This was a vote on an amendment offered by Rep. Murphy (D-NY) to substitute a new definition for the term “major swap participant”, which is an entity that engages in a type of risky financial transaction to which certain regulations apply. The amendment was offered to H.R. 4173, a major financial reform bill which implemented the most significant changes in the regulation of the financial industry since The Great Depression.
The term “major swap participant” generally refers to any entity that maintains a substantial financial position, based on the movement of a factor such as interest rates or stock prices. A “swap” is an agreement between two parties that allows one or both to lock in a future price on anything from currency to oil. Participating in a “swap” can leave one or both of the parties in a financially risky position.
The definitional change in the amendment would result in a greater number of financial companies being subject to more intense regulation, and a lower number of manufacturing companies being subject to that regulation. The National Association of Manufacturers supported the amendment. It wrote a letter to Members of Congress noting that many manufacturers use swaps as a tool to manage and control their borrowing costs and other operating risks, including those associated with fluctuating currency exchange, interest rates and commodity prices. The Association’s letter said that, without the amendment, the new financial requirements imposed by the legislation “could unnecessarily subject some end-users (of swaps) to burdensome margin and collateral requirements aimed primarily at those whose activities present risk to the financial system.”
Rep. Murphy said the reason for the change was that financial companies “are systemically risky (and should) be held to a higher standard of accountability, while manufacturing companies use swaps in the normal course of (doing) their business (to hedge) . . . their actual risk.”
Murphy also said that manufacturing companies should be allowed to make ongoing business decisions without being unduly monitored. He added that, in attempting to address the true underlying issues causing the financial crisis, Congress should see to it that it does not limit “the ability of responsible companies to access the (markets) . . . they need to keep their businesses up and running.”
Rep. Kratovil (D-MD) co-sponsored the amendment. He argued: “These (swaps) are not just used by the larger broker and dealer banks who do, in fact, present a systemic threat to the market, but also by smaller companies who use them to manage the risk associated with running an effective business. The fact of the matter is the legislation needs to distinguish between the two. Without this amendment, H.R. 4173 could subject some end users to burdensome costs and penalties that were primarily aimed at companies whose activities do, in fact, present a real risk to the stability of the financial system. Our amendment clarifies that (certain) end users do not pose a systemic risk and should not be designated as ‘major swap participants’ and incur the unintended costs.
Opponents of the amendment took the position that these additional regulations were needed to reduce the risks and potential abuses inherent in all swap transactions, regardless of whether those transactions were engaged in by financial institutions or by manufacturers.
Rep. Frank (D-MA), who chairs the Financial Services Committee that developed H.R. 4173, was one of those who opposed the amendment. He argued that if any party “is engaged in an activity that can cause financial problems, then we want them not to be exempt from regulation . . . .” Frank added: “We don't want to wait for systemic risk. I don't want to wait until people are at the edge of the cliff to start to pull them back. . . . (Those engaging in swaps) can avoid this regulation by being careful . . . (to) use some prudence before (they) engage in a transaction with a counterparty who will be at risk and could begin the kind of chain that we hope would not happen . . . .”
The amendment was approved by a vote of 304-124. One hundred and seventy-three Republicans and one hundred and thirty-one Democrats voted “aye”. One hundred and twenty-four Democrats, including a majority of the most progressive Members, voted “nay”. As a result, language was added to the major financial reform bill, which redefined the term “major swap participant.”