TheWeekInCongress.com (TM)
Week Ending September 29, 2006
H.R.5585 To improve the netting process for financial contracts, and for other purposes.
The President's Working Group on Financial Markets completed a review that resulted in this bill. The bill primarily would amend banking and other laws that govern financial contracts when there is bankruptcy involved. Other definitions and transaction detail amendments are also contained in the bill.
Under insolvency conditions some financial contracts are bundled or ‘netted’ and processed as such to limit financial risk that the failure of one will disrupt and endanger financial markets. The totality of the netted contracts would be assessed by their total value and impact rather than each being assessed individually. New contract forms would be included in the netting process under this bill.
The bill also raises the statutory filing fee paid for filing Chapter 7 bankruptcy and the extra money would be used to increase compensation to private trustees appointed to manage a debtor’s estate under bankruptcy relief. The fee, currently $45 from the $245 fee levied goes to the trustees. This bill would raise the fee to $300 and adjust compensation to the trustees accordingly.
Sponsor: Rep. Patrick T. McHenry (R-NC-10th)
Vote: Passed House by voice vote September 27, 2006
Cost to the taxpayers: “Enacting H.R. 5585 could affect direct spending, but CBO estimates that any such changes would not be significant”.
## All Rights Reserved. © 2006 TheWeekInCongress.com(TM)
No reproduction, language translation or distribution without written permission from TheWeekInCongress.com.(TM)
MORE INFORMATION
Section 1. Short title
This section sets forth the short title of this legislation--the `Financial Netting Improvements Act of 2006'.
Section 2. Treatment of certain agreements by conservators or receivers or depository institutions
This section amends the Federal Deposit Insurance Act's (FDIA) and Federal Credit Union Act's (FCUA) definitions of `securities contract', `forward contract' and `swap agreement' to make a number of technical and clarifying changes. It is intended that the legislative history and case law surrounding those terms, to the date of this amendment, be incorporated into the legislative history of the FDIA and FCUA.
The definition of `securities contract' and `forward contract'
The reference to `repurchase or reverse repurchase' transactions in section 2(a)(1)(A)(ii) is intended to confirm that a repurchase or reverse repurchase transaction included within the definitions of `securities contract' or `forward contract' is not limited by the definition of `repurchase agreement' contained in 12 U.S.C. section 1821(e)(8)(D)(v).
The definition of `securities contract'
The reference in sections 2(a)(1)(B) and 2(a)(2)(B) to guarantees `(including by novation)' by or to any securities clearing agency, together with the reference in the definition of `securities contract' (as amended by Pub. L. No. 109-8) to `any other agreement or transaction that is similar' is intended to confirm that the language covers other arrangements that have an effect similar to a guarantee or a novation.
The reference in sections 2(a)(1)(E) and 2(a)(2)(E) to the inclusion of `any extension of credit for the clearance or settlement of securities transactions' is intended to confirm that the definition encompasses credit extended for the execution, clearance and settlement of securities transactions, which provide important liquidity to the securities markets. Also, the inclusion of `any loan transaction coupled with a securities collar transaction, any prepaid securities forward transaction, or any total return swap transaction coupled with a securities sale transaction' is intended to confirm that similar agreements covered by the definition of securities contract include these transactions
which are functionally similar to other enumerated transactions in the definition, even though their form might differ. The common thread of these transactions is that they involve financial intermediaries--stockbrokers, financial institutions, financial participants or securities clearing agencies--that often hedge their risk on these transactions through other market transactions, repledge securities collateral received under these transactions, or both. As such these transactions implicate the systemic risk concerns that are addressed by the safe harbors.
The definition of `swap agreement'
Section 2(c) amends the definition of `swap agreement' to include `weather swap, option, future, or forward agreement; an emissions swap, option, future, or forward agreement; or an inflation swap, option, future, or forward agreement.' The inclusion of `weather swap, option, future, or forward agreement; an emissions swap, option, future, or forward agreement; or an inflation swap, option, future, or forward agreement' is intended to confirm that `similar agreements' covered by the definition of `swap agreement' include these transactions.
