I

103D CONGRESS

2D SESSION H. R. 4503

To enhance the supervision and regulation of derivatives activities of financial

institutions, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

MAY 26, 1994

Mr. GONZALEZ (for himself, Mr. LEACH, Mr. NEAL of North Carolina, Mr.

FRANK of Massachusetts, Mr. KANJORSKI, Mr. HINCHEY, and Mr. KENNEDY) introduced the following bill; which was referred to the Committee

on Banking, Finance and Urban Affairs

A BILL

To enhance the supervision and regulation of derivatives

activities of financial institutions, 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; TABLE OF CONTENTS.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Derivatives Safety and Soundness Supervision Act of

6 1994’’.

7 (b) TABLE OF CONTENTS.—

Sec. 1. Short title; table of contents.

Sec. 2. Definitions.

TITLE I—ENHANCED SUPERVISION OF DERIVATIVES ACTIVITIES
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Sec. 101. Increased agency oversight of financial institution activities involving

derivative financial instruments.

Sec. 102. Disclosure of amounts, nature, and terms of derivative financial instruments in financial institution call reports.

Sec. 103. Inclusion of FDIC and OCC as principals in interagency task force.

Sec. 104. Training for examiners and assistant examiners.

Sec. 105. State liaisons.

TITLE II—SUPERVISORY IMPROVEMENTS

Sec. 201. Unsafe or unsound practices.

Sec. 202. Confidential emergency management reporting.

Sec. 203. Internal controls.

Sec. 204. Foreign bank supervision.

TITLE III—FINANCIAL INSTITUTION INSOLVENCY REFORMS

Sec. 301. Treatment of certain swap agreements by conservators or receivers of

insured depository institutions.

Sec. 302. Authority of the corporation with respect to failed and failing institutions.

Sec. 303. Amendments relating to transfers of qualified financial contracts.

Sec. 304. Clarifying amendment relating to master agreements.

Sec. 305. Technical amendments relating to qualified financial contracts.

TITLE IV—INTERNATIONAL REGULATORY COOPERATION

Sec. 401. Study of international regulation and supervision of derivatives activities of financial institutions.

Sec. 402. International negotiations.

TITLE V—GAO STUDY

Sec. 501. Study of speculation and margin and collateral requirements with respect to derivatives activities of financial institutions.

1 SEC. 2. DEFINITIONS.

2 For purposes of this Act the following definitions

3 shall apply:

4 (1) ACTIVE END-USER.—The term ‘‘active end5 user’’ means any financial institution which buys or

6 sells a significant amount (as defined by the appro7 priate Federal regulatory agencies) of derivative fi8 nancial instruments, or conducts transactions in a

9 wide variety of derivative financial instruments.
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1 (2) APPROPRIATE FEDERAL BANKING AGEN2 CY.—The term ‘‘appropriate Federal banking agen3 cy’’ has the same meaning as in section 3(q) of the

4 Federal Deposit Insurance Act.

5 (3) APPROPRIATE FEDERAL REGULATORY

6 AGENCY.—The term ‘‘appropriate Federal regulatory

7 agency’’ means—

8 (A) any appropriate Federal banking agen9 cy, in the case of any insured depository institu10 tion or other entity described in section 3(q) of

11 the Federal Deposit Insurance Act;

12 (B) the National Credit Union Administra13 tion, in the case of any insured credit union;

14 (C) the Office of Federal Housing Enter15 prise Oversight of the Department of Housing

16 and Urban Development, in the case of any fi17 nancial institution which is subject to the over18 sight of such office;

19 (D) the Federal Housing Finance Board,

20 in the case of any Federal home loan bank or

21 the Office of Finance of the Federal home loan

22 banks; and

23 (E) the Board of Governors of the Federal

24 Reserve System, in the case of any financial in-
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1 stitution which is not described in subpara2 graph (A), (B), (C), or (D).

3 (4) DEPOSITORY INSTITUTION.—The term ‘‘de4 pository institution’’—

5 (A) has the same meaning as in section

6 3(c) of the Federal Deposit Insurance Act; and

7 (B) includes any Federal credit union and

8 any State credit union (as such terms are de9 fined in section 101 of the Federal Credit

10 Union Act).

11 (5) DERIVATIVES ACTIVITIES.—The term ‘‘de12 rivatives activities’’ means any activity in which a fi13 nancial institution is engaged as a dealer in deriva14 tive financial instruments or as an active end-user.

