, security-based swap data repository, or clearing agency that clears security-based swaps.

(6)

Annual report

On or before the date that is one year after the Office is established and annually thereafter, the Director shall submit to the Chairman and publish on the public website of the Commission a report that describes the activities of the Office during the preceding year, and the developments in the swaps and security-based swaps market.

(b)

Orderly implementation of derivatives provisions

(1)

Review of regulatory authority

Section 712 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (15 U.S.C. 8302) is amended—

(A)

in each of subsections (a)(3) and (e), by striking 360 each place that term appears and inserting 720; and

(B)

by adding at the end the following:

(g)

Orderly implementation schedule

(1)

In general

Not later than December 31, 2011, the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the prudential regulators shall jointly, pursuant to the notice and comment requirements contained in title 5, United States Code, adopt an implementation schedule for this title.

(2)

Schedule content

Such implementation schedule shall—

(A)

set forth a schedule for the publication of final rules required by this title, except that, unless otherwise specifically provided by a provision of this title, the rules required by subsection (d)(1) shall be adopted before any other required rules;

(B)

set forth a schedule for the effective dates for provisions of this title, including provisions that require a rulemaking and provisions that do not require a rulemaking;

(C)

take into consideration—

(i)

a quantitative analysis of the effects of this title on United States economic growth and job creation;

(ii)

the implications of this title for cross-border activity by, and international competitiveness of, United States financial institutions, companies, and investors;

(iii)

whether and how the definitional, clearing, trading, reporting, recordkeeping, real-time reporting, registration, capital, margin, business conduct, position limits and other requirements of this title work together, and how they affect market depth and liquidity; and

(iv)

the implications of any lack of harmonization by the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the prudential regulators with respect to the timing and the substance of their rules.

(h)

Orderly implementation authority

Notwithstanding any other provision of law, the Commodity Futures Trading Commission, the Securities and Exchange Commission and the prudential regulators, by rule, regulation, or order, may conditionally or unconditionally exempt any person, swap, security-based swap, activity, or transaction, or any class or classes of persons, swaps, security-based swaps, activities, or transactions, from any provision or provisions of this title administered thereby, or any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest and is in furtherance of the objectives of this title, such as the orderly implementation and international harmonization of the timing and substance of derivatives regulatory reform.

.

(2)

Effective dates

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111–203, 124 Stat. 1641) is amended—

(A)

in section 754 (7 U.S.C. 7a note), by striking the later of and all that follows through the period and inserting the dates specified in the implementation schedule adopted pursuant to section 712(g).; and

(B)

in section 774 (15 U.S.C. 77b note), by striking the later of and all that follows through the period and inserting the dates specified in the implementation schedule adopted pursuant to section 712(g)..

(c)

Clarification of end user status

(1)

End users of swaps

(A)

Margin requirements

Section 4s(e) of the Commodity Exchange Act (7 U.S.C. 6s(e)), as added by section 731 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is amended by adding at the end the following:

(4)

Applicability with respect to counterparties

The margin requirements of this subsection shall not apply to a swap in which one of the counterparties is not—

(A)

a swap dealer or major swap participant;

(B)

an investment fund that—

(i)

has issued securities (other than debt securities) to more than 5 unaffiliated persons;

(ii)

would be an investment company (as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a–3)) but for paragraph (1) or (7) of subsection (c) of that section; and

(iii)

is not primarily invested in physical assets (including commercial real estate) directly or through an interest in an affiliate that owns the physical assets;

(C)

a regulated entity, as defined in section 1303 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4502); or

(D)

a commodity pool that is predominantly invested in any combination of commodities, commodity swaps, commodity options, or commodity futures.

(5)

Margin transition rules

Swaps entered into before the date on which final rules under section 712(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (15 U.S.C. 8302(e)) become effective shall be exempt from the margin requirements under this subsection.

.

(B)

Major swap participant

Section 1a(33)(A) of the Commodity Exchange Act (7 U.S.C. 1a(33)(A)) is amended by striking clause (ii) and inserting the following:

(ii)

whose outstanding swaps create substantial net uncollateralized coun­ter­par­ty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets; or

.

(C)

Effective date

The amendments made by subsection (a) shall have the same effective date as provided in section 754 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended by section 1(b) of this Act.