Section 2(c) expands the definition of `swap agreement' to include `any agreement or transaction that is similar to any other agreement or transaction referred to in [section 11(e)(8)(D)(vi) of the FDIA/section 207(c)(8)(D)(vi) of the FCUA] and is of a type that has been, is presently, or in the future becomes, the subject of recurrent dealings in the swap or other derivatives markets * * * and that is a forward, swap, future, option, or spot transaction on one or more rates, currencies, commodities, equity securities or other equity instruments, debt securities or other debt instruments, quantitative measures associated with an occurrence, extent of an occurrence, or contingency associated with a financial, commercial, or economic consequence, or economic or financial indices or measures of economic or financial risk or value.' The proposed amendments would change the reference to `swap markets' to `swap or other derivatives markets' in order to avoid any suggestion that new developments are limited to transactions that are technically swaps as opposed to other types of derivatives, such as options. The addition of `or spot transaction' in the provision regarding `similar agreements' is a technical correction intended to refer to spot transactions that are similar to the spot transactions already enumerated in the definition of `swap agreement.' However, the reference in the definition of `swap agreement' to spot transactions in commodities is not intended to encompass ordinary sales of goods contracts, but rather financial market transactions in commodities.
The term `swap agreement' includes transactions documented as `contracts for differences,' which is another way to document the enumerated transactions.
Section 3. Clarifying amendments relating to definition of person
This section expands the FDIA's and FCUA's definition of `person' for purposes of determining who is eligible for termination, netting and close out rights in the event of insolvency. The revised definition would include any governmental entity in addition to any entity included in the definition of `person' under Section 1 of Title 1 of the United States Code.
Section 4. Federal Deposit Insurance Corporation Improvement Act of 1991
This section amends sections 403 and 404 of the Federal Deposit Insurance Corporation Improvement Act of 1991 to clarify that both financial institutions and clearing organizations are subject to the limitations of the entire section 11(e) of the FDIA and section 207 of FCUA.
Section 5. Conforming amendments
This section amends the Federal Bankruptcy Code's definitions of `swap agreement', `forward contract' and `securities contract' to make a number of technical and clarifying changes. This section also makes certain changes to the automatic stay provisions of the Bankruptcy Code and to the avoidance powers of a trustee under the Bankruptcy Code. This section also amends the Securities Investor Protection Act and amends the savings clause included in Pub. L. No. 109-8.
The definition of `swap agreement'
Section 5(a)(1)(D) amends the definition of `swap agreement' to include a weather swap, option, future, or forward agreement; an emissions swap, option, future, or forward agreement; or an inflation swap, option, future, or forward agreement. The inclusion of `weather swap, option, future, or forward agreement; an emissions swap, option, future, or forward agreement; or an inflation swap, option, future, or forward agreement' is intended to confirm that `similar agreements' covered by the definition of `swap agreement' include these transactions.
Section 5(a)(1)(D) expands the definition of `swap agreement' to include `any agreement or transaction that is similar to any other agreement or transaction referred to in [section 101(53B) of the Bankruptcy Code] and that is of a type that has been, is presently, or in the future becomes, the subject of recurrent dealings in the swap or other derivatives markets * * * and is a forward, swap, future, option, or spot transaction on one or more rates, currencies, commodities, equity securities or other equity instruments, debt securities or other debt instruments, quantitative measures associated with an occurrence, extent of an occurrence, or contingency associated with a financial, commercial, or economic consequence, or economic or financial indices or measures of economic or financial risk or value.' The proposed amendments would change the reference to `swap markets' to `swap or other derivatives markets' in order to avoid any suggestion that new developments are limited to transactions that are technically swaps as opposed to other types of derivatives, such as options. The addition of `or spot transaction' in the provision regarding `similar agreements' is a technical correction intended to refer to spot transactions that are similar to the spot transactions already enumerated in the definition of `swap agreement.' However, the reference in the definition of `swap agreement' to spot transactions in commodities is not intended to encompass ordinary sales of goods contracts, but rather financial market transactions in commodities.
The term `swap agreement' includes transactions documented as `contracts for differences,' which is another way to document the enumerated transactions.