15 (6) DERIVATIVE FINANCIAL INSTRUMENT.—

16 The term ‘‘derivative financial instrument’’ means

17 any appropriate qualified financial contract (as de18 fined in section 11(e)(8)(D) of the Federal Deposit

19 Insurance Act).

20 (7) FINANCIAL INSTITUTION.—The term ‘‘fi21 nancial institution’’—

22 (A) means—

23 (i) any depository institution;

24 (ii) any affiliate of any depository in25 stitution;
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1 (iii) any entity described in any sub2 paragraph of section 3(q)(2) of the Federal

3 Deposit Insurance Act;

4 (iv) any institution which is subject to

5 the oversight of the Office of Federal

6 Housing Enterprise Oversight of the De7 partment of Housing and Urban Develop8 ment; and

9 (v) any Federal home loan bank and

10 the Office of Finance of the Federal home

11 loan banks; and

12 (B) does not include any company which is

13 regulated by the Securities and Exchange Com14 mission or the Commodities Futures Trading

15 Commission.

16 (8) INSURED CREDIT UNION.—The term ‘‘in17 sured credit union’’ has the same meaning as in sec18 tion 101(7) of the Federal Credit Union Act.

19 (9) INSURED DEPOSITORY INSTITUTION.—The

20 term ‘‘insured depository institution’’—

21 (A) has the same meaning as in section 3(c)(2)

22 of the Federal Deposit Insurance Act; and

23 (B) includes an insured credit union.
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1 TITLE I—ENHANCED SUPER2 VISION OF DERIVATIVES AC3 TIVITIES

4 SEC. 101. INCREASED AGENCY OVERSIGHT OF FINANCIAL

5 INSTITUTION ACTIVITIES INVOLVING DERIV6 ATIVE FINANCIAL INSTRUMENTS.

7 (a) ESTABLISHMENT OF PRINCIPLES AND STAND8 ARDS.—The appropriate Federal regulatory agencies shall

9 jointly establish principles and standards relating to cap10 ital, accounting, disclosure, suitability, or other appro11 priate regulatory actions for the supervision of financial

12 institutions engaged in derivatives activities by such agen13 cies.

14 (b) ADMINISTRATIVE PROVISIONS.—

15 (1) ENHANCED REGULATORY COOPERATION.—

16 For purposes of implementing the principles and

17 standards established pursuant to subsection (a) and

18 the recommendations made pursuant to subsection

19 (c) and consistent with section 37 of the Federal De20 posit Insurance Act, the appropriate Federal regu21 latory agencies shall jointly—

22 (A) issue substantially similar definitions,

23 reporting requirements, capital standards, and

24 examination guidelines and procedures with re-
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1 spect to any derivatives activity of any financial

2 institution; and

3 (B) prescribe such other regulations gov4 erning derivatives activities of financial institu5 tions as the agencies have identified or rec6 ommended as appropriate for carrying out the

7 purposes of this Act.

8 (2) REPORTS TO BANKING COMMITTEES.—Dur9 ing the 5-year period beginning on the date of the

10 enactment of this Act, section 37(c) of the Federal

11 Deposit Insurance Act shall apply with respect to

12 the principles, standards, requirements, guidelines,

13 and procedures adopted, prescribed, or issued by any

14 appropriate Federal regulatory agency pursuant to

15 this Act in the same manner such section applies

16 with respect to accounting and capital standards

17 used by appropriate Federal banking agencies.

18 (c) RECOMMENDATIONS REGARDING SUPERVISORY

19 ACTIONS.—In establishing principles and standards under

20 subsection (a), the appropriate Federal regulatory agen21 cies shall consider and may make recommendations for

22 comparable regulatory action by all such agencies in other

23 matters relating to financial institutions engaged in de24 rivatives activities, including the need to establish prin25 ciples and standards to provide for the following:
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1 (1) Strong capital requirements (with particular

2 attention to a leverage ratio where appropriate) to

3 guard generally against risks at financial institu4 tions, including added risks that may be posed by

5 derivatives activities.

