Financial Derivatives Supervisory Improvement Act of 1998

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Financial Derivatives Supervisory 
Improvement Act of 1998''.

SEC. 2. FINDINGS.

    The Congress finds as follows:
            (1) There should be consistency, coordination, and clarity 
        in the regulation of derivative instruments used by financial 
        institutions.
            (2) Banks and their affiliates developed, and remain the 
        principal participants in, the derivatives markets.
            (3) Regulation of the derivatives markets directly affects 
        the liquidity, efficiency, capital position, and safety and 
        soundness of the banking industry and the safety and soundness 
        of the Federal deposit insurance fund.
            (4) Regulation of the derivatives markets has profound 
        consequences for the continued effectiveness of the bank 
        supervisory process, including the capital provisions of the 
        Federal banking agencies.
            (5) Statutes and regulations governing use of financial 
        derivatives by depository institutions in the United States, 
        including over-the-counter and exchange-traded derivatives, 
        should be brought up to date to reflect the rapid evolution of 
        the markets in recent years, framed so as to keep pace with 
        changes in the markets brought on by the onrush of 
        technological advances, and formulated in a manner that 
        enhances the legal certainty of derivatives transactions.
            (6) The Congress desires interagency cooperation to 
        harmonize, to the maximum extent possible, United States rules 
        and regulations related to the derivatives markets.
            (7) Regulatory arbitrage is a fact of commerce, with market 
        participants having the tendency to move to the weakest 
        regulator.
            (8) The stability of the international financial system and 
        the competitive position of United States financial 
        institutions are jeopardized if foreign markets are regulated 
        less prudently than United States markets.

SEC. 3. ESTABLISHMENT OF WORKING GROUP ON FINANCIAL DERIVATIVES.

    (a) Establishment; Composition.--There is established the Working 
Group on Financial Derivatives, which shall consist of--
            (1) the Secretary of the Treasury;
            (2) the Chairman of the Board of Governors of the Federal 
        Reserve System;
            (3) the Chairman of the Securities and Exchange Commission;
            (4) the Chairman of the Commodity Futures Trading 
        Commission;
            (5) the Comptroller of the Currency;
            (6) the Director of the Office of Thrift Supervision;
            (7) the Chairperson of the Board of Directors of the 
        Federal Deposit Insurance Corporation; and
            (8) the President of the Federal Reserve Bank of New York.
    (b) Chairmanship.--The Chairman of the Working Group on Financial 
Derivatives shall be the Secretary of the Treasury.
    (c) Designation of Officers and Employees.--The members of the 
Working Group on Financial Derivatives may, from time to time, 
designate other officers or employees of their respective agencies to 
assist in carrying out the duties on the Working Group on Financial 
Derivatives.
    (d) Establishment of Advisory Committees.--In the development of 
recommendations related to derivative products, the Working Group on 
Financial Derivatives shall consult, to the widest extent possible, 
with market participants, and may establish advisory committees 
accordingly.
    (e) Sunset; Reports.--The Working Group on Financial Derivatives 
shall cease to exist upon the enactment of legislation authorizing 
appropriations for the Commodity Futures Trading Commission for any 
fiscal year after fiscal year 2000. The Secretary of the Treasury and 
the Chairman of the Board of Governors of the Federal Reserve System 
shall submit to the Congress every 6 months, during the 4-year period 
beginning on the date of such cessation, a report on the progress of 
the implementation of the recommendations of the Working Group on 
Financial Derivatives.

SEC. 4. STUDY AND RECOMMENDATIONS ON REGULATION OF DERIVATIVES MARKETS.

