I

104TH CONGRESS

1ST SESSION H. R. 20

To provide a framework to improve risk management techniques at financial

institutions, including the prudential use of derivative products.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 4, 1995

Mr. LEACH introduced the following bill; which was referred to the Committee

on Banking and Financial Services and, in addition, to the Committees

on Commerce, and Agriculture, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions

as fall within the jurisdiction of the committee concerned

A BILL

To provide a framework to improve risk management techniques at financial institutions, including the prudential

use of derivative products.

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 shall be cited as the ‘‘Risk Management Im5 provement and Derivatives Oversight Act of 1995’’.
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1 TITLE I—FEDERAL DERIVATIVES

2 COMMISSION

3 SEC. 101. DECLARATION OF PURPOSE.

4 It is the purpose of this title to establish a Federal

5 Derivatives Commission which shall establish principles

6 and standards for the supervision and oversight by Fed7 eral financial institution regulators of financial institu8 tions engaged in derivatives activities and make rec9 ommendations to promote better risk management tech10 niques and uniformity in the supervision of these financial

11 institutions. The Commission’s actions shall be designed

12 to promote consistency in regulatory practices and to in13 sure progressive and vigilant supervision.

14 SEC. 102. DEFINITIONS.

15 As used in this title—

16 (1) the term ‘‘Federal financial institution regu17 latory agencies’’ means the Office of the Comptroller

18 of the Currency, the Board of Governors of the Fed19 eral Reserve System, the Federal Deposit Insurance

20 Corporation, the Office of Thrift Supervision, the

21 Securities and Exchange Commission, and the Com22 modity Futures Trading Commission;

23 (2) the term ‘‘Commission’’ means the Federal

24 Derivatives Commission;
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1 (3) the term ‘‘Federal banking agency’’ has the

2 same meaning as in section 3 of the Federal Deposit

3 Insurance Act (12 U.S.C. 1813);

4 (4) the term ‘‘financial institution’’ means any

5 institution covered under section 402(9) of the Fed6 eral Deposit Insurance Corporation Improvement

7 Act of 1991, any government sponsored enterprise,

8 or any other institution (including a state or local

9 government or other type of end-user) as determined

10 by the Commission;

11 (5) the term ‘‘government sponsored enter12 prise’’ has the same meaning as in section 1404(e)

13 of the Financial Institutions Reform, Recovery, and

14 Enforcement Act of 1989;

15 (6) the term ‘‘securities contract’’ has the same

16 meaning as in section 741(7) of title 11, United

17 States Code and includes a contract for the pur18 chase, sale or loan of a structured note or an option

19 on a structured note;

20 (7) the terms ‘‘commodity contract’’, ‘‘forward

21 contract’’, and ‘‘swap agreement’’ have the same

22 meaning as in section 11(e)(8)(D) of the Federal

23 Deposit Insurance Act (12 U.S.C. 1821(e)(8)(D));

24 (8) the term ‘‘derivative financial instrument’’

25 means any securities contract, commodity contract,
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1 forward contract, swap agreement or any other simi2 lar agreement or instrument which the Commission

3 determines to be a derivative financial instrument

4 for purposes of this title; and

5 (9) the term ‘‘derivatives activities’’ means ac6 tivities by a financial institution involving derivative

7 financial instruments.

8 SEC. 103. FEDERAL DERIVATIVES COMMISSION.

9 (a) ESTABLISHMENT; COMPOSITION.—There is es10 tablished the Federal Derivatives Commission which shall

11 consist of—

12 (1) the Chairman of the Board of Governors of

13 the Federal Reserve System,

14 (2) the Comptroller of the Currency,

15 (3) the Chairperson of the Board of Directors

16 of the Federal Deposit Insurance Corporation,

17 (4) the Director of the Office of Thrift Super18 vision,

19 (5) the Chairman of the Securities and Ex20 change Commission,

21 (6) the Chairman of the Commodity Futures

22 Trading Commission, and

23 (7) the Secretary of Treasury.
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1 (b) CHAIRMANSHIP.—The chairman of the Commis2 sion shall be the Chairman of the Board of Governors of

3 the Federal Reserve System.

4 (c) DESIGNATION OF OFFICERS AND EMPLOYEES.—

5 The members of the Commission may, from time to time,

6 designate other officers or employees of their respective

7 agencies to carry out their duties on the Commission.

8 (d) COMPENSATION AND EXPENSES.—Each member

9 of the Commission shall serve without additional com10 pensation but shall be entitled to reasonable expenses

11 incurred in carrying out his official duties as such a

12 member.

13 (e) COSTS AND EXPENSES OF COMMISSION.—One14 sixth of the costs and expenses of the Commission, includ15 ing the salaries of its employees, shall be paid by each

16 of the Federal financial institution regulatory agencies.

17 Annual assessments for such share shall be levied by the

18 Commission based upon its projected budget for the year,

19 and additional assessments may be made during the year

20 if necessary.

21 SEC. 104. FUNCTIONS OF COMMISSION.

22 (a) ESTABLISHMENT OF PRINCIPLES AND STAND23 ARDS.—

24 (1) The Commission shall establish principles

25 and standards to improve risk management and the
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1 prudent use of derivative financial instruments by fi2 nancial institutions. Such actions by the Commission

3 shall include principles and standards related to—

4 (A) capital or limits on leverage as appro5 priate;

6 (B) accounting (consistent with section 37

7 of the Federal Deposit Insurance Act);

8 (C) disclosure;

9 (D) sales practices or appropriateness; and

10 (E) such other regulatory actions for the

11 supervision of financial institutions engaged in

12 derivatives activities deemed appropriate by the

13 Commission.

14 (2) Each Federal financial institution regu15 latory agency shall issue substantially similar regula16 tions or guidelines governing derivatives activities for

17 purposes of implementing paragraph (1), unless it

18 finds that implementation of substantially similar

19 regulations is not necessary or appropriate in the

20 public interest.

21 (3) For purposes of implementing paragraph

22 (1), the Commission may establish differing stand23 ards for different classes of financial institutions, in24 cluding, but not limited to, dealers, end-users, or

25 municipalities as appropriate.
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1 (4) Any financial institution not subject to su2 pervision by a Federal banking agency or the Com3 modity Futures Trading Commission shall be super4 vised by the Securities and Exchange Commission to

5 the extent of their derivatives activities, except as

6 otherwise provided by the Commission. The Securi7 ties and Exchange Commission shall have the au8 thority to enforce the provisions of this title against

9 any financial institution covered by this paragraph

10 to the extent that such provisions govern the con11 duct or activities of the financial institution as if

12 they were provisions of the Securities Exchange Act

13 of 1934.

14 (b) RECOMMENDATIONS REGARDING SUPERVISORY

15 ACTIONS.—

16 (1) In establishing principles and standards

17 under subsection (a), the Commission shall consider

18 and may make recommendations for comparable reg19 ulatory action by the Federal financial institution

20 regulatory agencies in other matters related to fi21 nancial institutions engaged in derivatives activities,

22 including the need to establish principles and stand23 ards for the following:

24 (A) Strong capital requirements (with par25 ticular attention to a leverage ratio where ap-
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1 propriate) to guard generally against risks at fi2 nancial institutions, including added risks that

3 may be posed by derivative activities.

4 (B) Comprehensive risk management sys5 tems that—

6 (i) are commensurate in scope, size,

7 and complexity to the levels of activities

8 and risks assumed by financial institutions;

9 (ii) include limits and controls with

10 respect to levels or risk regarding

11 counterparty credit, concentration, and

12 other relevant market factors;

13 (iii) ensure that market factors affect14 ing risk exposures are adequately meas15 ured, monitored, controlled and disclosed;

16 and

17 (iv) adequately control potential losses

18 and undue risks arising from risk control

19 system deficiencies.

20 (C) To the extent practicable, joint regu21 latory examinations by the Federal banking

22 agencies of insured depository institutions that

23 are derivatives dealers and any affiliates.

24 (D) Effective senior management super25 vision and oversight by the board of directors of
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1 a financial institution to ensure that derivatives

2 activities are conducted in a safe and sound

3 manner and are consistent with the board of di4 rector’s overall risk management philosophy

5 and the institution’s business strategy.

6 (E) The prudent use of collateral by

7 counterparties to derivatives transactions.

8 (F) Appropriate parameters, models and

9 simulations for purposes of evaluating a finan10 cial institution’s exposure to derivatives activi11 ties and relevant economic scenarios and fur12 ther specifics regarding stress test.

13 (G) Appropriate credit risk reserves in con14 nection with derivatives activities.

15 (H) Protection against legal risk, including

16 foreign legal risk.

