I

103D CONGRESS

2D SESSION H. R. 4170

To amend the Federal Deposit Insurance Act and the Federal Credit Union

Act to require insured depository institutions to include information

on derivative financial instruments in reports of condition, and for other

purposes.

IN THE HOUSE OF REPRESENTATIVES

APRIL 12, 1994

Mr. GONZALEZ introduced the following bill; which was referred to the

Committee on Banking, Finance and Urban Affairs

A BILL

To amend the Federal Deposit Insurance Act and the Federal Credit Union Act to require insured depository institutions to include information on derivative financial instruments in reports of condition, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Derivatives Safety and

5 Soundness Act of 1994’’.
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1 SEC. 2. DISCLOSURE OF AMOUNTS, NATURE, AND TERMS

2 OF DERIVATIVE FINANCIAL INSTRUMENTS IN

3 DEPOSITORY INSTITUTION CALL REPORTS.

4 (a) INSURED DEPOSITORY INSTITUTIONS.—The Fed5 eral Deposit Insurance Act (12 U.S.C. 1811 et seq.) is

6 amended by adding at the end the following new section:

7 ‘‘SEC. 44. DISCLOSURE REQUIREMENTS FOR DERIVATIVE

8 FINANCIAL INSTRUMENTS.

9 ‘‘(a) INFORMATION REQUIRED TO BE INCLUDED IN

10 CALL REPORTS.—Any report of condition made by any

11 insured depository institution in accordance with section

12 7(a) with respect to any period beginning after December

13 31, 1994, shall include the following information:

14 ‘‘(1) QUANTITATIVE INFORMATION WITH RE15 SPECT TO ALL DERIVATIVE FINANCIAL INSTRU16 MENTS.—

17 ‘‘(A) GROSS NOTIONAL AND FAIR

18 VALUE.—The gross notional value and the

19 gross fair value of any holding, position, or

20 other interest of the institution in any deriva21 tive financial instrument.

22 ‘‘(B) REVENUE, GAINS, AND LOSSES.—All

23 revenue, gains, and losses of the institution at24 tributable to any holding, position, or other in25 terest of the institution in any derivative finan26 cial instrument.
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1 ‘‘(C) EXPOSURE UNDER BILATERAL NET2 TING CONTRACT.—The net current credit expo3 sure of the institution under legally enforceable

4 bilateral arrangements with respect to any hold5 ing, position, or other interest of the institution

6 in any derivative financial instrument.

7 ‘‘(2) TERMS TO MATURITY.—Information on

8 the remaining term to maturity of any holding, posi9 tion, or other interest of the institution in any deriv10 ative financial instrument.

11 ‘‘(3) QUANTITATIVE INFORMATION WITH RE12 SPECT TO DERIVATIVE FINANCIAL INSTRUMENTS

13 HELD FOR TRADING PURPOSES.—

14 ‘‘(A) AVERAGE FAIR VALUE BALANCES.—

15 The average maximum and minimum fair value

16 balances of the insured depository institution

17 during the period covered by the report with re18 spect to any holding, position, or other interest

19 of the institution in any derivative financial in20 strument which is acquired or taken by the in21 stitution for trading purposes.

22 ‘‘(B) REVENUE, GAINS, AND LOSSES.—All

23 revenue, gains, and losses of the institution at24 tributable to trading account operations involv25 ing any holding, position, or other interest of
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1 the institution in any derivative financial instru2 ment.

3 ‘‘(b) REQUIREMENTS APPLICABLE TO REPORTING

4 UNDER SUBSECTION (a).—

5 ‘‘(1) SEPARATE REPORTING FOR EXCHANGE

6 AND OTC TRADING.—To the maximum extent pos7 sible, information reported pursuant to paragraphs

8 (1) and (2) of subsection (a) with respect to trans9 actions which are conducted on an exchange, and the

10 holdings, positions, or other interests in derivative fi11 nancial instruments which are the subjects of such

12 transactions, shall be provided separately from infor13 mation relating to transactions which are conducted

14 over the counter, and the holdings, positions, or

15 other interests in derivative financial instruments

16 which are the subjects of such transactions.