    (a) Study.--The Working Group on Financial Derivatives established 
under section 2--
            (1) shall conduct a study on the regulation of the 
        derivatives markets, including over-the-counter derivatives and 
        exchange-traded derivatives, in which depository institutions, 
        brokers or dealers registered under the Securities and Exchange 
        Act of 1934, foreign banks, or affiliates of a depository 
        institution or a foreign bank, participate; and
            (2) shall develop recommendations for modernizing and 
        harmonizing statutes, regulations, and policies--
                    (A) to reflect changes in the markets described in 
                paragraph (1);
                    (B) to improve their operations;
                    (C) to enhance legal certainty for all types of 
                instruments related to such markets, including hybrid 
                instruments and swap agreements; and
                    (D) to promote the harmonization of regulation of 
                such markets worldwide.
    (b) Reports.--
            (1) Interim report.--Not later than 6 months after the date 
        of the enactment of this Act, the Working Group on Financial 
        Derivatives established under section 2 shall submit an interim 
        report to the Congress describing the working group's progress.
            (2) Final report.--Not later than 1 year after the date of 
        the enactment of this Act, the Working Group on Financial 
        Derivatives established under section 2 shall submit a final 
        report to the Congress describing the study conducted under 
        subsection (a)(1) and containing the recommendations developed 
        under subsection (a)(2).
            (3) Separate views.--The reports under paragraph (1) and 
        (2) may include separately stated views of any member of the 
        working group.

SEC. 5. PROTECTION OF INTERNATIONAL BANKING SYSTEM.

    To protect customers, stabilize the international financial system, 
and underpin the safety and soundness of banking institutions in the 
United States and the banking system around the world, the Government 
of the United States and the Working Group on Financial Derivatives 
should make a high priority continual negotiations to ensure that 
foreign markets and regulatory bodies establish and maintain 
regulations comparably prudent to those applicable in United States 
markets.

SEC. 6. RESTRICTIONS RELATING TO HYBRID INSTRUMENTS AND SWAP 
              AGREEMENTS.

    Notwithstanding any other provision of law--
            (1) during the period beginning on the date of the 
        enactment of this Act and ending upon the enactment of 
        legislation authorizing appropriations for the Commodity 
        Futures Trading Commission for any fiscal year after fiscal 
        year 2000, the Commodity Futures Trading Commission may not, 
        without the approval of the Secretary of the Treasury, propose 
        or promulgate any rule, regulation, or order, or issue any 
        interpretive or policy statement, that restricts or regulates 
        activity in a hybrid instrument or swap agreement--
                    (A) that is eligible for exemption under part 34 or 
                35 of title 17, Code of Federal Regulations (as in 
                effect on January 1, 1998); and
                    (B) to which a depository institution, a broker or 
                dealer registered under the Securities and Exchange Act 
                of 1934, a foreign bank, or an affiliate of a 
                depository institution or a foreign bank, is a party; 
                and
            (2) a hybrid instrument or swap agreement described in 
        paragraph (1) that is entered into before the period described 
        in such paragraph shall not be subject to section 2(a)(1)(B)(v) 
        of the Commodity Exchange Act (7 U.S.C. 2a(a)(1)(B)(v)).

SEC. 7. DEFINITIONS.

    For purposes of this Act:
            (1) The term ``depository institution'' has the meaning 
        given such term in section 19(b)(1)(A) of the Federal Reserve 
        Act (12 U.S.C. 461(b)(1)(A)).
            (2) The term ``foreign bank'' has the meaning given such 
        term in section 1(b)(7) of the International Banking Act of 
        1978 (12 U.S.C. 3101(b)(7)).

Summary: Financial Derivatives Supervisory Improvement Act of 1998 - Establishes the Working Group on Financial Derivatives to study and report to the Congress on: (1) the regulation of derivatives markets in which domestic and foreign depository institutions and registered brokers and dealers participate. And (2) any recommendations for modernizing and harmonizing statutes, regulations, and policies. Urges the Group to assign a high priority to continual negotiations to ensure that foreign markets and regulatory bodies establish and maintain regulations comparably prudent to those governing the US markets. Prohibits the Commodity Futures Trading Commission, for a specified time period, without the Secretary of the Treasury's approval, from promulgating or proposing regulations, or issuing any interpretive or policy statements that regulate or restrict activity in certain hybrid instruments and swap agreements. Declares that any such hybrid instruments or swap agreements entered into before such period shall not be subject to the Commodity Exchange Act's restriction of futures contracts or exempted securities.