6 (2) Comprehensive risk management systems

7 that—

8 (A) are commensurate in scope, size, and

9 complexity to the levels of activities and risks

10 assumed by financial institutions;

11 (B) include limits and controls with respect

12 to any level of risk regarding counterparty cred13 it, concentration, and other relevant market fac14 tors;

15 (C) ensure that market factors affecting

16 risk exposures are adequately measured, mon17 itored, and controlled; and

18 (D) adequately control potential losses and

19 undue risks arising from system deficiencies.

20 (3) To the extent practicable, joint regulatory

21 examinations by the appropriate Federal banking

22 agencies of financial institutions which engage in de23 rivatives activities.

24 (4) The prudent use of collateral by

25 counterparties to derivatives transactions.
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1 (5) Appropriate parameters, models, and sim2 ulations for the purpose of evaluating a financial in3 stitution’s exposure to derivatives activities and rel4 evant economic scenarios and further specifics re5 garding stress tests.

6 (6) Appropriate credit risk reserves in connec7 tion with derivatives activities.

8 (7) Protection against legal risk, including for9 eign legal risk.

10 (8) Protection against systemic risk.

11 (9) Assurance that a financial institution does

12 not recommend or engage in derivatives activities

13 that the institution knows or has reason to believe

14 would be inappropriate for a customer on the basis

15 of available information.

16 (10) Effective senior management supervision

17 and oversight by the board of directors of a financial

18 institution to ensure that derivatives activities are

19 conducted in a safe and sound manner and are con20 sistent with the board of director’s overall risk man21 agement philosophy and the institution’s business

22 strategy.
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1 SEC. 102. DISCLOSURE OF AMOUNTS, NATURE, AND TERMS

2 OF DERIVATIVE FINANCIAL INSTRUMENTS IN

3 FINANCIAL 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.—Each appropriate Federal banking

11 agency shall consider, and may require, disclosures in any

12 report of condition made by any insured depository insti13 tution in accordance with section 7(a) with respect to any

14 period beginning after December 31, 1994, of the follow15 ing information:

16 ‘‘(1) QUANTITATIVE INFORMATION WITH RE17 SPECT TO ALL DERIVATIVE FINANCIAL INSTRU18 MENTS.—

19 ‘‘(A) GROSS NOTIONAL VALUE.—The gross

20 notional value of each class of derivative finan21 cial instruments.

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

23 revenue, gains, and losses of the institution at24 tributable to each class of derivative financial

25 instruments.
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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 each

5 class of derivative financial instruments.

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

7 the remaining term to maturity of each class of de8 rivative financial instruments.

9 ‘‘(3) QUANTITATIVE INFORMATION WITH RE10 SPECT TO DERIVATIVE FINANCIAL INSTRUMENTS

11 HELD FOR TRADING PURPOSES.—

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

13 The average maximum and minimum fair value

14 balances of the insured depository institution

15 with respect to each class of derivative financial

16 instruments used by the institution for trading

17 purposes.

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

19 revenue, gains, and losses of the institution at20 tributable to trading account operations with

21 respect to each class of derivative financial in22 struments.

23 ‘‘(4) ADDITIONAL INFORMATION.—Any addi24 tional information that any appropriate Federal

25 banking agency may consider to be appropriate.
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1 ‘‘(b) SEPARATE REPORTING FOR EXCHANGE AND

2 OTC TRADING.—To the maximum extent possible, infor3 mation reported pursuant to subsection (a) with respect

4 to transactions which are conducted on an exchange, and

5 each class of derivative financial instruments which are

6 the subjects of such transactions, shall be provided sepa7 rately from information relating to transactions which are

8 conducted over the counter, and the classes of derivative

9 financial instruments which are the subjects of such trans10 actions.

11 ‘‘(c) QUALITATIVE REPORTING REQUIREMENTS.—

12 The Federal banking agencies shall take such action as

13 may be appropriate to encourage insured depository insti14 tutions to publicly report the following information with

15 such frequency as the agencies determine to be appro16 priate:

17 ‘‘(1) NATURE OF DERIVATIVE FINANCIAL IN18 STRUMENTS.—A description of—

19 ‘‘(A) the purposes for which each class of

20 derivative financial instruments has been ac21 quired by the institution, including the specific

22 objectives of the institution; and

23 ‘‘(B) the overall operating and investment

24 strategies of the institution which provide the

25 context for acquiring or taking any such hold-
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1 ing, position, or other interest in any derivative

2 financial instrument.