17 ‘‘(2) EXEMPTION BY AGENCY PROHIBITED.—A

18 Federal banking agency may not—

19 ‘‘(A) exempt any insured depository insti20 tution from the requirements of subsection (a);

21 or

22 ‘‘(B) allow any exception to any such re23 quirement with respect to any insured deposi24 tory institution,
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1 unless the agency determines that such exemption or

2 exception is in the public interest and submits a

3 written notice of such determination and a detailed

4 description of the reasons for the determination to

5 the Committee on Banking, Finance and Urban Af6 fairs of the House of Representatives and the Com7 mittee on Banking, Housing, and Urban Affairs of

8 the Senate at least 30 days before the effective date

9 of the exemption or exception.

10 ‘‘(c) QUALITATIVE REPORTING REQUIREMENTS.—

11 The Federal banking agencies shall take such action as

12 may be appropriate to encourage insured depository insti13 tutions to publicly report the following information with

14 such frequency as the agencies determine to be appro15 priate:

16 ‘‘(1) NATURE OF DERIVATIVE FINANCIAL IN17 STRUMENTS.—A description of—

18 ‘‘(A) the purposes for which any holding,

19 position, or other interest of the institution in

20 any derivative financial instrument has been ac21 quired or taken by the institution during the

22 period since the prior report, including the spe23 cific objectives of the institution;

24 ‘‘(B) the overall operating and investment

25 strategies of the institution which provide the
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1 context for acquiring or taking any such hold2 ing, position, or other interest in any derivative

3 financial instrument; and

4 ‘‘(C) the manner in which the institution

5 acquires or takes a holding, position, or other

6 interest in a derivative financial instrument in

7 furtherance of the purposes and objectives for

8 such activities.

9 ‘‘(2) ACCOUNTING POLICIES AND METHODOL10 OGY FOR DETERMINING FAIR VALUE AND OTHER

11 AMOUNTS.—A description of the accounting policy

12 and principles and the methodologies used by the in13 stitution to determine—

14 ‘‘(A) the fair value of the various types of

15 holdings, positions, and other interests of the

16 institution in derivative financial instruments;

17 and

18 ‘‘(B) any other amount required to be re19 ported under subsection (a) with respect to any

20 such holding, position, or other interest.

21 ‘‘(d) CONFIDENTIAL EMERGENCY MANAGEMENT RE22 PORTING.—

23 ‘‘(1) IN GENERAL.—Before the end of the 1-

24 year period beginning on the date of the enactment

25 of the Derivatives Safety and Soundness Act of
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1 1994, the Federal banking agencies shall develop the

2 means to obtain, on a nightly basis, all necessary in3 formation from any insured depository institution, or

4 any affiliate of any such institution, which is a deal5 er in derivative financial instruments or is an active

6 end-user relating to any activity of such institution

7 or affiliate which involves derivative financial instru8 ments or any holding, position, or other interest in

9 a derivative financial instrument if the agency deter10 mines that the agency needs such information as a

11 result of adverse market conditions or other emer12 gency situation (as defined by the agency).

13 ‘‘(2) ACCESSIBILITY OF INFORMATION.—Each

14 insured depository institution referred to in para15 graph (1) shall—

16 ‘‘(A) obtain such information and make

17 and keep such records as the appropriate Fed18 eral banking agency may require by regulation

19 for purposes of such paragraph; and

20 ‘‘(B) promptly provide to the agency any

21 information requested by the agency pursuant

22 to such paragraph.

23 ‘‘(3) CONFIDENTIALITY OF INFORMATION PRO24 VIDED.—No information provided to or obtained by

25 a Federal banking agency pursuant to paragraph (1)
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1 with respect to any insured depository institution or

2 any affiliate of any such institution may be provided

3 to any person or entity other than another Federal

4 regulatory agency with jurisdiction over the insured

5 depository institution or affiliate without the prior

6 written approval of the agency.

7 ‘‘(e) ADMINISTRATIVE PROVISIONS.—

8 ‘‘(1) ENHANCED REGULATORY COOPERATION.—

9 The Federal banking agencies and the National

10 Credit Union Administration Board shall jointly de11 velop uniform definitions, reporting requirements,

12 capital standards, and examination guidelines and

13 procedures with respect to activities of insured de14 pository institutions and insured credit unions which

15 involve derivative financial instruments or to any

16 holding, position, or other interest of any such insti17 tution or credit union in any such instrument.