17 (I) Minimum prudential practices for mu18 nicipalities and pension funds that may use de19 rivatives.

20 (J) Enhanced disclosures to mutual fund

21 customers of the risks that may be posed to

22 mutual funds that are end-users of derivative

23 products.

24 (K) Assurances that, consistent with safe

25 and sound banking practices, a financial insti-
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1 tution does not engage in inappropriate deriva2 tives activities.

3 (L) Protection against systemic risk.

4 (2) When a recommendation of the Commission

5 is found unacceptable by one or more of the applica6 ble Federal financial institution regulatory agencies,

7 the agency or agencies shall submit to the Commis8 sion, within a time period specified by the Commis9 sion, a written statement of the reasons the rec10 ommendation is unacceptable and such statement

11 shall be published in the Federal Register.

12 SEC. 105. TRAINING FOR EXAMINERS AND ASSISTANT EX13 AMINERS.

14 The Commission shall sponsor training programs

15 concerning risk management techniques and derivatives

16 activities for examiners, assistant examiners and other em17 ployees of the Federal financial institution regulatory

18 agencies. Such training programs shall be open to enroll19 ment by employees of State financial institutions super20 visory agencies and employees of the Federal Housing Fi21 nance Board and the Department of Housing and Urban

22 Development’s Office of Federal Housing Enterprise

23 Oversight under conditions specified by the Commission.
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1 SEC. 106. RISK MANAGEMENT TRAINING.

2 The Commission shall develop training seminars in

3 risk management techniques related to derivatives activi4 ties for employees of state or local governments and finan5 cial institutions.

6 SEC. 107. EFFECT ON FEDERAL REGULATORY AGENCY RE7 SEARCH AND DEVELOPMENT OF NEW FINAN8 CIAL INSTITUTIONS SUPERVISORY METHODS.

9 Nothing in this title shall be construed to limit or

10 discourage Federal financial institution regulatory agency

11 research and development of new financial institutions su12 pervisory methods and tools related to derivatives activi13 ties, nor to preclude the field testing of any innovation

14 devised by any Federal financial institution regulatory

15 agency.

16 SEC. 108. STATE LIAISON.

17 To encourage the application of uniform examination

18 principles and standards by State and Federal supervisory

19 agencies, the Commission shall establish a liaison commit20 tee composed of five representatives of State agencies

21 which supervise financial institutions which shall meet at

22 least twice a year with the Commission. Members of the

23 liaison committee shall receive a reasonable allowance for

24 necessary expenses incurred in attending meetings.
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1 SEC. 109. ADMINISTRATION.

2 (a) AUTHORITY OF CHAIRMAN OF COMMISSION.—

3 The Chairman of the Commission is authorized to carry

4 out and to delegate the authority to carry out the internal

5 administration of the Commission, including the appoint6 ment and supervision of employees and the distribution

7 of business among members, employees, and administra8 tive units.

9 (b) USE OF PERSONNEL, SERVICES, AND FACILITIES

10 OF FEDERAL FINANCIAL INSTITUTION REGULATORY

11 AGENCIES.—In addition to any other authority conferred

12 upon it by this title, in carrying out its functions under

13 this title, the Commission may utilize, with their consent

14 and to the extent practical, the personnel, services, and

15 facilities of the Federal financial institution regulatory

16 agencies, with or without reimbursement therefor.

17 (c) COMPENSATION, AUTHORITY, AND DUTIES OF

18 OFFICERS AND EMPLOYEES; EXPERTS AND CONSULT19 ANTS.—In addition, the Commission may—

20 (1) subject to the provisions of title 5 relating

21 to the competitive service, classification, and General

22 Schedule pay rates, appoint and fix the compensa23 tion of such officers and employees as are necessary

24 to carry out the provisions of this title, and to pre25 scribe the authority and duties of such officers and

26 employees; and
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1 (2) obtain the services of such experts and con2 sultants as are necessary to carry out the provisions

3 of this title.

4 SEC. 110. INTERNATIONAL NEGOTIATIONS.

5 The Chairman of the Board of Governors of the Fed6 eral Reserve System, in consultation with the members of

7 the Commission, shall encourage governments, central

8 banks, and regulatory authorities of other countries to

9 work toward maintaining and, where appropriate, adopt10 ing comparable supervisory standards and regulations,

11 particularly capital standards, for financial institutions

12 engaged in derivatives activities.

13 SEC. 111. CREDIT UNIONS.

14 Insured credit unions (as defined in section 101(7)

15 of the Federal Credit Union Act) shall be supervised for

16 purposes of derivatives activities by the National Credit

17 Union Administration under standards no less stringent

18 than standards under which Federal depository institu19 tions (as defined in section 3(c) of the Federal Deposit

20 Insurance Act) are supervised by the Federal banking

21 agencies.

22 SEC. 112. ANNUAL REPORT.

23 Not later than April 1 of each year, the Commission

24 shall prepare a report covering its activities during the

25 preceding calendar year.
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1 TITLE II—SUPERVISORY

2 IMPROVEMENTS

3 SEC. 201. UNSAFE OR UNSOUND BANKING PRACTICES.

4 (a) IN GENERAL.—Failure of an institution-affiliated

5 party engaged in derivatives activities to have adequate

6 technical expertise may be deemed by the appropriate fed7 eral banking agency to constitute an unsafe or unsound

8 banking practice within the meaning of section 8 of the

9 Federal Deposit Insurance Act (12 U.S.C. 1818).

10 (b) RULE OF CONSTRUCTION.—This section shall be

11 in addition to and not in derogation of the authority of

12 any appropriate Federal banking agency under section 8

13 of the Federal Deposit Insurance Act to determine unsafe

14 or unsound banking practices.

15 SEC. 202. INTERNAL CONTROLS.

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

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

18 ‘‘internal controls’’ and inserting ‘‘internal controls (in19 cluding internal controls for derivatives activities)’’.

20 SEC. 203. FOREIGN BANK SUPERVISION.

21 Section 7(d)(2)(A) of the International Banking Act

22 of 1978 (12 U.S.C. 3105(d)(2)(A)) is amended after

23 ‘‘country’’ by inserting ‘‘, including, in the case of a for24 eign bank engaged in derivatives activities, comprehensive

25 supervision and regulation for derivatives activities (as
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1 that term is defined in the Risk Management Improve2 ment and Derivatives Oversight Act of 1995). In making

3 any determination under this paragraph, the Board shall

4 consider whether the home country maintains comprehen5 sive supervision and regulation of derivatives activities, in6 cluding capital and disclosure standards, not less stringent

7 than United States standards.’’.

8 SEC. 204. CONFIDENTIAL EMERGENCY MANAGEMENT RE9 PORTING.

10 (a) IN GENERAL.—Before the end of the 1-year pe11 riod beginning on the date of the enactment of this Act,

12 the Federal financial institution regulatory agencies shall

13 develop the means to obtain all necessary information re14 lating to any derivatives activity or any class of derivative

15 financial instruments, whenever the appropriate Federal

16 financial institution regulatory agency determines that re17 ceipt of such information from any financial institution

18 engaged in derivates activities is necessary as a result of

19 adverse market conditions or other emergency situations

20 (as defined by the agency).

21 (b) ACCESSIBILITY OF INFORMATION.—Each finan22 cial institution referred to in paragraph (1) shall—

23 (1) assemble such information and retain such

24 records as the appropriate Federal financial institu-
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1 tion regulatory agency may require by regulation for

2 purposes of such paragraph; and

3 (2) promptly provide to the appropriate Federal

4 financial institution regulatory agency any informa5 tion requested by the agency pursuant to such para6 graph.

7 (c) CONFIDENTIALITY OF INFORMATION PRO8 VIDED.—No information provided to or obtained by an ap9 propriate Federal financial institution regulatory agency

10 pursuant to paragraph (1) with respect to any financial

11 institution may be provided to any person or entity other

12 than another Federal financial institution regulatory agen13 cy, except that such information may be provided with the

14 prior written approval of the agency.

