Opening Statment: Chairman K. Michael Conaway Committee on Agriculture markup of H.R. 1317, a bill to amend the Commodity Exchange Act (CEA) and the Securities Exchange Act of 1934 to specify how clearing requirements apply to certain affiliate transact

Sep 30, 2015

Remarks as prepared for delivery:

Thank you for joining us today and welcome to today’s business meeting to consider H.R. 1317, a bill to amend the Commodity Exchange Act and Securities Exchange Act of 1934 to specify how clearing requirements apply to certain affiliate transactions, and for other purposes.

During consideration of the Dodd-Frank Act, Congress clearly intended to exempt commercial end-users from the Act’s costly clearing requirements.  These end-users are not speculators or risk-takers.  They are agricultural producers, manufacturers, and utilities who employ thousands of Americans and rely on the derivatives markets to hedge their operational risks. 

Unfortunately, the Dodd-Frank Act did not grant adequate relief to commercial end-users from its clearing requirements.  The bill before us represents the bipartisan work of dozens of members of Congress over the past four years to relieve commercial end-users from burdensome and unnecessary clearing requirements.

Many commercial end-users are affiliates of parent companies.  The parent companies generally prefer to mitigate risk among their affiliates instead of having each affiliate face the market independently.  These parent companies manage and offset risk among their affiliates through a centralized treasury unit or CTU.  CTUs can aggregate the commercial risk of the parent company’s end-user affiliates and offset the remaining risk through swaps with third parties.

CTUs reduce the overall credit risk a corporate group poses to the market because they can net positions across affiliates, reducing the overall number of external facing transactions.  In addition, they permit a company to enhance its efficiency by centralizing its risk management expertise in a single affiliate.

Section 723 of the Dodd-Frank Act grants an exemption from the clearing mandate to CTUs that act as an “agent” for their end-user affiliates.  However, it does not provide an exception for CTUs that act as a “principal” for their end-user affiliates.

Unfortunately, most end-user CTUs act as a principal in order to net exposures and simplify their parent company’s hedging program.  Accordingly, most end-user CTUs do not currently qualify for the exception afforded by the law.  This substantially increases the end-user’s costs, without any real reduction in risk.  Those increased costs may preclude commercial end-users from hedging their operational risks, in spite of Congress’ clear intention to exempt them from the clearing mandate.

H.R. 1317 seeks to narrowly expand the end-user clearing exception afforded to CTUs so that it functions as Congress intended.   Importantly, the bill does not provide relief from clearing requirements for trades entered into by CTUs to hedge the risk of financial affiliates.  The amendment offered by Ms. Fudge will further cement these protections to ensure that the exception is only available for end-users.

Members of our committee have long been supportive of fixing this issue and similar language was even included in the Commodity End User Protection Act.  I want to thank Ms. Fudge and Mr. Gibson for their work shepherding this bill through the House the past four years.  It is an important issue and one that I hope can finally be resolved.

With that, I’ll turn to my Ranking Member for any thoughts he might have.