18 ‘‘(2) STANDARDIZED METHODOLOGIES FOR ES19 TIMATING FAIR VALUES.—The Federal banking

20 agencies and the National Credit Union Administra21 tion Board shall jointly take such action as may be

22 appropriate to encourage insured depository institu23 tions and insured credit unions to develop standard

24 methodologies and assumptions which may be used

25 in estimating the fair value of any holding, position,
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1 or other interest of any such institution in any deriv2 ative financial instrument for use in preparing re3 ports of condition.

4 ‘‘(3) ACCOUNTING STANDARDS.—The Federal

5 banking agencies and the National Credit Union Ad6 ministration Board, in consultation with the Finan7 cial Accounting Standards Board, shall develop and

8 implement accounting standards for derivative finan9 cial instruments which are uniformly applicable to

10 insured depository institutions and insured credit

11 unions.

12 ‘‘(4) INCLUSION OF FDIC AND OCC AS PRIN13 CIPALS IN INTERAGENCY TASK FORCE.—The Sec14 retary of the Treasury shall include the Chairperson

15 of the Federal Deposit Insurance Corporation and

16 the Comptroller of the Currency as principals on any

17 interagency task force or working group dealing with

18 issues relating to derivative financial institutions.

19 ‘‘(f) REQUIREMENTS RELATING TO DIRECTORS AND

20 SENIOR EXECUTIVE OFFICERS.—

21 ‘‘(1) EFFECTIVE MANAGEMENT OVERSIGHT.—

22 No insured depository institution may engage in ac23 tivities involving derivative financial instruments

24 without a management plan which ensures that such

25 activities are—
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1 ‘‘(A) conducted with appropriate direct

2 oversight of the directors and the senior execu3 tive officers (as defined pursuant to section

4 32(f)) of the institution;

5 ‘‘(B) conducted in a safe and sound man6 ner; and

7 ‘‘(C) consistent with the overall risk man8 agement philosophy and the business strategy

9 of the management of the institution.

10 ‘‘(2) REQUIREMENT FOR DIRECTORS.—No in11 sured depository institution may act as a dealer in

12 derivative financial instruments or as an active end13 user unless a sufficient number of the directors of

14 such institution are familiar with the risks associ15 ated with each holding, position, or other interest of

16 the institution in any derivative financial instrument

17 and the total current credit exposure of the institu18 tion with respect to the holdings, positions, and

19 other interests of the institution in derivative finan20 cial instruments and activities of the institution re21 lating to such holdings, positions, and other inter22 ests.

23 ‘‘(3) ENFORCEMENT.—In the case of the failure

24 of any insured depository institution to comply with

25 the requirements of this subsection, the appropriate
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1 Federal banking agency shall, in addition to such

2 other enforcement action the agency may determine

3 to be appropriate—

4 ‘‘(A) treat the failure as an unsafe or un5 sound practice in conducting the business of the

6 institution;

7 ‘‘(B) issue a notice under section 8(e) to

8 the chairperson of the board of directors of the

9 institution, and any other director of the insti10 tution the agency determines to be appropriate,

11 of the agency’s intention to remove the chair12 person or other director from office; and

13 ‘‘(C) assess a civil penalty under section

14 8(i)(2) on any appropriate institution-affiliated

15 party.

16 ‘‘(g) DEFINITIONS.—For purposes of this section, the

17 following definitions shall apply:

18 ‘‘(1) ACTIVE END-USER.—

19 ‘‘(A) IN GENERAL.—The term ‘active end20 user’ means any insured depository institution

21 or any affiliate of any insured depository insti22 tution which buys or sells high volumes of de23 rivative financial instruments, or conducts

24 transactions in a wide variety of derivative fi25 nancial instruments, in order to manage the ex-
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1 posure of the institution or affiliate to individ2 ual or multiple market factors.

3 ‘‘(B) OTHER TERMS.—The terms ‘‘high

4 volumes’’ and ‘‘wide variety of transactions’’, as

5 used in subparagraph (A), shall have the mean6 ings prescribed for such terms by the appro7 priate Federal banking agency by regulation.