3 ‘‘(2) ACCOUNTING POLICIES.—A description of

4 the accounting policy and principles and the meth5 odologies used by the institution to determine the

6 value of the various classes of derivative financial in7 struments.

8 ‘‘(d) DEFINITIONS.—For purposes of this section, the

9 terms ‘active end-user’ and ‘derivative financial instru10 ment’ have the same meanings as in section 2 of the De11 rivatives Safety and Soundness Supervision Act of 1994.’’.

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

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

14 amended by adding at the end the following new para15 graph:

16 ‘‘(8) DERIVATIVE FINANCIAL INSTRUMENTS.—

17 ‘‘(A) IN GENERAL.—The reports of condi18 tion made by insured credit unions under this

19 section shall include all the information with re20 spect to derivative financial instruments which

21 is required, under section 44 of the Federal De22 posit Insurance Act, to be included in reports of

23 condition made by insured depository institu24 tions (as defined in section 3 of such Act).
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1 ‘‘(B) APPLICABILITY OF SECTION 44 OF

2 THE FEDERAL DEPOSIT INSURANCE ACT.—Sec3 tion 44 of the Federal Deposit Insurance Act

4 shall apply with respect to insured credit unions

5 and the Board in the same manner such section

6 applies to insured depository institutions and

7 Federal banking agencies (as such terms are

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

9 enforceable by the Board with respect to in10 sured credit unions under this Act.’’.

11 (c) OTHER FINANCIAL INSTITUTIONS.—

12 (1) IN GENERAL.—A financial institution which

13 is not an insured depository institution or an insured

14 credit union shall file a quarterly report, with such

15 institution’s appropriate Federal regulatory agency,

16 containing all the information with respect to deriva17 tive financial instruments which is required, under

18 section 44 of the Federal Deposit Insurance Act, to

19 be included in reports of condition made by insured

20 depository institutions (as defined in section 3 of

21 such Act).

22 (2) APPLICABILITY OF SECTION 44 OF THE

23 FEDERAL DEPOSIT INSURANCE ACT.—Section 44 of

24 the Federal Deposit Insurance Act shall apply with

25 respect to financial institutions and appropriate
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1 Federal regulatory agencies described in paragraph

2 (1) in the same manner such section applies to in3 sured depository institutions and Federal banking

4 agencies (as such terms are defined in section 3 of

5 such Act) and shall be enforceable by such agencies

6 with respect to such financial institutions under any

7 other law which provides such agency with adminis8 trative enforcement authority over such institution.

9 SEC. 103. INCLUSION OF FDIC AND OCC AS PRINCIPALS IN

10 INTERAGENCY TASK FORCE.

11 The Chairperson of the Federal Deposit Insurance

12 Corporation and the Comptroller of the Currency shall be

13 included as principals on any interagency task force or

14 working group dealing with issues relating to derivative

15 financial instruments.

16 SEC. 104. TRAINING FOR EXAMINERS AND ASSISTANT EX17 AMINERS.

18 (a) IN GENERAL.—The Financial Institutions Exam19 ination Council shall sponsor training programs concern20 ing derivatives activities for examiners and assistant ex21 aminers employed by such any agency represented on such

22 council.

23 (b) ENROLLMENT.—Under such conditions as the Fi24 nancial Institutions Examination Council may establish,

25 training programs sponsored by the council pursuant to
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1 subsection (a) shall be open to enrollment by employees

2 of State bank supervisors (as defined in section 3(r) of

3 the Federal Deposit Insurance Act) and employees of the

4 Federal Housing Finance Board and the Office of Federal

5 Housing Enterprise Oversight of the Department of Hous6 ing and Urban Development.

7 (c) RISK MANAGEMENT TRAINING.—The risk man8 agement training provided under section 1009A of the

9 Federal Financial Institutions Examination Council Act of

10 1978 shall include risk management techniques related to

11 derivatives activities, except that the cost of providing

12 training with respect to such activities to employees of fi13 nancial institutions shall be paid by the institutions.