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

16 terms ‘‘Federal financial institution regulatory agencies’’,

17 ‘‘financial institution’’, ‘‘derivative financial instrument’’,

18 and ‘‘derivatives activities’’ have the same meaning as in

19 title I of this Act.
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1 TITLE III—FINANCIAL INSTITU2 TION INSOLVENCY REFORMS

3 SEC. 301. TREATMENT OF CERTAIN SWAP AGREEMENTS BY

4 CONSERVATORS OR RECEIVERS OF INSURED

5 DEPOSITORY INSTITUTIONS.

6 Section 11(e)(8)(D)(vi)(I) of the Federal Deposit In7 surance Act (12 U.S.C. 1821(e)(8)(D)(vi)(I)) is amended

8 to read as follows:

9 ‘‘(I) means any agreement, in10 cluding the terms and conditions in11 corporated by reference in any such

12 agreement, which is a rate swap

13 agreement, basis swap, commodity

14 swap, forward rate agreement, inter15 est rate future, interest rate option,

16 foreign exchange agreement, rate cap

17 agreement, rate floor agreement, rate

18 collar agreement, currency swap

19 agreement, cross-currency rate swap

20 agreement, currency future, currency

21 option, equity or equity index swap,

22 equity or equity index option, bond

23 option, or any other similar agree24 ment, and’’
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1 SEC. 302. AUTHORITY OF THE CORPORATION WITH RE2 SPECT TO FAILED AND FAILING INSTITU3 TIONS.

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

5 Act (12 U.S.C. 1821(e)(8)) is amended—

6 (1) in subparagraph (E)—

7 (A) by striking ‘‘paragraph (12) of this

8 subsection’’; and

9 (B) by striking ‘‘subsection (d)(9)’’ and in10 serting ‘‘subsections (d)(9), (e)(10), and

11 (n)(4)(I)’’; and

12 (2) by adding the following new subparagraphs:

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

14 shall be construed as limiting the right or

15 power of the Corporation, or authorizing any

16 court or agency to limit or delay, in any man17 ner, the right or power of the Corporation to

18 transfer any qualified financial contract in ac19 cordance with paragraph (9) and (10) or to liq20 uidate any such contract.

21 ‘‘(G) RECORDKEEPING REQUIREMENTS.—

22 The Corporation, in consultation with the ap23 propriate Federal banking agencies, may pre24 scribe regulations requiring more detailed rec25 ordkeeping with respect to qualified financial
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1 contracts (including market valuations) by in2 sured depository institutions.’’.

3 SEC. 303. AMENDMENTS RELATING TO TRANSFERS OF

4 QUALIFIED FINANCIAL CONTRACTS.

5 (a) TRANSFERS OF QUALIFIED FINANCIAL CON6 TRACTS TO PERSONS OTHER THAN DEPOSITORY INSTI7 TUTIONS.—Section 11(e)(9)(A) of the Federal Deposit In8 surance Act (12 U.S.C. 1821(e)(9)(A)) is amended to read

9 as follows:

10 ‘‘(A) transfer to 1 depository institution (other

11 than a depository institution in default) or to 1 per12 son that is not a depository institution (other than

13 a person for which a conservator, receiver, trustee in

14 bankruptcy, or other legal custodian has been ap15 pointed or which is otherwise the subject of a bank16 ruptcy or insolvency proceeding)—’’.

17 (b) NOTICE TO QUALIFIED FINANCIAL CONTRACT

18 COUNTERPARTIES.—Section 11(e)(10)(A) of the Federal

19 Deposit Insurance Act (12 U.S.C. 1821(e)(10)(A)) is

20 amended to read as follows:

21 ‘‘(A) IN GENERAL.—If—

22 ‘‘(i) the receiver for an insured deposi23 tory institution in default makes any

24 transfer of the assets and liabilities of such

25 institution; and
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1 ‘‘(ii) the transfer includes any quali2 fied financial contract; the receiver shall

3 notify any person who is a party to any

4 such contract of such transfer by 5:00 p.m.

5 (Eastern Time) on the business day follow6 ing the date of the appointment of the re7 ceiver.’’.

8 (c) RIGHTS AGAINST RECEIVER AND TREATMENT OF

9 BRIDGE BANKS.—Section 11(e)(10) of the Federal

10 Deposit Insurance Act (12 U.S.C. 1821(e)(10)) is

11 amended—

12 (1) by redesignating subparagraph (B) as sub13 paragraph (D);

14 (2) by inserting after subparagraph (A) the fol15 lowing new subparagraphs:

16 ‘‘(B) CERTAIN RIGHTS NOT ENFORCE17 ABLE.—

18 ‘‘(i) IN GENERAL.—A person who is a

19 party to a qualified financial contract with

20 an insured depository institution may not

21 exercise any right such person has to net

22 or close out such contract under paragraph

23 (8)(A) or section 403 or 404 of the Fed24 eral Deposit Insurance Corporation Im25 provement Act of 1991 solely by reason of
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1 the appointment of a receiver for the de2 pository institution (or the insolvency or fi3 nancial condition of the institution for

4 which the receiver has been appointed)—

5 ‘‘(I) until 5:00 p.m. (Eastern

6 time) of the business day following the

7 date of the appointment of the re8 ceiver; or

9 ‘‘(II) after the person has re10 ceived notice that the contract has

11 been transferred pursuant to para12 graph (9)(A).

13 ‘‘(ii) NOTICE TO LAST-KNOWN AD14 DRESS.—For purposes of this subpara15 graph, the Corporation as receiver of an

16 insured depository institution shall be

17 deemed to have notified a person who is a

18 party to a qualified financial contract with

19 such depository institution if the Corpora20 tion has sent notice to the last address of

21 such person shown on the books and

22 records of the depository institution with

23 respect to such contract in the manner

24 provided for in the contract or by other

25 means reasonably calculated to reach such
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1 person by the time specified in subpara2 graphs (A) and (B)(i)(I) of this subsection.

3 ‘‘(iii) EXCEPTION TO RIGHT OF CON4 TRACTING PARTY TO NET OR CLOSE OUT

5 CONTRACTS.—A person who is a party to

6 a qualified financial contract with an in7 sured depository institution may not exer8 cise any right such person has to net or

9 close out such contract under paragraph

10 (8)(E) or sections 403 or 404 of the Fed11 eral Deposit Insurance Corporation Im12 provement Act of 1991, solely by reason of

13 the appointment of a conservator for the

14 depository institution.

15 ‘‘(C) TREATMENT OF BRIDGE BANKS.—

16 The following institutions shall not be consid17 ered depository institutions in default for pur18 poses of subsection(e)(9):

19 ‘‘(i) A bridge bank.

20 ‘‘(ii) An institution organized by the

21 Corporation, for which a conservator is ap22 pointed either, (I) immediately upon the

23 organization of the institution, or (II) at

24 the time of a purchase and assumption

25 transaction between such institution and
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1 the Corporation as receiver for a failed de2 pository institution.’’.

3 SEC. 304. CLARIFYING AMENDMENT RELATING TO MASTER

4 AGREEMENTS.

5 Section 11(e)(8)(D)(vii) of the Federal Deposit In6 surance Act (12 U.S.C. 1821(e)(8)(D)(vii)) is amended to

7 read as follows:

8 ‘‘(vii) TREATMENT OF MASTER

9 AGREEMENT AS ONE AGREEMENT.—Any

10 master agreement for any contract or

11 agreement described in any preceeding

12 clause of this subparagraph (or any master

13 agreement for such master agreement or

14 agreements), together with all supplements

15 to such master agreement, shall be treated

16 as a single agreement and a single quali17 fied financial contract.’’.

18 SEC. 305. QUALIFIED FINANCIAL CONTRACTS.

19 (a) DEFINITION OF QUALIFIED FINANCIAL CON20 TRACT.—Section 11(e)(8)(D) of the Federal Deposit In21 surance Act (12 U.S.C. 1821(e)(8)(D)) is amended—

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

24 (2) in clause (v), by striking ‘‘101(41)’’ and in25 serting ‘‘101(47)’’.
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1 (b) FEDERAL DEPOSIT INSURANCE CORPORATION

2 IMPROVEMENT ACT OF 1991.—Sections 403(a) and

3 404(a) of the Federal Deposit Insurance Corporation Im4 provement Act of 1991 (12 U.S.C. 4403(a), 4404(a)) are

5 each amended by inserting ‘‘other than paragraphs (8)(E)

6 and (10)(B) of section 11(e) of the Federal Deposit Insur7 ance Act’’ after ‘‘other provisions of law’’.

8 SEC. 306. TECHNICAL AND CONFORMING AMENDMENTS.

9 (a) DEFINITION OF SWAP AGREEMENT.—Section

10 101 of title 11, United States Code, is amended in para11 graph (53B)—

12 (1) by inserting ‘‘equity or equity index swap,

13 equity or equity index option, bond option,’’ after

14 ‘‘basis swap,’’;

15 (2) by inserting ‘‘interest rate future,’’ after

16 ‘‘commodity swap,’’; and

17 (3) by inserting ‘‘currency future,’’ after ‘‘cross18 currency rate swap agreement,’’.

