S.Amdt. 4109

SA 4109. Mr. DORGAN submitted an amendment intended to be proposed to
amendment SA 3739 proposed by Mr. Reid (for Mr. Dodd (for himself and
Mrs. Lincoln)) to the bill S. 3217, to promote the financial stability
of the United States by improving accountability and transparency in
the financial system, to end ``too big to fail'', to protect the
American taxpayer by ending bailouts, to protect consumers from abusive
financial services practices, and for other purposes; which was ordered
to lie on the table; as follows:

On page 893, after line 25, insert the following:

SEC. 774. CLEARING OF CREDIT DEFAULT SWAPS.

(a) Clearing of Credit Default Swaps Under the Commodity
Exchange Act.--Section 2 of the Commodity Exchange Act (7
U.S.C. 2), as amended by this title, is amended by adding at
the end the following:
``(k) Clearing of Credit Default Swaps.--
``(1) Submission.--It shall be unlawful for any party to
enter into a credit default swap unless that person shall
submit such credit default swap for clearing to a derivatives
clearing organization that is registered under this Act or a
derivatives clearing organization that is exempt from
registration under section 5b(i) of this Act.
``(2) Prohibition.--Notwithstanding any other provisions in
this section or of this Act, if no derivatives clearing
organization will accept a credit default swap for clearing,
it shall be unlawful for any party to enter into the credit
default swap.
``(3) Limitation on short positions.--
``(A) In general.--It shall be unlawful for a protection
buyer to enter into a credit default swap which establishes a
short position in a reference entity's credit instrument
unless the protection buyer can demonstrate to the
Commission, in such manner and in such form as may be
prescribed by the Commission, that the protection buyer--
``(i) is undertaking such action to establish a legitimate
short position in credit default swaps; or
``(ii) is regulated by the Commission as a swap dealer in
credit default swaps, and is acting as a market-maker or is
otherwise engaged in a financial transaction on behalf of a
customer.
``(B) Legitimate short position in credit default swaps.--A
protection buyer's short position in credit default swaps
shall be considered a legitimate short position in credit
default swaps if--
``(i) the value of the protection buyer's holdings in valid
credit instruments is equal to or greater than the absolute
notional value of the protection buyer's credit default
swaps; and
``(ii) the reference entity or entities for the protection
buyer's credit default swaps in clause (i), whether in a
single-name, or a narrow-based index or a broad-based index
credit default swap transaction, must be the same as the
borrower or issuer, or borrowers or issuers, of the valid
credit instrument or valid credit instruments the protection
buyer owns.
``(C) Determination of the commission.--
``(i) In general.--The Commission and the Securities and
Exchange Commission, shall jointly establish and adopt rules,
regulations, or orders, in accordance with the public
interest, defining the term `valid credit instrument'.
``(ii) Considerations and requirements.--In defining the
term `valid credit instrument', the Commission and the
Securities and Exchange Commission shall consider which
group, category, type, or class of credit instruments can be
effectively hedged using credit default swaps.
``(iii) Rule of construction.--For purposes of this
paragraph, any instrument with an equity risk exposure or
equity-like features shall not be considered by the
Commission to be a valid credit instrument.
``(D) Reporting.--Each protection buyer shall report all of
its legitimate short positions in credit default swaps, as
well as any other credit default swap positions and the valid
credit instruments that it owns to the Commission, in such
manner, in such frequency, and in such form as may be
prescribed by the Commission.
``(E) Holding of short positions in credit default swaps by
swap dealers.--Any swap dealer in credit default swaps
seeking to establish, possess, or otherwise obtain a short
position as the protection buyer of any credit default swap
for more than 60 consecutive calendar days or for more than
two-thirds of the days in any calendar quarter, shall
demonstrate to the Commission, in such manner and in such
form as may be prescribed by the Commission, that--
``(i) the value of the swap dealer's holdings in valid
credit instruments is equal to or

[[Page S3942]]