14 SEC. 105. STATE LIAISONS.

15 (a) IN GENERAL.—To encourage the application of

16 uniform examination principles and standards by State

17 and Federal agencies with respect to derivatives activities

18 of financial institutions, the appropriate Federal regu19 latory agencies shall establish a liaison committee com20 posed of 5 representatives of State agencies which super21 vise financial institutions which shall meet at least twice

22 a year with such Federal agencies.

23 (b) TRAVEL EXPENSES.—Each member of the liaison

24 committee established pursuant to subsection (a) shall re25 ceive travel expenses, including per diem in lieu of subsist-
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1 ence, in accordance with sections 5702 and 5703 of title

2 5, United States Code.

3 TITLE II—SUPERVISORY

4 IMPROVEMENTS

5 SEC. 201. UNSAFE OR UNSOUND PRACTICES.

6 (a) EFFECTIVE MANAGEMENT OVERSIGHT.—No fi7 nancial institution may engage in derivatives activities

8 without a written management plan approved by the board

9 of directors of the institution which—

10 (1) ensures that such activities are—

11 (A) conducted with appropriate direct over12 sight of the directors and the senior executive

13 officers (as defined pursuant to section 32(f) of

14 the Federal Deposit Insurance Act) of the insti15 tution;

16 (B) conducted in a safe and sound man17 ner; and

18 (C) consistent with the overall risk man19 agement philosophy and the business strategy

20 of the management of the institution; and

21 (2) establishes prudential standards for the

22 management of the risks involved in such activities

23 and a framework for internal controls with respect

24 to such activities.
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1 (b) REQUIREMENT FOR DIRECTORS.—No financial

2 institution may act as a dealer in derivative financial in3 struments or as an active end-user unless a sufficient

4 number of the directors of such institution are familiar

5 with the risks associated with any class of derivative finan6 cial instruments involved in any derivatives activity of a

7 financial institution and the total current credit exposure

8 of the institution with respect to any such class, and ac9 tivities of the institution relating to such class of instru10 ments.

11 (c) ENFORCEMENT.—Any failure to comply with the

12 provisions of this subsection, and the failure of any insti13 tution-affiliated party (as defined in section 3(u) of the

14 Federal Deposit Insurance Act) engaged in derivatives ac15 tivities to have adequate technical expertise with respect

16 to such activities, may be treated by the appropriate Fed17 eral regulatory agency as an unsafe or unsound practice

18 in conducting the business of the institution involved.

19 SEC. 202. CONFIDENTIAL EMERGENCY MANAGEMENT RE20 PORTING.

21 (a) IN GENERAL.—Before the end of the 1-year pe22 riod beginning on the date of the enactment of this Act,

23 the appropriate Federal regulatory agencies shall develop

24 the means to obtain all necessary information relating to

25 any derivatives activity or any class of derivative financial
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1 instruments, whenever the appropriate Federal regulatory

2 agency determines such information is needed, from any

3 financial institution which is a dealer in derivative finan4 cial instruments or is an active end-user if the agency de5 termines that the agency needs such information as a re6 sult of adverse market conditions or other emergency situ7 ation (as defined by the agency).

8 (b) ACCESSIBILITY OF INFORMATION.—Each finan9 cial institution referred to in paragraph (1) shall—

10 (1) obtain such information and make and keep

11 such records as the appropriate Federal regulatory

12 agency may require by regulation for purposes of

13 such paragraph; and

14 (2) promptly provide to the appropriate Federal

15 regulatory agency any information requested by the

16 agency pursuant to such paragraph.

17 (c) CONFIDENTIALITY OF INFORMATION PRO18 VIDED.—No information provided to or obtained by an ap19 propriate Federal regulatory agency pursuant to para20 graph (1) with respect to any financial institution may be

21 provided to any person or entity other than another Fed22 eral regulatory agency with jurisdiction over the financial

23 institution without the prior written approval of the agen24 cy.
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1 SEC. 203. INTERNAL CONTROLS.

2 Section 39(a)(1)(A) of the Federal Deposit Insurance

3 Act (12 U.S.C. 1831p–1(a)(1)(A)) is amended by striking

4 ‘‘internal controls’’ and inserting ‘‘internal controls (in5 cluding internal controls for activities involving derivative

6 financial instruments (as defined in section 44(d)))’’.