8 ‘‘(2) DERIVATIVE FINANCIAL INSTRUMENT.—

9 The term ‘derivative financial instrument’ means—

10 ‘‘(A) an instrument the value of which is

11 derived from the value of other assets, interest

12 or currency exchange rates, or indexes, includ13 ing qualified financial contracts (as defined in

14 section 11(e)(8)); and

15 ‘‘(B) any other instrument which an ap16 propriate Federal banking agency determines,

17 by regulation or order, to be a derivative finan18 cial instrument for purposes of this section.’’.

19 (b) INSURED CREDIT UNIONS.—Section 202(a) of

20 the Federal Credit Union Act (12 U.S.C. 1782(a)) is

21 amended by adding at the end the following new para22 graph:

23 ‘‘(8) DERIVATIVE FINANCIAL INSTRUMENTS.—

24 ‘‘(A) IN GENERAL.—The reports of condi25 tion made by insured credit unions under this
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1 section shall include all the information with re2 spect to derivative financial instruments which

3 are required, under section 44 of the Federal

4 Deposit Insurance Act, to be included in reports

5 of condition made by insured depository institu6 tions (as defined in section 3 of such Act).

7 ‘‘(B) APPLICABILITY OF SECTION 44 OF

8 THE FEDERAL DEPOSIT INSURANCE ACT.—Sec9 tion 44 of the Federal Deposit Insurance Act

10 shall apply with respect to insured credit unions

11 and the Board in the same manner such section

12 applies to insured depository institutions and

13 Federal banking agencies (as such terms are

14 defined in section 3 of such Act) and shall be

15 enforceable by the Board with respect to in16 sured credit unions under this Act.’’.

17 SEC. 3. STUDY OF INTERNATIONAL REGULATION AND SU18 PERVISION OF DERIVATIVE FINANCIAL IN19 STRUMENTS.

20 (a) IN GENERAL.—Before the end of the 30-day pe21 riod beginning on the date of the enactment of this Act,

22 the Secretary of the Treasury shall request a meeting with

23 the appropriate representatives of the other major indus24 trialized countries to plan a study to examine the adequacy

25 of the international regulation and supervision of deriva-
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1 tive financial instruments (as defined in section 44(f)(2)

2 of the Federal Deposit Insurance Act).

3 (b) GOALS OF STUDY.—The goals of the study as

4 proposed by the Secretary of the Treasury shall be as

5 follows:

6 (1) To foster a greater understanding of the

7 manner in which derivative financial instruments af8 fect the stability of the world’s financial systems and

9 markets.

10 (2) To examine the adequacy of international

11 regulation and supervision of derivative financial

12 activities.

13 (3) To make recommendations for improving

14 the international regulation and supervision of deriv15 ative financial activities.

16 (4) To foster greater cooperation between all

17 regulatory agencies with jurisdiction over derivative

18 financial activities.

19 (5) To make recommendations for action by the

20 financial regulators in the respective countries that

21 would facilitate the safe and sound conduct of enti22 ties involved in derivative financial activities.

23 (6) To evaluate the feasibility of establishing a

24 single governing body to regulate international deriv25 ative financial activities.
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1 (c) ISSUES TO STUDY.—The Secretary of the Treas2 ury shall propose that the study include the following

3 factors:

4 (1) Identification of the manner in which deriv5 ative financial instruments affect the stability of the

6 world’s financial systems and markets.

7 (2) Identification of the various regulatory enti8 ties and mechanisms that are used to regulate and

9 supervise derivative financial activities around the

10 world.

11 (3) Analysis of the adequacy of the cooperation

12 between the various regulatory entities and mecha13 nisms referred to in paragraph (2).

14 (4) Identification of problems that inhibit the

15 safe and sound conduct of world-wide derivative fi16 nancial activities.

17 (5) Analysis of the extent to which derivative fi18 nancial activities in countries other than the major

19 industrialized countries affect the safety and sound20 ness of the world’s financial systems and markets.

21 (6) Identification of uniform accounting and

22 public reporting standards for derivative financial in23 struments.
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1 (7) Evaluation of the feasibility of establishing

2 a single governing body to regulate international de3 rivative financial activities.

