Swaps Agreements and Community Development

HR 4541

President Clinton on Dec. 21 signed the year's final government spending bill, including two provisions of particular interest to bankers.

The law included a measure to overhaul commodities laws and another to spur investment in poor inner city or rural areas.

The Commodity Futures Modernization Act of 2000, among other things, restricts nonbank regulators' jurisdiction over wholesale swaps contracts executed by banks.

A version of the measure had passed the House overwhelmingly Oct. 19 but had stalled in the Senate because of concerns that it would insufficiently protect bank swaps products from regulation by the Commodity Futures Trading Commission, thus driving American business overseas.

Led by Senate Banking Committee Chairman Phil Gramm, Senate negotiators redrafted the bill to strengthen protections for current and future banking products.

The measure explicitly exempted all banking products - as defined under the Gramm-Leach-Bliley Act - from regulation by the CFTC. It protects swaps contracts entered into by financial institutions, governments, and most corporations. The measure also covers swaps contracts entered into by individual investors who have assets of $10 million or more ($5 million if the contract is used solely as a hedging technique). Swaps involving less sophisticated retail customers are not covered.

Further, the bill protects new bank products from CFTC regulation by establishing a so-called predominance test. The test would be used to determine which agency has the most valid claim to regulate a particular new product. It is intended to insure that predominantly bank-related products remain under the sole oversight of banking regulators.

If the CFTC wanted to regulate a new product offered by banks, it could do so only with the Federal Reserve Board's permission. If the commission tried to regulate such a product without the Fed's agreement, the central bank could challenge this action in court.

Another section of the measure bars the Securities and Exchange Commission from asserting jurisdiction over any swaps except equity swaps and then only in cases of fraud, stock manipulation, or insider trading.

In addition the commodities measure repeals the Shad-Johnson accord, ending an 18-year ban on trading in single-stock futures, and eases some restrictions under which U.S. commodity exchanges operate.

The yearend spending package also contains a community redevelopment initiative that increases by 40% the tax credit to banks that lend for low-income housing construction and offers roughly $4 billion of tax breaks over five years to banks and other companies that invest in poor communities.

The credits are part of a legislative package that President Clinton and House Speaker J. Dennis Hastert shook hands on in late 1999 to attract private investment to the country's poorest regions.

Bankruptcy Reform HR 2415

A bankruptcy reform bill highly sought by the financial services industry officially died Dec. 21 as President Clinton left it unsigned. Lawmakers had adjourned for the year and thus were not in session to try to override the so-called pocket veto.

"I firmly believe that Americans would benefit from bankruptcy legislation that would stem abuse of the bankruptcy system by, and encourage responsibility of, debtors and creditors alike," President Clinton said in a statement. "Unfortunately this bill is not balanced reform."

The measure - which would have overhauled bankruptcy law to relieve creditors from having to shoulder most of filers' debts - passed the Senate on Dec. 7 and the House Oct. 12 with veto-proof majorities.

Backers of the measure are expected to reintroduce it in the new congressional session, which began Jan. 3.

Regulatory Relief HR 5640

President Clinton on Dec. 27 signed into law the American Homeownership and Economic Opportunity Act of 2000, a catchall package of banking and housing measures. The legislation cleared the House on Dec. 5 and the Senate on Dec. 7.

The new law has about 20 regulatory relief provisions for banks and thrifts, including one that repeals a requirement that at least 4% of a thrift's assets be easily liquidated. It also gives national banks more flexibility in electing directors by allowing board terms to be staggered and up to three years long. Under previous law, national bank directors were elected simultaneously for one-year terms.

Other provisions reinstated 45 banking and housing regulatory reports to Congress, including the Federal Reserve Board's annual survey of bank fees. The Fed chairman is still required to testify on the state of the economy at least twice a year, once before the House Banking Committee and once before the Senate Banking Committee.

The law also gives Fed officials a raise - the chairman's annual salary rises by $15,700, to $157,000 - and lets the central bank buy a third office building in Washington.

The law's housing provisions include clarification of a 1998 law to make it easier for homeowners to cancel private mortgage insurance.

The bill was spearheaded by former House Banking Committee Chairman Jim Leach of Iowa and the panel's top Democrat, Rep. John J. LaFalce of New York.

NEW LEGISLATIONNetting Derivatives Contracts HR 11

Rep. Jim Leach, the former chairman of the House Banking Committee, reintroduced on Jan. 3 legislation intended to prevent a financially harmful domino effect when companies holding a large number of derivatives contracts go bankrupt.

The legislation, which had been part of last year's bankruptcy reform package vetoed by President Clinton, would keep the contracts from being frozen in bankruptcy proceedings and let the counterparties reconcile, or "net" out, their obligations on paper and reduce the solvent parties' losses.

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