7 SEC. 204. FOREIGN BANK SUPERVISION.

8 (a) STANDARDS FOR APPROVAL.—Section 7(d)(2)(A)

9 of the International Banking Act of 1978 (12 U.S.C.

10 3105(d)(2)(A)) is amended by inserting before the semi11 colon the following: ‘‘, including, in the case of a foreign

12 bank engaged in derivatives activities (as defined in sec13 tion 2(5) of the Derivatives Safety and Soundness Super14 vision Act of 1994), comprehensive supervision and regu15 lation of such activities.’’.

16 (b) FACTOR FOR CONSIDERATION.—Section 7(d) of

17 the International Banking Act of 1978 (12 U.S.C.

18 3105(d)) is amended by adding at the end the following

19 new paragraph:

20 ‘‘(6) FACTOR FOR CONSIDERATION.—In making

21 any determination under paragraph (2), the Board

22 shall consider whether the home country of a foreign

23 bank maintains comprehensive supervision and regu24 lation of derivatives activities (as defined in section

25 2(5) of the Derivatives Safety and Soundness Super26 vision Act of 1994), including, where appropriate,
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1 capital and disclosure standards, which are not less

2 stringent than United States standards.’’.

3 TITLE III—FINANCIAL INSTITU4 TION INSOLVENCY REFORMS

5 SEC. 301. TREATMENT OF CERTAIN SWAP AGREEMENTS BY

6 CONSERVATORS OR RECEIVERS OF INSURED

7 DEPOSITORY INSTITUTIONS.

8 Section 11(e)(8)(D)(vi) of the Federal Deposit Insur9 ance Act (12 U.S.C. 1821(e)(8)(D)(vi)) is amended—

10 (1) by striking ‘‘purchased’’ each place such

11 term appears; and

12 (2) by inserting ‘‘, equity derivative, equity or

13 equity index swap, equity or equity index option,

14 bond option, spot foreign exchange transaction’’

15 after ‘‘currency option’’.

16 SEC. 302. AUTHORITY OF THE CORPORATION WITH RE17 SPECT TO FAILED AND FAILING INSTITU18 TIONS.

19 Section 11(e)(8) of the Federal Deposit Insurance

20 Act (12 U.S.C. 1821(e)(8)) is amended by adding the fol21 lowing new subparagraphs:

22 ‘‘(F) CLARIFICATION.—No provision of law

23 shall be construed as limiting the right or

24 power of the Corporation, or authorizing any

25 court or agency to limit or delay, in any man-
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1 ner, the right or power of the Corporation, to

2 transfer any qualified financial contract in ac3 cordance with paragraphs (9) and (10) or to

4 liquidate any such contract.

5 ‘‘(G) UNDERCAPITALIZED INSURED DE6 POSITORY INSTITUTIONS.—The Corporation, in

7 consultation with the appropriate Federal bank8 ing agencies, shall prescribe regulations requir9 ing more detailed recordkeeping with respect to

10 qualified financial contracts (including market

11 valuations) by insured depository institutions

12 that are undercapitalized (as defined in section

13 38).’’.

14 SEC. 303. AMENDMENTS RELATING TO TRANSFERS OF

15 QUALIFIED FINANCIAL CONTRACTS.

16 Section 11(e)(10) of the Federal Deposit Insurance

17 Act (12 U.S.C. 1821(e)(10)) is amended—

18 (1) by redesignating subparagraph (B) as sub19 paragraph (E);

20 (2) by inserting after subparagraph (A) the fol21 lowing new subparagraphs:

22 ‘‘(B) EFFECT OF NOTICE.—If a conserva23 tor or receiver for an insured depository institu24 tion in default has taken steps reasonably cal25 culated to provide notice, pursuant to subpara-
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1 graph (A), to any person by the close of busi2 ness (local time) on the business day following

3 the appointment of the conservator or receiver

4 for such institution that the conservator or re5 ceiver has transferred, pursuant to paragraph

6 (9)(A), all qualified financial contracts between

7 the depository institution and such person, or

8 any affiliate of such person, paragraph (8)(A)

9 shall not apply with respect to such person or

10 affiliate in connection with any such contract.