4 (d) UTILIZATION OF INFORMATION AND RE5 SOURCES.—The Secretary of the Treasury shall propose

6 that, in conducting the study under this section, the major

7 industrialized countries should—

8 (1) gather information from a wide variety of

9 sources including government agencies, central

10 banks, market participants, and the consumers of

11 the derivative financial instruments; and

12 (2) to the extent feasible, obtain and use infor13 mation from the International Monetary Fund, the

14 Bank for International Settlements, and other multi15 lateral organizations.

16 SEC. 4. GAO STUDY OF SPECULATION, TRANSACTION

17 TAXES, AND MARGIN REQUIREMENTS WITH

18 RESPECT TO DERIVATIVE FINANCIAL IN19 STRUMENTS.

20 (a) STUDY REQUIRED.—

21 (1) IN GENERAL.—The Comptroller General of

22 the United States shall conduct a study of the spec23 ulative uses of derivative financial instruments (as

24 defined in section 44 of the Federal Deposit Insur25 ance Act) and the feasibility of imposing taxes and
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1 margin requirements on speculative transactions in2 volving derivative financial instruments.

3 (2) REPORT.—The Comptroller General shall

4 submit a report on the study conducted pursuant to

5 paragraph (1) to the Congress before the end of the

6 18-month period beginning on the date of the enact7 ment of this Act.

8 (b) ISSUES INVOLVING SPECULATIVE TRANSACTIONS

9 INVOLVING DERIVATIVE FINANCIAL INSTRUMENTS.—In

10 conducting the study under subsection (a)(1), the Comp11 troller General shall—

12 (1) define the term ‘‘speculation’’ as such term

13 is used in connection with derivative financial instru14 ments;

15 (2) determine the extent to which depository in16 stitutions, including credit unions, use holdings, po17 sitions, and other interests in derivative financial in18 struments to engage in speculation for the institu19 tion’s own trading account; and

20 (3) determine the extent to which depository in21 stitutions, including credit unions, sell holdings, po22 sitions, or other interests in derivative financial in23 struments to—

24 (A) speculators such as hedge funds; or
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1 (B) consumers of such financial instru2 ments who are engaged in the use of such hold3 ings, positions, or other interests in derivative

4 financial instruments for purposes other than

5 hedging against risks.

6 (c) ISSUES INVOLVING TRANSACTION TAXES AND

7 FEES.—In conducting the study under subsection (a)(1),

8 the Comptroller General shall—

9 (1) determine the extent to which any holding,

10 position, or other interest in a derivative financial

11 instrument is subject to Federal or State transaction

12 tax or fee, the entity imposing the tax or fee, the

13 purpose of the tax or fee, and the amount of annual

14 revenue derived from the tax or fee;

15 (2) evaluate the feasibility of imposing a tax or

16 fee on the acquisition or taking of a holding, posi17 tion, or other interest in a derivative financial in18 strument for speculative purposes and estimate the

19 revenue which would result from such a tax or fee;

20 and

21 (3) evaluate the competitive impact of the impo22 sition of a tax or fee described in paragraph (2).

23 (d) ISSUES INVOLVING MARGIN REQUIREMENTS.—In

24 conducting the study under subsection (a)(1), the Comp25 troller General shall—
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1 (1) determine which holdings, position, or other

2 interests in a derivative financial instrument are

3 subject to margin requirements and the amount and

4 purpose of the margin requirement;

5 (2) determine the extent to which the trans6 actions of insured depository institutions which in7 volve a holding, position, or other interest in a deriv8 ative financial instrument are conducted over the

9 counter and evaluate the feasibility of imposing mar10 gin requirements on such transactions;

11 (3) evaluate the feasibility of imposing margin

12 requirements on any holding, position, or other in13 terest in a derivative financial instrument which was

14 acquired or taken for speculative purposes; and

15 (4) evaluate the competitive impact of imposing

16 margin requirements on any holding, position, or

17 other interest in a derivative financial instrument

18 which was acquired or taken for speculative pur19 poses.

20 (e) ACCESS TO INFORMATION.—The head of any de21 partment or agency of the Federal Government and any

22 insured depository institution shall provide, upon the re23 quest of the Comptroller General, such information to the

24 General Accounting Office as the Comptroller General
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1 may determine to be appropriate for purposes of carrying

2 out the study required under this section.

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