19 (b) DEFINITION OF MASTER NETTING AGREEMENT

20 AND MASTER NETTING AGREEMENT PARTICIPANT.—Sec21 tion 101 of title 11, United States Code, is amended by

22 adding, after paragraph (38), the following new para23 graphs:

24 ‘‘(38A) ‘master netting agreement’ means an

25 agreement providing for the exercise of rights, in-
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1 cluding rights of setoff, liquidation, termination, ac2 celeration, or closeout, in connection with one or

3 more contracts with the debtor that are described in

4 paragraphs (1) through (5) of section 561(a);

5 ‘‘(38B) ‘master netting agreement participant’

6 means an entity that, at any time before the filing

7 of the petition, has an outstanding master netting

8 agreement with the debtor.’’.

9 (c) MASTER AGREEMENTS UNDER THE AUTO10 STAY.—Section 362(b)(17) of title 11, United States

11 Code, is amended to read as follows:

12 ‘‘(17) under subsection (a), of the setoff by a

13 swap participant or master netting agreement par14 ticipant of any mutual debt and claim under or in

15 connection with any swap agreement or master net16 ting agreement that constitutes the setoff of a claim

17 against the debtor for any payment due from the

18 debtor under or in connection with any such agree19 ment against—

20 ‘‘(A) any payment due to the debtor from

21 such participant under or in connection with

22 any such agreement; or

23 ‘‘(B) cash, securities, or other property of

24 the debtor held by or due from such participant
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1 to guarantee, secure or settle any such agree2 ment.’’.

3 (d) LIMITATION OF AVOIDANCE POWERS UNDER

4 MASTER NETTING AGREEMENT.—Section 546(g) of title

5 11, United States Code, is amended—

6 (1) by inserting ‘‘or a master netting agree7 ment’’ after ‘‘under a swap agreement’’;

8 (2) by inserting ‘‘or a master netting agreement

9 participant’’ after ‘‘swap participant’’; and

10 (3) by inserting ‘‘or any master netting agree11 ment’’ after ‘‘with a swap agreement’’.

12 (e) FRAUDULENT TRANSFERS OF MASTER NETTING

13 AGREEMENTS.—Section 548(d)(2) of title 11, United

14 States Code, is amended—

15 (1) in subparagraph (C), by striking ‘‘and’’;

16 (2) in subparagraph (D), by striking the period

17 and inserting ‘‘; and’’; and

18 (3) by adding at the end the following new sub19 paragraph:

20 ‘‘(E) a master netting agreement participant

21 that receives a transfer in connection with a master

22 netting agreement takes for value to the extent of

23 such transfer.’’.
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1 (f) TERMINATION OR ACCELERATION OF SECURITIES

2 CONTRACTS.—Section 555 of title 11, United States Code,

3 is amended—

4 (1) in the section heading, by inserting ‘‘, ter5 minate, or accelerate’’ after ‘‘liquidate’’; and

6 (2) in the first sentence, by inserting ‘‘, termi7 nation, or acceleration’’ after ‘‘liquidation’’.

8 (g) TERMINATION OR ACCELERATION OF COMMOD9 ITIES OR FORWARD CONTRACTS.—Section 556 of title 11,

10 United States Code, is amended—

11 (1) in the section heading, by inserting ‘‘, ter12 minate, or accelerate’’ after ‘‘liquidate’’; and

13 (2) in the first sentence, by inserting ‘‘, termi14 nation, or acceleration’’ after ‘‘liquidation’’.

15 (h) TERMINATION OR ACCELERATION OF REPUR16 CHASE AGREEMENTS.—Section 559 of title 11, United

17 States Code, is amended—

18 (1) in the section heading, by inserting ‘‘, ter19 minate, or accelerate’’ after ‘‘liquidate’’; and

20 (2) in the first sentence, by inserting ‘‘, termi21 nation, or acceleration’’ after ‘‘liquidation’’.

22 (i) LIQUIDATION, TERMINATION OR ACCELERATION

23 OF SWAP AGREEMENTS.—Section 560 of title 11, United

24 States Code, is amended—
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1 (1) in the section heading, by striking ‘‘termi2 nate’’ and inserting ‘‘liquidate, terminate, or acceler3 ate’’; and

4 (2) in the first sentence, by striking ‘‘termi5 nation’’ and inserting ‘‘liquidation, termination, or

6 acceleration’’.

7 (j) LIQUIDATION, TERMINATION, ACCELERATION, OR

8 OFFSET UNDER A MASTER NETTING AGREEMENT.—

9 Chapter 5 of title 11, United States Code, is amended by

10 adding at the end of the following new section:

11 ‘‘SEC. 561. CONTRACTUAL RIGHT TO TERMINATE, LIQ12 UIDATE, ACCELERATE, OR OFFSET UNDER A

13 MASTER NETTING AGREEMENT.

14 ‘‘(a) IN GENERAL.—Subject to subsection (b), the ex15 ercise of any contractual right, because of a condition of

16 the kind specified in section 365(e)(1), to cause termi17 nation, liquidation, acceleration, offset, or netting of val18 ues or payment amounts arising under or in connection

19 with one or more—

20 ‘‘(1) securities contracts, as defined in section

21 741(7);

22 ‘‘(2) commodities contracts, as defined in sec23 tion 761(4);

24 ‘‘(3) forward contracts;

25 ‘‘(4) repurchase agreements; or
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1 ‘‘(5) swap agreements;

2 under a master netting agreement covering such contracts

3 shall not be stayed, avoided, or otherwise limited by oper4 ation of any provision of this title or by any order of a

5 court or administrative agency in any proceeding under

6 this title.

7 ‘‘(b) EXCEPTION.—A party may exercise a contrac8 tual right described in subsection (a) only if that party

9 could exercise such a right under section 555, 556, 559,

10 or 560 for each individual contract covered by the master

11 netting agreement in issue.

12 ‘‘(c) DEFINITION.—As used in this section, the term

13 ‘contractual right’ includes, but is not limited to, a right

14 set forth in a rule or bylaw of a national securities ex15 change, a national securities association or a securities

16 clearing agency, and a right set forth in a bylaw of a clear17 ing organization or contract market or in a resolution of

18 the governing board thereof.’’.

19 (k) MUNICIPAL BANKRUPTCIES.—Section 901 of title

20 11, United States Code, is amended—

21 (1) by inserting ‘‘555, 556,’’ after ‘‘553,’’; and

22 (2) by inserting ‘‘559, 560 561’’ after ‘‘557,’’.
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1 SEC. 307. COLLATERALIZATION OF QUALIFIED FINANCIAL

2 CONTRACTS AND CERTAIN OTHER LIABIL3 ITIES.

4 Section 13(e) of the Federal Deposit Insurance Act

5 (12 U.S.C. 1823(e)) is amended by striking paragraph (2)

6 and adding the following new paragraph:

7 ‘‘(2) EXEMPTIONS FROM CONTEMPORANEOUS

8 EXECUTION REQUIREMENT.—An agreement to pro9 vide for the lawful collateralization of—

10 ‘‘(A) deposits of, or other credit extension

11 by, a Federal, state, or local governmental en12 tity, or of any depositor referred to in section

13 11(a)(2), including an agreement to provide col14 lateral in lieu of a surety bond;

15 ‘‘(B) bankruptcy estate funds pursuant to

16 section 345(b)(2) of title 11, United States

17 Code;

18 ‘‘(C) extensions of credit, including any

19 overdraft, from a Federal Reserve Bank or

20 Federal Home Loan Bank; or

21 ‘‘(D) a qualified financial contract, as de22 fined in section 1821(e)(8)(D); shall not be

23 deemed to be invalid pursuant to paragraph

24 (1)(B) solely because such agreement was not

25 executed contemporaneously with the acquisi26 tion of the collateral or because of pledges, de-
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1 livery, or substitution of the collateral made in

2 accordance with such agreement.’’.

3 TITLE IV—DERIVATIVES DEALER

4 SELF-REGULATION

5 SEC. 401. SHORT TITLE.

6 This title may be cited as the ‘‘Derivatives Dealer

7 Self-Regulation Act of 1995’’.

8 SEC. 402. DECLARATION OF PURPOSE.

9 It is the purpose of this title to authorize the estab10 lishment of a self-regulatory system for the supervision of

11 derivatives dealers.

12 SEC. 403. DEFINITIONS.

13 As used in this title:

14 (1) BOARD.—The term ‘‘Board’’ means the

15 Board of Governors of the Federal Reserve System.

16 (2) DERIVATIVES DEALER.—The term ‘‘deriva17 tives dealer’’ means any financial institution engaged

18 in the business of brokering or dealing in derivative

19 financial instruments, as determined by the Board,

20 except that such term does not include any person

21 that is registered as a broker or dealer of securities

22 or as a futures commission merchant.