11 ‘‘(C) TREATMENT OF BRIDGE BANKS.—If

12 a bridge bank or other institution is organized

13 by the Corporation and a conservator is ap14 pointed for such bank or institution—

15 ‘‘(i) immediately upon the organiza16 tion of the bank or institution; or

17 ‘‘(ii) at the time of a purchase and as18 sumption transaction between such bank

19 or institution and a failed depository insti20 tution for which the Corporation has been

21 appointed receiver,

22 the bridge bank or other institution shall not be

23 considered a depository institution in default

24 for purposes of this paragraph and paragraphs

25 (8) and (9).’’.
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1 SEC. 304. CLARIFYING AMENDMENT RELATING TO MASTER

2 AGREEMENTS.

3 Section 11(e)(8)(D)(vii) of the Federal Deposit In4 surance Act (12 U.S.C. 1821(e)(8)(D)(vii)) is amended to

5 read as follows:

6 ‘‘(vii) TREATMENT OF MASTER

7 AGREEMENT AS 1 SWAP AGREEMENT.—

8 Notwithstanding any other provision of

9 law, any master agreement for any con10 tract or agreement described in clause (ii),

11 (iii), (iv), or (vi), together with all supple12 ments to such master agreement, shall be

13 treated as 1 swap agreement for purposes

14 of this paragraph.’’.

15 SEC. 305. TECHNICAL AMENDMENTS RELATING TO QUALI16 FIED FINANCIAL CONTRACTS.

17 (a) DEFINITION OF QUALIFIED FINANCIAL CON18 TRACT.—Section 11(e)(8)(D) of the Federal Deposit In19 surance Act (12 U.S.C. 1821(e)(8)(D)) is amended—

20 (1) in clause (i), by inserting ‘‘spot contract,’’

21 after ‘‘swap agreement,’’;

22 (2) in clause (iv), by striking ‘‘(24)’’ and insert23 ing ‘‘(25)’’; and

24 (3) in clause (v), by striking ‘‘101(41)’’ and in25 serting ‘‘101(47)’’.
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1 (b) LIMITATION ON RIGHTS OF COUNTERPARTIES IN

2 EVENT OF DEFAULT DUE TO APPOINTMENT OF A CON3 SERVATOR.—Section 11(e)(8)(E)(i) of the Federal De4 posit Insurance Act (12 U.S.C. 1821(e)(8)(E)(i)) is

5 amended by inserting ‘‘, other than a default based solely

6 upon the appointment of a conservator’’ before the semi7 colon at the end.

8 TITLE IV—INTERNATIONAL

9 REGULATORY COOPERATION

10 SEC. 401. STUDY OF INTERNATIONAL REGULATION AND SU11 PERVISION OF DERIVATIVES ACTIVITIES OF

12 FINANCIAL INSTITUTIONS.

13 (a) IN GENERAL.—Before the end of the 30-day pe14 riod beginning on the date of the enactment of this Act,

15 the Secretary of the Treasury shall request a meeting with

16 the appropriate representatives of the other major indus17 trialized countries to plan a study to examine the adequacy

18 of the international regulation and supervision of deriva19 tives activities of financial institutions.

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

21 proposed by the Secretary of the Treasury pursuant to

22 subsection (a) with respect to derivatives activities of fi23 nancial institutions shall be as follows:

24 (1) To foster a greater understanding of the

25 manner in which derivative financial instruments af-
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1 fect the stability of the world’s financial systems and

2 markets.

3 (2) To examine the adequacy of international

4 regulation and supervision of derivative financial ac5 tivities.

6 (3) To make recommendations for improving

7 the international regulation and supervision of deriv8 ative financial activities.

9 (4) To foster greater cooperation between all

10 regulatory agencies with jurisdiction over derivatives

11 activities.

12 (5) To make recommendations for action by the

13 financial regulators in the respective countries that

14 would facilitate the safe and sound conduct of enti15 ties involved in derivative financial activities.

16 (6) To evaluate the feasibility of establishing a

17 single governing body to regulate international deriv18 ative financial activities.

19 (c) ISSUES TO STUDY.—The Secretary of the Treas20 ury shall propose that the study with respect to derivatives

21 activities of financial institutions include the following fac22 tors:

23 (1) Identification of the manner in which deriv24 ative financial instruments affect the stability of the

25 world’s financial systems and markets.
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1 (2) Identification of the various regulatory enti2 ties and mechanisms that are used to regulate and

3 supervise derivative financial activities around the

4 world.

