H.R. 2682 seeks to harmonize a recent joint-rulemaking by certain bank and financial regulators, which would have subjected certain OTC end-user transactions with banks or other financial institutions to margin requirements, with a conflicting proposed rulemaking from the CFTC expressly not imposing similar requirements on registered swap entities, including banks and other financial institutions. The proposed legislation resolves the conflict by applying the exemption across the board to all OTC end-user transactions with registered swap entities, bank or non-bank.

Under the proposed legislation, a derivative transaction involving an end-user may be exempt from margin requirements if it satisfies the requirements under Dodd-Frank for the end-user clearing exemption. The clearing exemption is available to any end-user that (i) is not a “financial entity” and (ii) is using swaps to “hedge or mitigate commercial risks.”

The term “financial entity” is defined under the Dodd-Frank Act to include certain registered swap entities, banks, commodity pools, and private funds. The precise contours of who is a financial entity depends upon the yet-to-be finalized rules containing the definitions for the terms “swap dealer,” “major swap participant,” “security-based swap dealer” and “major security-based swap participant.”

The determination as to when a swap is being used to hedge or mitigate commercial risk is also addressed in other proposed rules. Generally, a swap is deemed to be used to hedge or mitigate commercial risk when the swap is not in the nature of speculation, investing or trading, and either (i) qualifies as bona fide hedging for purposes of the Commodity Exchange Act’s position limits exemption, (ii) qualifies for hedging treatment for certain accounting purposes or (iii) is an economically appropriate swap used to hedge risks arising from potential changes in the value of assets, liabilities, services, inputs, products, commodities or interest/currency/exchange rates. 

In sum, H.R. 2682 would clarify that all non-cleared OTC end-user transactions used to hedge or mitigate commercial risk are exempt from margin requirements.

While H.R. 2682 is limited to the application of the margin requirements to commercial end-users, it signals a renewed congressional direction to clarify, and arguably limit, the impact of the Dodd-Frank Act on OTC end-user transactions. This direction may be instructive to the various regulators in resolving other open issues of concern to end-users.

For any questions regarding H.R. 2682, the end-user clearing exemption, or other issues related to OTC derivatives and the Dodd-Frank Act, please contact Brian Harms or John Leonti.

For more information, review the full text of H.R. 2682 or the Proposed Rule regarding the end-user clearing exemption.

Under the SBLF, the United States Treasury (the Treasury) would make capital investments by purchasing securities in participating community banks, most likely in the form of senior preferred stock.  As proposed, the SBLF limits investment by the Treasury to 5 percent of risk-weighted assets for participating banks with total assets of $1 billion or less, and to 3 percent of risk-weighted assets for participating banks with more than $1 billion and less than $10 billion of total assets.  The SBLF aims to stimulate small business lending by reducing the dividend rate on SBLF capital investments as a participating community bank increases lending to small businesses.  Although the dividend rate would initially be set at 5 percent, the participating community bank could decrease the dividend rate to 1 percent by increasing its small business lending, thus providing the bank with an attractive and relatively inexpensive source of capital.

As proposed, the SBLF also provides an attractive option for many community banks to refinance preferred stock issued to the Treasury pursuant to the TARP program.  The primary advantages of such a refinancing would be: (1) by increasing small business lending, the participating community bank could decrease the dividend rate on SBLF securities well below the 5 percent (and 9 percent after five years) TARP dividend rates; and (2) participation in the SBLF is likely to impose fewer restrictions on the participating community bank than TARP participation, including fewer restrictions on executive compensation.  However, community banks participating in the SBLF to refinance TARP securities would be required to be current on their dividend payments to the Treasury.

Senate approval appears to be the only remaining obstacle to the SBLF, as the House has already approved H.R. 5297 and the President is a strong advocate who intends to sign the bill into law as a jobs creation initiative.  Thereafter, the Treasury would be required to announce eligibility requirements and application processes for community banks to participate in the SBLF.  The Financial Institutions Practice Group at Troutman Sanders will continue to monitor all developments regarding the SBLF and will notify its clients and friends of any opportunity to participate in this capital investment program.

The foregoing is only a summary of one of the many significant issues affecting financial institutions.  If you have any questions about the foregoing or about other financial institution issues, please direct them to your regular contact at Troutman Sanders LLP or to any of the persons listed in the sidebar to this release.