(2)

End users of security-based swaps

(A)

Margin requirements

Section 15F(e) of the Securities Exchange Act of 1934 (15 U.S.C. 780–10(e)), as added by section 764 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is amended by adding at the end the following:

(4)

Applicability with respect to counterparties

The margin requirements of this subsection shall not apply to a security-based swap in which one of the counterparties is not—

(A)

a security-based swap dealer or major security-based swap participant;

(B)

an investment fund that would be an investment company (as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a–3)), but for paragraph (1) or (7) of section 3(c) of that Act (15 U.S.C. 80a–3(c)), that is not primarily invested in physical assets (including commercial real estate) directly or through interest in its affiliates that own such assets;

(C)

a regulated entity, as defined in section 1303 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4502); or

(D)

a commodity pool that is predominantly invested in any combination of commodities, commodity swaps, commodity options or commodity futures.

(5)

Margin transition rules

Security-based swaps entered into before the date on which final rules under section 712(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act become effective are exempt from the margin requirements of this subsection.

.

(B)

Major security-based swap participant

Section 3(a)(67)(A)(ii)(II) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(67)(A)(ii)(II)), is amended to read as follows:

(II)

whose outstanding security-based swaps create substantial net uncollateralized counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets;

.

(C)

Effective date

The amendments made by this paragraph shall have the same effective date as provided in section 774 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended by this Act.

(d)

Treatment of affiliate transactions

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (15 U.S.C. 8301 et seq.) is amended by inserting after section 713 (15 U.S.C. the following new section:

713A.

Treatment of affiliate transactions

(a)

In general

An agreement, contract, or transaction that would otherwise be a swap or security-based swap, and that is entered into by a party that is controlling, controlled by, or under common control with its counterparty shall not be deemed to be a swap or security-based swap for purposes of this Act.

(b)

Reporting

All agreements, contracts, or transactions described in subsection (a) shall be reported to either a swap data repository, or, if there is no swap data repository that would accept such transaction reports, to the Commission pursuant to sections 729 and 766. within such time period as the Commission may prescribe by rule or regulation.

.

(e)

International competitiveness and harmonization

(1)

Study on international swap regulation

Section 719(c)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (15 U.S.C. 8307(c)(2)) is amended—

(A)

by striking 18 and inserting 30;

(B)

in subparagraph (C), by striking and at the end;

(C)

in subparagraph (D), by striking the period at the end and inserting ; and; and

(D)

by adding at the end the following:

(E)

an analysis of the progress of members of the Group of 20 and other countries toward implementing derivatives regulatory reform, including material differences in the schedule for implementation (as well as material differences in definitions, clearing, trading, reporting, registration, capital, margin, business conduct, and position limits) and their possible and likely effects on United States competitiveness, market liquidity, and financial stability.

.

(2)

Applicability

The Dodd-Frank Wall Street Reform and Consumer Protection Act is amended by inserting after section 719 the following new section:

719A.

Applicability

(a)

In general

Subject to subsections (b) and (c), and notwithstanding any other provision of this title, no activities conducted outside of the United States between counterparties established under the laws of any jurisdiction outside of the United States (including a non-United States branch of a United States entity licensed and recognized under local law outside of the United States) shall be considered—

(1)

to have a direct and significant connection with activities in, or effect on, commerce of the United States;

(2)

to constitute a business within the jurisdiction of the United States; or

(3)

to constitute evasion of any provision of this title, unless those activities contravene such rules as may be adopted by the Commodity Futures Trading Commission and the Securities and Exchange Commission pursuant to subsection (b).

(b)

Rulemaking

After completing the report required by section 719(c)(2), the Commodity Futures Trading Commission and the Securities and Exchange Commission may jointly issue such rules as are necessary to prohibit transactions or activities, or classes of transactions or activities conducted outside of the United States that the agencies find—

(1)

have no valid business purpose;

(2)

are structured with the sole purpose of evading the requirements of this title; and

(3)

might reasonably be expected to have a serious adverse effect on the stability of the United States financial system.

(c)

Exception

Subsection (a) shall not apply to any provision of this title prohibiting fraud or manipulation or any rule or regulation thereunder.

.