The automatic stay
Section 5(a)(2) amends section 362(b) of the Bankruptcy Code to protect enforcement, free from the automatic stay, of collateral, setoff or netting provisions in commodity contracts, forward contracts, securities contracts, repurchase agreements or swap agreements and in master netting agreements and security agreements or arrangements or other credit enhancements related to one or more swap agreements or master netting agreements. These changes conform the provisions of the Bankruptcy Code to the parallel provisions of the FDIA and FCUA to confirm that Sections 362(b)(6), (7) and (17) protect, free from the automatic stay, all rights previously protected by Sections 362(b)(6), (7) and (17), including self-help foreclosure-on-collateral rights, setoff rights and netting rights (including foreclosure on, and setoff against, cash and securities held to margin or secure claims for margin payments and settlement payments, title transfer arrangements and the right to offset obligations owed against collateral pledged to the debtor). The provisions protect the exercise of `contractual rights' as defined in Sections 555, 556, 559, or 560, as appropriate, which include not only rights evidenced by agreements between the parties, but other rights as set forth in those definitions.
The definition of `securities contract'
The reference in section 5(a)(3)(B) to guarantees `(including by novation)' by or to any securities clearing agency, together with the reference in the definition of `securities contract' (as amended by Pub. L. No. 109-8) to `any other agreement or transaction that is similar,' is intended to confirm that the language covers other arrangements that have an effect similar to a guarantee or a novation.
Under section 5(a)(3)(E), the inclusion of `any extension of credit for the clearance or settlement of securities transactions' is intended to confirm that the definition encompasses credit extended for the execution, clearance and settlement of securities transactions, which provide important liquidity to the securities markets. Also, the inclusion of `any loan transaction coupled with a securities collar transaction, any prepaid securities forward transaction, or any total return swap transaction coupled with a securities sale transaction' is intended to confirm that transactions which are functionally similar to other enumerated transactions in the definition are covered by the definition of `securities contract', even though their form might differ.
The common thread of these transactions is that they involve financial intermediaries--stockbrokers, financial institutions, financial participants or securities clearing agencies--that often hedge their risk on these transactions through other market transactions, repledge securities collateral received under these transactions, or both.
Trustee avoidance powers
Section 5(b) amends Sections 546(e) and 546(f) of the Bankruptcy Code, which protect margin payments and settlement payments, to also protect transfers made by or to a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, securities clearing agency, or repo participant, in connection with a securities contract, commodity contract, forward contract, or repurchase agreement. This amendment conforms the language of Sections 546(e) and 546(f) to the language in 546(g), regarding the protection of transfers in connection with swap agreements.
Section 6. Walkaway clauses
Section 5 amends the `walkaway clause' provision of the FDIA (Section 11(e)(8)(G) of the FDIA) and the FCUA (Section 207(c)(8)(G)), both of which were added by Title IX of S. 256, to clarify the ability of the receiver, to enforce contracts.
Section 7. Bankruptcy trustee compensation
Section 7 amends titles 11 and 28 of the United States Code to increase the compensation paid to a case trustee for administering a chapter 7 bankruptcy case from $60 to $100. Under current law, the trustee's $60 fee is paid out of the statutory and miscellaneous fees that a debtor must pay to commence a chapter 7 bankruptcy case, which currently total $299. The provision effectuates the increase by: (1) reclassifying the trustee's compensation to be entirely derived from the statutory filing fee; (2) increasing the statutory filing fee by $40; and (3) adjusting the percentage of the statutory filing fee allocated to the United States Trustee System Fund and the fund established pursuant to 28 U.S.C. Sec. 1931 to ensure that the respective amounts these funds and the Treasury receive remain the same. In addition, section 7 deletes section 10101(a)(2) of the Deficit Reduction Act of 2005, Pub. L. No. 109-171, which was intended to increase the statutory chapter 11 filing fee, but was incorrectly drafted.
In recognition of the fact that the statutory filing fees have been raised recently on two prior occasions, the Committee on the Judiciary urges the Judicial Conference of the United States to be sensitive to the impact these increases have on chapter 7 debtors should the Conference consider prescribing additional fees pursuant to 28 U.S.C. Sec. 1930(b).
## All Rights Reserved. © 2006 TheWeekInCongress.com.(TM)
No reproduction, language translation or distribution without written permission from TheWeekInCongress.com.(TM)