5 (3) Analysis of the adequacy of the cooperation

6 between the various regulatory entities and mecha7 nisms referred to in paragraph (2).

8 (4) Identification of problems that inhibit the

9 safe and sound conduct of worldwide derivatives ac10 tivities.

11 (5) Analysis of the extent to which derivative fi12 nancial activities in countries other than the major

13 industrialized countries affect the safety and sound14 ness of the world’s financial systems and markets.

15 (6) Identification of uniform accounting and

16 public reporting standards for derivative financial in17 struments.

18 (7) Evaluation of the feasibility of establishing

19 a single governing body to regulate international de20 rivatives activities.

21 (d) UTILIZATION OF INFORMATION AND RE22 SOURCES.—The Secretary of the Treasury shall propose

23 that, in conducting the study under this section with re24 spect to derivatives activities of financial institutions, the

25 major industrialized countries should—
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1 (1) gather information from a wide variety of

2 sources including government agencies, central

3 banks, market participants, and the consumers of

4 the derivative financial instruments;

5 (2) to the extent feasible, obtain and use infor6 mation from the International Monetary Fund, the

7 Bank for International Settlements, and other multi8 lateral organizations; and

9 (3) utilize all available information and conclu10 sions from studies conducted by any multilateral or11 ganization, central bank, or any group consisting of

12 representatives of major industrialized countries.

13 SEC. 402. INTERNATIONAL NEGOTIATIONS.

14 The Chairman of the Board of Governors of the Fed15 eral Reserve System and the Comptroller of the Currency

16 shall encourage central banks, and regulatory authorities

17 of the other industrialized countries to work toward main18 taining and, where appropriate, adopting comparable su19 pervisory standards and regulations, particularly capital

20 standards, for financial institutions engaged in derivatives

21 activities.
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1 TITLE V—GAO STUDY

2 SEC. 501. STUDY OF SPECULATION AND MARGIN AND COL3 LATERAL REQUIREMENTS WITH RESPECT TO

4 DERIVATIVES ACTIVITIES OF FINANCIAL IN5 STITUTIONS.

6 (a) STUDY REQUIRED.—

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

8 the United States shall conduct a study of the spec9 ulative uses of derivative financial instruments by fi10 nancial institutions and the feasibility of imposing

11 margin and collateral requirements on speculative

12 transactions engaged in by financial institutions

13 which involve derivative financial instruments.

14 (2) REPORT.—The Comptroller General shall

15 submit a report on the study conducted pursuant to

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

17 18-month period beginning on the date of the enact18 ment of this Act.

19 (b) ISSUES INVOLVING SPECULATIVE TRANSACTIONS

20 INVOLVING DERIVATIVE FINANCIAL INSTRUMENTS.—In

21 conducting the study under subsection (a)(1), the Comp22 troller General shall—

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

24 is used in connection with derivative financial instru25 ments;
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1 (2) determine the extent to which financial in2 stitutions use the various classes of derivative finan3 cial instruments to engage in speculation for the in4 stitution’s own trading account; and

5 (3) determine the extent to which financial in6 stitutions engage in derivatives activities involving

7 the various classes of derivative financial instru8 ments with speculators.

9 (c) ISSUES INVOLVING MARGIN AND COLLATERAL

10 REQUIREMENTS.—In conducting the study under sub11 section (a)(1), the Comptroller General shall—

12 (1) determine which classes of derivative finan13 cial instruments are subject to margin and collateral

14 requirements and the amount and purpose of the

15 margin and collateral requirement;

16 (2) determine the extent to which the trans17 actions of financial institutions which involve any

18 class of derivative financial instruments are con19 ducted over the counter and evaluate the feasibility

20 of imposing margin and collateral requirements on

21 such transactions;

22 (3) evaluate the feasibility of imposing margin

23 and collateral requirements on any class of deriva24 tive financial instruments which were acquired or

25 taken for speculative purposes; and
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1 (4) evaluate the competitive impact of imposing

2 margin and collateral requirements on the various

3 classes of derivative financial instruments which

4 were acquired or taken for speculative purposes.

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