23 (3) FINANCIAL INSTITUTION.—The term ‘‘fi24 nancial institution’’ means any institution described

25 in section 402(9) of the Federal Deposit Insurance
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1 Corporation Improvement Act of 1991, and any

2 other institution that the Board determines to be a

3 financial institution.

4 (4) DERIVATIVE FINANCIAL INSTRUMENT.—

5 The term ‘‘derivative financial instrument’’ means

6 any securities contract, commodity contract, forward

7 contract, swap agreement, or any other similar

8 agreement or instrument which the Board deter9 mines to be a derivative financial instrument for

10 purposes of this title.

11 (5) COMMODITY CONTRACT; FORWARD CON12 TRACT; SWAP AGREEMENT.—The terms ‘‘commodity

13 contract’’, ‘‘forward contract’’, and ‘‘swap agree14 ment’’ have the same meaning as in section

15 11(e)(8)(D) of the Federal Deposit Insurance Act

16 (12 U.S.C. 1821(e)(8)(D)).

17 (6) SECURITIES CONTRACT.—The term ‘‘securi18 ties contract’’ has the same meaning as in section

19 741(7) of title 11, United States Code and includes

20 a structured note.

21 (7) STATUTORY DISQUALIFICATION.—A person

22 is subject to a ‘‘statutory disqualification’’ with re23 spect to membership or participation in, or associa24 tion with a member of, a national derivatives asso25 ciation, if such person—
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1 (A) has been and is expelled or suspended

2 from membership or participation in, or barred

3 or suspended from being associated with a

4 member of, any self-regulatory organization

5 under the Federal securities laws, foreign equiv6 alent of a self-regulatory organization, foreign

7 or international securities exchange, contract

8 market designated pursuant to section 5 of the

9 Commodity Exchange Act (7 U.S.C. 7), or any

10 substantially equivalent foreign statute or regu11 lation, or futures association registered under

12 section 17 of such Act (7 U.S.C. 21), or any

13 substantially equivalent foreign statute or regu14 lation, or has been and is denied trading privi15 leges on any such contract market or foreign

16 equivalent;

17 (B) is subject to—

18 (i) an order to the Board, other ap19 propriate regulatory agency, or foreign fi20 nancial regulatory authority—

21 (I) denying, suspending for a pe22 riod not exceeding 12 months, or re23 voking his or her registration as a

24 broker, dealer, municipal securities

25 dealer, government securities broker,
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1 or government securities dealer or

2 limiting his or her activities as a for3 eign person performing a function

4 substantially equivalent to any of the

5 above; or

6 (II) barring or suspending for a

7 period not exceeding 12 months his or

8 her being associated with a broker,

9 dealer, municipal securities dealer,

10 government securities broker, govern11 ment securities dealer, or foreign per12 son performing a function substan13 tially equivalent to any of the above;

14 (ii) an order of the Commodity Fu15 tures Trading Commission denying, sus16 pending, or revoking his or her registration

17 under the Commodity Exchange Act (7

18 U.S.C. 1 et seq.); or

19 (iii) an order by a foreign financial

20 regulatory authority denying, suspending,

21 or revoking the person’s authority to en22 gage in transactions in contracts of sale of

23 a commodity for future delivery or other

24 instruments traded on or subject to the
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1 rules of a contract market, board of trade,

2 or foreign equivalent thereof;

3 (C) by his or her conduct while associated

4 with a broker, dealer, municipal securities deal5 er, government securities broker, or government

6 securities dealer, or while associated with an en7 tity or person required to be registered under

8 the Commodity Exchange Act, has been found

9 to be a cause of any effective suspension, expul10 sion, or order of the character described in sub11 paragraph (A) or (B) of this paragraph, and

12 in entering such a suspension, expulsion, or

13 order, the Board, an appropriate regulatory

14 agency, or any such self-regulatory organization

15 shall have jurisdiction to find whether or not

16 any person was a cause thereof;

17 (D) by his or her conduct while associated

18 with any broker, dealer, municipal securities

19 dealer, government securities broker, govern20 ment securities dealer, or any other entity en21 gaged in transactions in securities, or while as22 sociated with an entity engaged in transactions

23 in contracts of sale of a commodity for future

24 delivery or other instruments traded on or sub25 ject to the rules of a contract market, board of
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1 trade, or foreign equivalent thereof, has been

2 found to be a cause of any effective suspension,

3 expulsion, or order by a foreign or international

4 securities exchange or foreign financial regu5 latory authority empowered by a foreign govern6 ment to administer or enforce its laws relating

7 to financial transactions as described in sub8 paragraph (A) or (B) of this paragraph;

9 (E) has associated with him any person

10 who is known, or in the exercise of reasonable

11 care should be known, to him to be a person de12 scribed by subparagraph (A), (B), (C), or (D)

13 of this paragraph; or

14 (F) has committed or omitted any act enu15 merated in subparagraph (D), (E), or (F) of

16 section 408(g)(2) of this title, has been con17 victed of any offense specified in subparagraph

18 (B) of such section or any other felony within

19 ten years of the date of the filing of an applica20 tion for membership or participation in, or to

21 become associated with a member of, such na22 tional derivatives association, is enjoined from

23 any action, conduct, or practice specified in

24 subparagraph (C) of such section, has willfully

25 made or caused to be made in any application
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1 for membership or participation in, or to be2 come associated with a member of, a national

3 derivatives association, report required to be

4 filed with a national derivatives association, or

5 proceeding before a national derivatives associa6 tion, any statement which was at the time, and

7 in the light of the circumstances under which it

8 was made, false or misleading with respect to

9 any material fact, or has omitted to state in

10 any such application, report, or proceeding any

11 material fact which is required to be stated

12 therein.

13 (8) APPROPRIATE REGULATORY AGENCY.—The

14 term ‘‘appropriate regulatory agency’’ includes the

15 Board, the Securities and Exchange Commission,

16 the Commodity Futures Trading Commission, the

17 Comptroller of the Currency, and the Federal De18 posit Insurance Corporation.

19 SEC. 404. AUTHORITY OF BOARD TO REQUIRE SELF-REGU20 LATORY ORGANIZATION.

21 (a) AUTHORITY TO REQUIRE SELF-REGULATION.—

22 The provisions of this title, requiring the establishment of

23 a self-regulatory system for the supervision of derivatives

24 dealers, shall be effective at such time (or at such different
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1 times for different provisions) as the Board shall specify

2 in a determination made pursuant to subsection (b).

3 (b) GROUNDS FOR DETERMINATION.—The Board

4 may provide for the taking effect of this title if the Board

5 determines that the establishment of a self-regulatory sys6 tem for the supervision of derivatives dealers is in the pub7 lic interest. In making such determination, the Board shall

8 take into account the following factors:

9 (1) Promotion of fair and orderly markets for

10 derivative financial instruments.

11 (2) Control of risks associated with derivative

12 financial instruments, including market risk, legal

13 risk, and systemic risk.

14 (3) Establishment of uniformity and com15 parability in regulatory principles and standards ap16 plied to derivatives dealers.

17 (4) Improvement in regulatory coordination

18 among those responsible for supervision of deriva19 tives dealers.

20 (5) Closure of gaps and loopholes in the super21 vision of derivatives dealers.

22 (6) Strengthened enforcement of rules and reg23 ulations applicable to derivatives dealers.

24 (7) Maintenance of high standards and quali25 fications for derivatives dealers.
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1 (8) Prevention of fraud and manipulation in the

2 derivatives markets and protection of investors in

3 derivative financial instruments.

4 (9) General improvement in the supervision and

5 functioning of the markets for derivative financial

6 instruments.

7 (c) PROCEDURES TO IMPOSE REQUIREMENTS.—The

8 Board shall not issue a determination under subsection

9 (b) except after notice and opportunity for comment.

10 SEC. 405. REGISTRATION OF SELF-REGULATORY ORGANI11 ZATION.

12 (a) REGISTRATION.—

13 (1) FILING.—An association of derivatives deal14 ers may be registered as a national derivatives asso15 ciation pursuant to subsection (b) under the terms

16 and conditions hereinafter provided in this section

17 by filing with the Board an application for registra18 tion in such form as the Board, by rule, may pre19 scribe containing the rules of the association and

20 such other information and documents as the Board,

21 by rule, may prescribe as necessary or appropriate

22 in the public interest or for the protection of inves23 tors.

24 (2) NOTICE OF FILING.—The Board shall, upon

25 the filing of an application for registration as a na-
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1 tional derivatives exchange, publish notice of such

2 filing and afford interested persons an opportunity

3 to submit written data, views, and arguments con4 cerning such application.