greater than the absolute notional value of the swap dealer's
position in credit default swaps; and
``(ii) the reference entity or entities for the swap
dealer's credit default swaps in clause (i), whether in a
single-name, or a narrow-based index or a broad-based index
credit default swap transaction, must be the same as the
borrower or issuer, or borrowers or issuers, of the valid
credit instrument or valid credit instruments the swap dealer
owns.
``(F) Prohibition on evasions and structuring of
transactions.--No person, including any protection buyer,
protection seller, or counterparty, may take any action in
connection with a credit default swap to structure such swap
for the purpose and with the intent of evading the provisions
of this subsection.
``(G) Authority of the commission.--The Commission, in
consultation with the Securities and Exchange Commission,
may, in the public interest, for the protection of investors,
for the protection of market participants, and the
maintenance of fair and orderly markets, prohibit any other
action, practice, or conduct in connection with or related to
the direct or indirect purchase or sale of credit default
swaps.
``(4) Determination of the council; phase in.--
``(A) Effective date.--Subject to subparagraph (B), this
subsection shall take effect on the earlier of--
``(i) the effective date established under section 753 of
the Wall Street Transparency and Accountability Act of 2010;
or
``(ii) the date on which the Chairperson of the Financial
Stability Oversight Council makes a determination that the
prohibitions and limitations established under this
subsection would not cause undue market disruptions.
``(B) Determination of market disruption.--Not later than
the effective date established under section 753 of the Wall
Street Transparency and Accountability Act of 2010, if the
Chairperson of the Financial Stability Oversight Council
determines that a phase in of the prohibitions and
limitations established under this subsection is necessary to
avoid undue market disruptions, then the Chairperson shall
recommend, and the Commission shall adopt, a phase in period
for such prohibitions and limitations. Any phase in period
described under this subparagraph shall not exceed 18 months.
``(5) Definitions.--
``(A) In general.--In this subsection, the following
definitions shall apply:
``(i) Credit default swap.--The term `credit default
swap'--

``(I) means a swap or security-based swap whose payout is
determined by the occurrence of a credit event with respect
to a single referenced credit instrument or reference entity
or multiple referenced credit instruments or reference
entities; and
``(II) is not a debt security registered with the
Securities and Exchange Commission and issued by a
corporation, State, municipality, or sovereign entity.

``(ii) Credit event.--The term `credit event' includes a
default, restructuring, insolvency, bankruptcy, credit
downgrade, and a violation of a debt covenant.
``(iii) Protection buyer.--The term `protection buyer'
means a person that enters into a credit default swap to
obtain a payoff from a third party (commonly referred to as
the `protection seller') upon the occurrence of one or more
credit events.
``(iv) Reference entity.--The term `reference entity' means
any borrower, such as a corporation, State, municipality,
sovereign entity, or special purpose entity, which has issued
a public debt obligation or obtained a loan that is
referenced by a credit default swap.
``(B) Further definition of terms.--The Commission and the
Securities and Exchange Commission, shall jointly establish
and adopt rules, regulations, or orders, in accordance with
the public interest, further defining the terms `credit
default swap', `credit event', `protection buyer', and
`reference entity'.''.
(b) Clearing of Credit Default Swaps Under Securities
Exchange Act of 1934.--The Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.) is amended by inserting after section
3C, as added by this title, the following:

``SEC. 3C-1. CLEARING OF CREDIT DEFAULT SWAPS.