CONTACT

Jake Lutz
Practice Group Leader
804.697.1490

Tom Powell
404.885.3294

Jerome Walker
212.704.6286

CONTRIBUTOR

Seth Winter
804.697.2329

The ARRA program is not just an expansion of funding for governmental facilities – it provides for energy and environmental investment and retrofit, technology research and development and tax incentives useful to a wide range of corporate and real estate enterprises.  The program also encompasses the technology infrastructure on a broad scale, including the smart power grid, broadband expansion and electronic medical records system. As a result of ARRA, construction, technology networking, government contracting and regulatory interaction are likely to become more important components of business strategy.

Even within the governmental facility arena, ARRA will create investment opportunities for lenders, private equity, investment funds, sovereign wealth funds and public and private pension and retirement funds.  Such investors as well as public authorities, municipalities and other governmental entities will be utilizing more bold and sophisticated public private partnerships and joint ventures (PPP) as well as structured financing techniques.

Just as businesses, investors and governmental entities needed to transform themselves to the on-line world in the past decade, they are now in the process of adapting to the new economic environment.  Infrastructure and similar governmental economic stimulus programs are going to be an important component of this new era. The Troutman Sanders’ multi-disciplinary infrastructure team seeks to efficiently provide the mix of legal skills and experience our private and public clients will need to develop and execute their strategy for capitalizing upon the economic stimulus package.

We have synthesized the ARRA legislation and set forth below is a snapshot of programs to be funded by ARRA which we believe are of interest to our clients.  Troutman Sanders can assist clients in recognizing and implementing opportunities arising from the legislation.  We would be pleased to talk with you and interchange views on the ARRA legislation, trends and developments, and infrastructure opportunities for your organization.

Troutman Sanders Infrastructure Initiative 2009 Practice Team:

To help you understand and pursue the opportunities presented by the stimulus package, more than 100 Troutman Sanders professionals from sixteen practice groups have come together to form an Infrastructure Initiative 2009 Practice Team. Client Advisories covering specific components of the stimulus package will be prepared by several of these practice groups; click this link to an Advisory on “Energy in the Stimulus Package”. For a complete listing of skills, project experience and Troutman professionals who form this team, click on any link below:

AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009

Selected Infrastructure Client Opportunities

(Dollar amounts are approximate and may be adjusted)

ENERGY

• Smart Grid and Energy Transmission Programs – $11 billion for R&D, pilot projects, Federal matching funds and power administration borrowing authority, all to modernize the electricity grid
• Renewable Energy Loan Guarantees – $6 billion for power generation and transmission projects
• Facility Retrofits for Energy Efficiency – Federal, Local Government and Institutions – $8.8 billion
• Energy R&D, Pilot and Manufacturing Projects – $11.7 billion covering energy efficiency, renewable energy, advanced batteries and carbon capture technology

TRANSPORTATION

• Highway and Bridge Construction – $27.5 billion
• Mass Transit – $9.3 billion for new construction, system modernization and purchase of railcars, buses and equipment
• AMTRAK and other intercity rail improvements – $1.6 billion
• Airport Improvement Grants – $3 billion
• Airport explosive detection systems – $1 billion
• Border and Maritime Ports – $680 million primarily for security

ENVIRONMENTAL

• Hazardous Waste Cleanup – $1 billion, including Superfund sites, underground storage tanks and “Brownfield” grants
• Clean Water Programs – $6 billion in grants and loans to local governments for drinking water infrastructure and wastewater treatment projects
• Flood Control and Navigation Infrastructure- $4.6 for Army Corps of Engineers projects and $300 million for Coast Guard projects

TELECOMMUNICATIONS, HEALTHCARE AND OTHER INFORMATION TECHNOLOGY

• Wireless and Broadband Services to Underserved Communities – $7.2 billion
• Computerization of HealthCare Records – $19 billion
• Information Technology Upgrades – Federal Agencies – $900 million
• Smart Grid and Energy Transmission Programs – $11 billion – see Energy above

MULTI-FAMILY HOUSING MODERNIZATION

• Energy Efficient Housing Retrofits for HUD sponsored low income housing – $2.3 billion
• HUD Public Housing Capital Fund for repair and modernization – $4 billion

FEDERAL, LOCAL AND UNIVERSITY FACILITY CONSTRUCTION

• Federal, Local and University research facilities – $2.8 billion
• Department of Defense – $8 billion, including $3.8 billion for medical facilities
• Veterans Medical Facilities – $1.2 billion

CONTACT
Lawrence M. Levinson
212.704.6251