5 (3) GRANT OF REGISTRATION OR INITIATION

6 OF PROCEEDINGS.—Within ninety days of the date

7 of publication of such notice (or within such longer

8 period as to which the applicant consents), the

9 Board shall—

10 (A) by order grant such registration, or

11 (B) institute proceedings to determine

12 whether registration should be denied.

13 Such proceedings shall include notice of the grounds

14 for denial under consideration and opportunity for

15 hearing and shall be concluded within one hundred

16 eighty days of the date of a publication of notice of

17 the filing of the application for registration. At the

18 conclusion of such proceedings the Board, by order,

19 shall grant or deny such registration. The Board

20 may extend the time for conclusion of such proceed21 ings for up to ninety days if it finds good cause for

22 such extension and publishes its reasons for so find23 ing or for such longer period as to which the appli24 cant consents.
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1 (b) GROUNDS FOR DECISIONS ON APPLICATIONS FOR

2 REGISTRATION.—

3 (1) IN GENERAL.—The Board shall grant such

4 registration if it finds that the requirements of this

5 title and the rules and regulations thereunder with

6 respect to the applicant are satisfied. The Board

7 shall deny such registration if it does not make such

8 finding.

9 (2) CRITERIA FOR APPROVAL.—An association

10 of derivatives dealers shall not be registered as a na11 tional derivatives association unless the Board deter12 mines that:

13 (A) By reason of the number and geo14 graphical distribution of its members and the

15 scope of their transactions, such association will

16 be able to carry out the purposes of this sec17 tion.

18 (B) Such association is so organized and

19 has the capacity to be able to carry out the pur20 poses of this Act and to comply, and to enforce

21 compliance by its members and persons associ22 ated with its members, with the provisions of

23 this Act, and the rules and regulations there24 under, and the rules of the association.
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1 (C) Subject to the provisions of section

2 406, the rules of the association provide that

3 any derivatives dealer may become a member of

4 such association and any person may become

5 associated with a member thereof.

6 (D) The rules of the association assure a

7 fair representation of its members in the selec8 tion of its directors and administration of its

9 affairs.

10 (E) The rules of the association provide for

11 the equitable allocation of reasonable dues, fees,

12 and other charges among members and other

13 persons using any facility or system which the

14 association operates or controls.

15 (F) The rules of the association are de16 signed to prevent fraudulent and manipulative

17 acts and practices, to promote just and equi18 table principles of trade, to foster cooperation

19 and coordination with persons engaged in regu20 lating, clearing, settling, processing information

21 with respect to, and facilitating transactions in

22 derivatives, and, in general, to protect investors

23 and the public interest.

24 (G) The rules of the association provide

25 that its members and persons associated with
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1 its members shall be appropriately disciplined

2 for violation of any provision of this Act, the

3 rules or regulations thereunder, or the rules of

4 the association, by expulsion, suspension, limi5 tation of activities, functions, and operations,

6 fine, censure, being suspended or barred from

7 being associated with a member, or any other

8 fitting sanction.

9 (H) The rules of the association provide a

10 fair procedure for the disciplining of members

11 and persons associated with members, the de12 nial of membership to any person seeking mem13 bership therein, the barring of any person from

14 becoming associated with a member thereof,

15 and the prohibition or limitation by the associa16 tion of any person with respect to access to

17 services offered by the association or a member

18 thereof.

19 (I) The rules of the association do not im20 pose any burden on competition not necessary

21 or appropriate in furtherance of the purposes of

22 this Act.

23 (J) The rules of the association to promote

24 just and equitable principles of trade.
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1 (c) WITHDRAWAL FROM REGISTRATION.—A national

2 derivatives association may, upon such terms and condi3 tions as the Board, by rule, deems necessary or appro4 priate in the public interest or for the protection of inves5 tors, withdraw from registration by filing a written notice

6 of withdrawal with the Board. If the Board finds that any

7 national derivatives association is no longer in existence

8 or has ceased to do business in the capacity specified in

9 its application for registration, the Board, by order, shall

10 cancel its registration. Upon the withdrawal of a national

11 derivatives association from registration or the cancella12 tion, suspension, or revocation of the registration of a na13 tional derivatives association, the registration of any asso14 ciation affiliated therewith shall automatically terminate.

15 SEC. 406. REGISTRATION OF DERIVATIVES DEALERS WITH

16 ASSOCIATION.

17 (a) DENIAL OF MEMBERSHIP.—

18 (1) STATUTORY DISQUALIFICATIONS.—A na19 tional derivatives association may, and in cases in

20 which the Board, by order, directs as necessary or

21 appropriate in the public interest or for the protec22 tion of investors shall, deny membership to any de23 rivatives dealer, and bar from becoming associated

24 with a member any person, who is subject to a stat25 utory disqualification. A national derivatives associa-
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1 tion shall file notice with the Board not less than

2 thirty days prior to admitting any derivatives dealer

3 to membership or permitting any person to become

4 associated with a member, if the association knew,

5 or in the exercise of reasonable care should have

6 known, that such derivatives dealer or person was

7 subject to a statutory disqualification. The notice

8 shall be in such form and contain such information

9 as the Board, by rule, may prescribe as necessary or

10 appropriate in the public interest or for the protec11 tion of investors.

12 (2) ADDITIONAL DISQUALIFICATIONS.—A na13 tional derivatives association may deny membership

14 to, or condition the membership of, a derivatives

15 dealer if (A) such derivatives dealer does not meet

16 such standards of financial responsibility or oper17 ational capability or such derivatives dealer or any

18 natural person associated with such derivatives deal19 er does not meet such standards of training, experi20 ence, and competence as are prescribed by the rules

21 of the association or (B) such derivatives dealer or

22 person associated with such derivatives dealer has

23 engaged and there is a reasonable likelihood he will

24 again engage in acts or practices inconsistent with

25 just and equitable principles of trade. A national de-
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1 rivatives association may examine and verify the

2 qualifications of an applicant to become a member

3 and the natural persons associated with such an ap4 plicant in accordance with procedures established by

5 the rules of the association.

6 (3) ASSOCIATIONS BASED ON BUSINESS TYPE

7 PERMITTED.—A national derivatives association may

8 deny membership to a derivatives dealer not engaged

9 in a type of business in which the rules of the asso10 ciation require members to be engaged, except that

11 no national derivatives association may deny mem12 bership to a derivatives dealer by reason of the

13 amount of such type of business done by such de14 rivatives dealer or the other types of business in

15 which he is engaged.

16 (b) DENIAL OF ASSOCIATION.—

17 (1) ASSOCIATION WITH MEMBERS.—A national

18 derivatives association may bar a natural person

19 from becoming associated with a member or condi20 tion the association of a natural person with a mem21 ber if such natural person (A) does not meet such

22 standards of training, experience, and competence as

23 are prescribed by the rules of the association or (B)

24 has engaged and there is a reasonable likelihood he

25 will again engage in acts or practices inconsistent
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1 with just and equitable principles of trade. A na2 tional derivatives association may examine and verify

3 the qualifications of an applicant to become a person

4 associated with a member in accordance with proce5 dures established by the rules of the association and

6 require a natural person associated with a member,

7 or any class of such natural persons, to be registered

8 with the association in accordance with procedures

9 so established.

10 (2) INFORMATION AND RECORDS ACCESS.—A

11 national derivatives association may bar any person

12 from becoming associated with a member if such

13 person does not agree (A) to supply the association

14 with such information with respect to its relationship

15 and dealings with the member as may be specified

16 in the rules of the association and (B) to permit ex17 amination of its books and records to verify the ac18 curacy of any information so supplied.

19 SEC. 407. PROCEDURES FOR SELF-REGULATION OF MEM20 BERS.

21 (a) IN GENERAL.—In any proceeding by a national

22 derivatives association to determine whether a member or

23 person associated with a member should be disciplined

24 (other than a summary proceeding pursuant to subsection

25 (c) of this section) the association shall bring specific
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1 charges, notify such member or person of, and give him

2 an opportunity to defend against, such charges, and keep

3 a record. A determination by the association to impose a

4 disciplinary sanction shall be supported by a statement

5 setting forth—

6 (1) any act or practice in which such member

7 or person associated with a member has been found

8 to have engaged, or which such member or person

9 has been found to have omitted;

10 (2) the specific provision of this Act, the rules

11 or regulations thereunder, or the rules of the asso12 ciation which any such act or practice, or omission

13 to act, is deemed to violate; and

14 (3) the sanction imposed and the reason there15 for.