``(a) Submission.--It shall be unlawful for any party to
enter into a credit default swap unless that person shall
submit such credit default swap for clearing to a clearing
agency that is registered under section 17A of this Act.
``(b) Prohibition.--Notwithstanding any other provisions in
this section or of this Act, if no clearing agency will
accept a credit default swap for clearing, it shall be
unlawful for any party to enter into the credit default swap.
``(c) Limitation on Short Positions.--
``(1) In general.--It shall be unlawful for a protection
buyer to enter into a credit default swap which establishes a
short position in a reference entity's credit unless the
protection buyer can demonstrate to the Commission, in such
manner and in such form as may be prescribed by the
Commission, that the protection buyer--
``(A) is undertaking such action to establish a legitimate
short position in credit default swaps; or
``(B) is regulated by the Commission as a security-based
swap dealer in credit default swaps, and is acting as a
market-maker or otherwise for the purpose of serving clients.
``(2) Legitimate short position in credit default swaps.--A
protection buyer's short position in credit default swaps
shall be considered a legitimate short position in credit
default swaps if --
``(A) the value of the protection buyer's holdings in valid
credit instruments is equal to or greater than the absolute
notional value of the protection buyer's credit default
swaps; and
``(B) the reference entity or entities for the protection
buyer's credit default swaps in subparagraph (A), whether in
a single-name, or a narrow-based index or a broad-based index
credit default swap transaction, must be the same as the
borrower or issuer, or borrowers or issuers, of the valid
credit instrument or valid credit instruments the protection
buyer owns.
``(3) Determination of the commission.--
``(A) In general.--The Commission and the Commodity Futures
Trading Commission, shall jointly establish and adopt rules,
regulations, or orders, in accordance with the public
interest, defining the term `valid credit instrument'.
``(B) Considerations and requirements.--In defining the
term `valid credit instrument', the Commission and the
Commodity Futures Trading Commission shall consider which
group, category, type, or class of credit instruments can be
effectively hedged using credit default swaps.
``(C) Rule of construction.--For purposes of this
subsection, any instrument with an equity risk exposure or
equity-like features shall not be considered by the
Commission to be a valid credit instrument.
``(4) Reporting.--Each protection buyer shall report all of
its legitimate short positions in credit default swaps, as
well as any other credit default swap positions and the valid
credit instruments that it owns to the Commission, in such
manner, in such frequency, and in such form as may be
prescribed by the Commission.
``(5) Holdings of short positions in credit default swaps
by security-based swap dealers.--Any security-based swap
dealer in credit default swaps seeking to establish, possess,
or otherwise obtain a short position as the protection buyer
of any credit default swap for more than 60 consecutive
calendar days or for more than two-thirds of the days in any
calendar quarter, shall demonstrate to the Commission, in
such manner and in such form as may be prescribed by the
Commission, that--
``(A) the value of the security-based swap dealer's long
holdings in valid credit instruments is equal to or greater
than the absolute notional value of the security-based swap
dealer's position in credit default swaps; and
``(B) the reference entity or entities for the security-
based swap dealer's credit default swaps in subparagraph (A),
whether in a single-name, or a narrow-based index or a broad-
based index credit default swap transaction, must be the same
as the borrower or issuer, or borrowers or issuers, of the
valid credit instrument or valid credit instruments the
security-based swaps dealer owns.
``(6) Prohibition on evasions and structuring of
transactions.--No person, including any protection buyer,
protection seller, or counterparty, may take any action in
connection with a credit default swap to structure such swap
for the purpose and with the intent of evading the provisions
of this section.
``(7) Authority of the commission.--The Commission, in
consultation with the Commodity Futures Trading Commission,
may, in the public interest, for the protection of investors,
for the protection of market participants, and the
maintenance of fair and orderly markets, prohibit any other
action, practice, or conduct in connection with or related to
the direct or indirect purchase or sale of credit default
swaps.
``(d) Determination of the Council; Phase in.--
``(1) Effective date.--Subject to paragraph (2), this
section shall take effect on the earlier of--
``(A) the effective date established under section 773 of
the Wall Street Transparency and Accountability Act of 2010;
or
``(B) the date on which the Chairperson of the Financial
Stability Oversight Council makes a determination that the
prohibitions and limitations established under this
subsection would not cause undue market disruptions.
``(2) Determination of market disruption.--Not later than
the effective date established under section 773 of the Wall
Street Transparency and Accountability Act of 2010, if the
Chairperson of the Financial Stability Oversight Council
determines that a phase in of the prohibitions and
limitations established under this section is necessary to
avoid undue market disruptions, then the Chairperson shall
recommend, and the Commission shall adopt, a phase in period
for such prohibitions and limitations. Any phase in period
described under this paragraph shall not exceed 18 months.
``(e) Definitions.--
``(1) In general.--In this section, the following
definitions shall apply:
``(A) Credit default swap.--The term `credit default
swap'--
``(i) means a swap or security-based swap whose payout is
determined by the occurrence of a credit event with respect
to a single referenced credit instrument or reference entity
or multiple referenced credit instruments or reference
entities; and

[[Page S3943]]

``(ii) is not a debt security registered with the
Commission and issued by a corporation, State, municipality,
or sovereign entity.
``(B) Credit event.--The term `credit event' includes a
default, restructuring, insolvency, bankruptcy, credit
downgrade, and a violation of a debt covenant.
``(C) Protection buyer.--The term `protection buyer' means
a person that enters into a credit default swap to obtain a
payoff from a third party (commonly referred to as the
`protection seller') upon the occurrence of one or more
credit events.
``(D) Reference entity.--The term `reference entity' means
any borrower, such as a corporation, State, municipality,
sovereign entity, or special purpose entity, which has issued
a public debt obligation or obtained a loan that is
referenced by a credit default swap.
``(2) Further definition of terms.--The Commission and the
Commodity Futures Trading Commission, shall jointly establish
and adopt rules, regulations, or orders, in accordance with
the public interest, further defining the terms `credit
default swap', `credit event', `protection buyer', and
`reference entity'.''.

SEC. 775. RESTRICTION ON SYNTHETIC ASSET-BACKED SECURITIES.

The Securities Act of 1933 (15 U.S.C. 77a et seq.) is
amended by inserting after section 5 the following:

``SEC. 5A. RESTRICTION ON SYNTHETIC ASSET-BACKED SECURITIES.

``(a) Definition.--For purposes of this section, the term
`synthetic asset-backed security' means an asset-backed
security, as defined in section 3(a)(77) of the Securities
Exchange Act of 1934, with respect to which, by design, the
self-liquidating financial assets referenced in the synthetic
securitization do not provide any direct payment or cash flow
to the holders of the security.
``(b) Restriction.--
``(1) In general.--No issuer, underwriter, placement agent,
sponsor, or initial purchaser may offer, sell, or transfer a
synthetic asset-backed security that has no purpose apart
from speculation on a possible future gain or loss associated
with the value or condition of the referenced assets. The
Commission may determine, by rule or otherwise, whether a
security is included within the description set forth in the
preceding sentence. Any such determination by the Commission,
other than by rule, is not subject to judicial review.
``(2) Rulemaking.--Not later than 270 days after the date
of enactment of this section, the Commission shall issue
rules carry out this section and to prevent evasions
thereof.''.
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