16 (b) PROCEDURES PRIOR TO SANCTION.—In any pro17 ceeding by a national derivatives association to determine

18 whether a person shall be denied membership, barred from

19 becoming associated with a member, or prohibited or lim20 ited with respect to access to services offered by the asso21 ciation or a member thereof (other than a summary pro22 ceeding pursuant to subsection (c) of this section), the as23 sociation shall notify such person of and give him an op24 portunity to be heard upon, the specific grounds for de25 nial, bar, or prohibition or limitation under consideration
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1 and keep a record. A determination by the association to

2 deny membership, bar a person from becoming associated

3 with a member, or prohibit or limit a person with respect

4 to access to services offered by the association or a mem5 ber thereof shall be supported by a statement setting forth

6 the specific grounds on which the denial, bar, or prohibi7 tion or limitation is based.

8 (c) SUMMARY SUSPENSIONS.—A national derivatives

9 association may summarily (1) suspend a member or per10 son associated with a member who has been and is ex11 pelled or suspended from any national derivatives associa12 tion or barred or suspended from being associated with

13 a member of any national derivatives association, (2) sus14 pend a member who is in such financial or operating dif15 ficulty that the association determines and so notifies the

16 Board that the member cannot be permitted to continue

17 to do business as a member with safety to investors, credi18 tors, other members, or the association, or (3) limit or

19 prohibit any person with respect to access to services of20 fered by the association if paragraph (1) or (2) of this

21 subsection is applicable to such person or, in the case of

22 a person who is not a member, if the association deter23 mines that such person does not meet the qualification re24 quirements or other prerequisites for such access and such

25 person cannot be permitted to continue to have such ac-
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1 cess with safety to investors, creditors, members, or the

2 association. Any person aggrieved by any such summary

3 action shall be promptly afforded an opportunity for a

4 hearing by the association in accordance with the provi5 sions of subsection (a) or (b) of this section. The Board,

6 by order, may stay any such summary action on its own

7 motion or upon application by any person aggrieved there8 by, if the Board determines summarily or after notice and

9 opportunity for hearing (which hearing may consist solely

10 of the submission of affidavits or presentation of oral ar11 guments) that such stay is consistent with the public inter12 est and the protection of investors.

13 SEC. 408. ENFORCEMENT.

14 (a) MEMBERSHIP REQUIRED TO ENGAGE IN DE15 RIVATIVES BUSINESS..—If the Board has made a deter16 mination under section 404, it shall be unlawful, after the

17 effective date of this title (as determined under such sec18 tion), for any derivatives dealer to effect any transaction

19 in, or induce or attempt to induce the purchase or sale

20 of, any derivative financial instrument, unless such deriva21 tives dealer is a member of a national derivatives associa22 tion registered pursuant to section 405 of this Act.

23 (b) CRIMINAL PENALTY FOR VIOLATION.—Any per24 son who willfully violates any provision of this title, or any

25 rule or regulation thereunder the violation of which is
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1 made unlawful or the observance of which is required

2 under the terms of this title, or any person who willfully

3 and knowingly makes, or causes to be made, any state4 ment in any application, report, or document required to

5 be filed under this title or any rule or regulation there6 under or by any self-regulatory organization in connection

7 with an application for membership or participation there8 in or to become associated with a member thereof, which

9 statement was false or misleading with respect to any ma10 terial fact, shall upon conviction be fined not more than

11 $1,000,000, or imprisoned not more than 10 years, or

12 both, except that when such person is a person other than

13 a natural person, a fine not exceeding $2,500,000 may

14 be imposed; but no person shall be subject to imprison15 ment under this section for the violation of any rule or

16 regulation if he proves that he had no knowledge of such

17 rule or regulation.

18 (c) OBLIGATION TO ENFORCE.—

19 (1) IN GENERAL.—Every national derivatives

20 association shall comply with the provisions of this

21 Act, the rules and regulations thereunder, and its

22 own rules, and (subject to paragraph (2) of this sub23 section, and the rules thereunder) absent reasonable

24 justification or excuse enforce compliance with such
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1 provisions by its members and persons associated

2 with its members.

3 (2) EXCEPTIONS.—The Board, by rule, consist4 ent with the public interest, the protection of inves5 tors, and the other purposes of this Act, may relieve

6 any national derivatives association of any respon7 sibility under this Act to enforce compliance with

8 any specified provision of this Act or the rules or

9 regulations thereunder by any member of such orga10 nization or person associated with such a member,

11 or any class of such members or persons associated

12 with a member.

13 (d) FILING AND APPROVAL OF RULES.—

14 (1) RULES AND CHANGES REQUIRED TO BE

15 FILED.—Each national derivatives association shall

16 file with the Board, in accordance with such rules as

17 the Board may prescribe, copies of any proposed

18 rule or any proposed change in, addition to, or dele19 tion from the rules of such national derivatives asso20 ciation (hereinafter in this subsection collectively re21 ferred to as a ‘‘proposed rule change’’) accompanied

22 by a concise general statement of the basis and pur23 pose of such proposed rule change. The Board shall,

24 upon the filing of any proposed rule change, publish

25 notice thereof together with the terms of substance
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1 of the proposed rule change or a description of the

2 subjects and issues involved. The Board shall give

3 interested persons an opportunity to submit written

4 data, views, and arguments concerning such pro5 posed rule change. No proposed rule change shall

6 take effect unless approved by the Board or other7 wise permitted in accordance with the provisions of

8 this subsection.

9 (2) APPROVAL OR INITIATION OF PROCEED10 INGS.—Within thirty-five days of the date of publi11 cation of notice of the filing of a proposed rule

12 change in accordance with paragraph (1) of this

13 subsection, or within such longer period as the

14 Board may designate up to ninety days of such date

15 if it finds such longer period to be appropriate and

16 publishes its reasons for so finding or as to which

17 the national derivatives association consents, the

18 Board shall—

19 (A) by order approve such proposed rule

20 change, or

21 (B) institute proceedings to determine

22 whether the proposed rule change should be dis23 approved.

24 (2) APPROVAL OR DISAPPROVAL.—Such pro25 ceedings shall include notice of the grounds for dis-
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1 approval under consideration and opportunity for

2 hearing and be concluded within one hundred eighty

3 days of the date of publication of notice of the filing

4 of the proposed rule change. At the conclusion of

5 such proceedings the Board, by order, shall approve

6 or disapprove such proposed rule change. The Board

7 may extend the time for conclusion of such proceed8 ings for up to sixty days if it finds good cause for

9 such extension and publishes its reasons for so find10 ing or for such longer period as to which the na11 tional derivatives association consents.

12 (3) GROUNDS FOR APPROVAL OR DIS13 APPROVAL.—The Board shall approve a proposed

14 rule change of a national derivatives association if it

15 finds that such proposed rule change is consistent

16 with the requirements of this Act and the rules and

17 regulations thereunder applicable to such organiza18 tion. The Board shall disapprove a proposed rule

19 change of a national derivatives association if it does

20 not make such finding. The Board shall not approve

21 any proposed rule change prior to the thirtieth day

22 after the date of publication of notice of the filing

23 thereof, unless the Board finds good cause for so

24 doing and publishes its reasons for so finding.
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1 (4) EXPEDITED EFFECTIVENESS.—(A) Not2 withstanding the provisions of paragraphs (2) and

3 (3) of this subsection, a proposed rule change may

4 take effect upon filing with the Board if designated

5 by the national derivatives association as (i) con6 stituting a stated policy, practice, or interpretation

7 with respect to the meaning, administration, or en8 forcement of an existing rule of the national deriva9 tives association, (ii) establishing or changing a due,

10 fee, or other charged imposed by the national deriva11 tives association, or (iii) concerned solely with the

12 administration of the national derivatives association

13 or other matters which the Board, by rule, consist14 ent with the public interest and the purposes of this

15 subsection, may specify as without the provisions of

16 such paragraph (2) or (3).

17 (B) Notwithstanding any other provision of this

18 subsection, a proposed rule change may be put into

19 effect summarily if it appears to the Board that

20 such action is necessary for the protection of inves21 tors, the maintenance of fair and orderly markets,

22 the safeguarding of securities or funds, or the pro23 tection against systemic risk. Any proposed rule

24 change so put into effect shall be filed promptly
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1 thereafter in accordance with the provisions of para2 graph (1) of this subsection.

3 (C) Any proposed rule change of a national de4 rivatives association which has taken effect pursuant

5 to subparagraph (A) or (B) of this paragraph may

6 be enforced by such organization to the extent it is

7 not inconsistent with the provisions of this Act, the

8 rules and regulations thereunder, and applicable

9 Federal and State law. At any time within sixty days

10 of the date of filing of such a proposed rule change

11 in accordance with the provisions of paragraph (1)

12 of this subsection, the Board summarily may abro13 gate the change in the rules of the national deriva14 tives association made thereby and require that the

15 proposed rule change be refiled in accordance with

16 the provisions of paragraph (1) of this subsection

17 and reviewed in accordance with the provisions of

18 paragraph (2) of this subsection, if it appears to the

19 Board that such action is necessary or appropriate

20 in the public interest, for the protection of investors,

21 or otherwise in furtherance of the purposes of this

22 Act. Board action pursuant to the preceding sen23 tence shall not affect the validity or force of the rule

24 change during the period it was in effect and shall

25 not be reviewable nor deemed to be ‘‘final agency ac-
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1 tion’’ for purposes of section 704 of title 5, United

2 States Code.

3 (e) AUTHORITY OF BOARD TO MODIFY ASSOCIATION

4 RULES.—The Board, by rule, may abrogate, add to, and

5 delete from (hereinafter in this subsection collectively re6 ferred to as ‘‘amend’’) the rules of a national derivatives

7 association as the Board deems necessary or appropriate

8 to insure the fair administration of the national derivatives

9 association, to conform its rules to requirements of this

10 Act and the rules and regulations thereunder applicable

11 to such organization, or otherwise in furtherance of the

12 purposes of this Act, in the following manner:

13 (1) The Board shall notify the national deriva14 tives association and publish notice of the proposed

15 rulemaking in the Federal Register. The notice shall

16 include the text of the proposed amendment to the

17 rules of the national derivatives association and a

18 statement of the Board’s reasons, including any per19 tinent facts, for commencing such proposed rule20 making.

21 (2) The Board shall give interested persons an

22 opportunity for the oral presentation of data, views,

23 and arguments, in addition to an opportunity to

24 make written submissions. A transcript shall be kept

25 of any oral presentation.
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1 (3) A rule adopted pursuant to this subsection

2 shall incorporate the text of the amendment to the

3 rules of the national derivatives association and a

4 statement of the Board’s basis for and purpose in so

5 amending such rules. This statement shall include

6 an identification of any facts on which the Board

7 considers its determination so to amend the rules of

8 the self-regulatory agency to be based, including the

9 reasons for the Board’s conclusions as to any of

10 such facts which were disputed in the rulemaking.

11 (4)(A) Except as provided in paragraphs (1)

12 through (3) of this subsection, rulemaking under

13 this subsection shall be in accordance with the pro14 cedures specified in section 553 of title 5, United

15 States Code, for rulemaking not on the record.

16 (B) Nothing in this subsection shall be con17 strued to impair or limit the Board’s power to make,

18 or to modify or alter the procedures the Board may

19 follow in making, rules and regulations pursuant to

20 any other authority under this Act.

21 (C) Any amendment to the rules of a national

22 derivatives association made by the Board pursuant

23 to this subsection shall be considered for all pur24 poses of this Act to be part of the rules of such na-
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1 tional derivatives association and shall not be consid2 ered to be a rule of the Board.

3 (f) REVIEW BY BOARD OF ASSOCIATION DISCIPLI4 NARY ACTIONS.—

5 (1) NOTICE.—If any national derivatives asso6 ciation imposes any final disciplinary sanction on

7 any member thereof or participant therein, denies

8 membership or participation to any applicant, or

9 prohibits or limits any person in respect to access to

10 services offered by such organization or member

11 thereof, or if any national derivatives association im12 poses any final disciplinary sanction on any person

13 associated with a member or bars any person from

14 becoming associated with a member, the national de15 rivatives association shall promptly file notice there16 of with the Board. The notice shall be in such form

17 and contain such information as the Board, by rule,

18 may prescribe as necessary or appropriate in fur19 therance of the purposes of this Act.

20 (2) AUTHORITY TO REVIEW.—Any action with

21 respect to which a national derivatives association is

22 required by paragraph (1) of this subsection to file

23 notice shall be subject to review by the Board on its

24 own motion, or upon application by any person ag25 grieved thereby filed within thirty days after the
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1 date such notice was filed with such Board and re2 ceived by such aggrieved person, or within such

3 longer period as such Board may determine. Appli4 cation to the Board for review, or the institution of

5 review by such Board on its own motion, shall not

6 operate as a stay of such action unless the Board

7 otherwise orders, summarily or after notice and op8 portunity for hearing on the question of a stay

9 (which hearing may consist solely of the submission

10 of affidavits or presentation of oral arguments). The

11 Board shall establish for appropriate cases an expe12 dited procedure for consideration and determination

13 of the question of a stay.

14 (3) DECISION AFTER REVIEW.—In any proceed15 ing to review a final disciplinary sanction imposed by

16 a national derivatives association on a member

17 thereof or participant therein or a person associated

18 with such a member, after notice and opportunity

19 for hearing (which hearing may consist solely of con20 sideration of the record before the national deriva21 tives association and opportunity for the presen22 tation of supporting reasons to affirm, modify, or set

23 aside the sanction)—

24 (A) if the Board finds that such member,

25 participant, or person associated with a member
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1 has engaged in such acts or practices, or has

2 omitted such acts, as the national derivatives

3 association has found him to have engaged in or

4 omitted, that such acts or practices, or omis5 sions to act, are in violation of such provisions

6 of this Act, the rules or regulations thereunder,

7 or the rules of the national derivatives associa8 tion, as have been specified in the determina9 tion of the national derivatives association, and

10 that such provisions are, and were applied in a

11 manner, consistent with the purposes of this

12 Act, the Board, by order, shall so declare and,

13 as appropriate, affirm the sanction imposed by

14 the national derivatives association, modify the

15 sanction in accordance with paragraph (2) of

16 this subsection, or remand to the national de17 rivatives association for further proceedings; or

18 (B) if the Board does not make any such

19 finding it shall, by order, set aside the sanction

20 imposed by the national derivatives association

21 and, if appropriate, remand to the national de22 rivatives association for further proceedings.

23 (4) AUTHORITY TO CANCEL OR REDUCE SANC24 TIONS.—If the Board for a member, participant, or

25 person associated with a member, having due regard
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1 for the public interest and the protection of inves2 tors, finds after a proceeding in accordance with this

3 subsection that a sanction imposed by a national de4 rivatives association upon such member, participant,

5 or person associated with a member imposes any

6 burden on competition not necessary or appropriate

7 in furtherance of the proposes of this Act or is ex8 cessive or oppressive, the Board may cancel, reduce,

9 or require the remission of such sanction.

10 (g) AUTHORITY OF BOARD TO SANCTION ASSOCIA11 TION.—

12 (1) IN GENERAL.—The Board is authorized, by

13 order, if in its opinion such action is necessary or

14 appropriate in the public interest, for the protection

15 of investors, or otherwise in furtherance of the pur16 poses of this Act to suspend for a period not exceed17 ing twelve months or revoke the registration of such

18 national derivatives association, or to censure or im19 pose limitations upon the activities, functions, and

20 operations of such national derivatives association, if

21 the Board finds, on the record after notice and op22 portunity for hearing, that such national derivatives

23 association has violated or is unable to comply with

24 any provision of this Act, the rules or regulations

25 thereunder, or its own rules or without reasonable
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1 justification or excuse has failed to enforce compli2 ance with any such provision by a member thereof

3 or a person associated with a member thereof.

4 (2) AUTHORITY TO SUSPEND OR EXPEL MEM5 BERS.—The Board is authorized, by order, if in its

6 opinion such action is necessary or appropriate in

7 the public interest, for the protection of investors, or

8 otherwise in furtherance of the purposes of this Act,

9 to suspend for a period not exceeding twelve months

10 or expel from such national derivatives association

11 any member thereof or participant therein, if the

12 Board finds, on the record after notice and oppor13 tunity for hearing, that such suspension or expulsion

14 is in the public interest and that such member,

15 whether prior or subsequent to becoming such, or

16 any person associated with such broker or dealer,

17 whether prior or subsequent to becoming so associ18 ated—

19 (A) has willfully made or caused to be

20 made in any application for registration or re21 port required to be filed with the Board, or in

22 any proceeding before the Board with respect to

23 registration, any statement which was at the

24 time and in the light of the circumstances

25 under which it was made false or misleading
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1 with respect to any material fact, or has omit2 ted to state in any such application or report

3 any material fact which is required to be stated

4 therein;

5 (B) has been convicted within ten years

6 preceding the filing of any application for reg7 istration or at any time thereafter of any felony

8 or misdemeanor or of a substantially equivalent

9 crime by a foreign court of competent jurisdic10 tion which the Board finds—

11 (i) involves the purchase or sale of

12 any derivative financial instrument, the

13 taking of a false oath, the making of a

14 false report, bribery, perjury, burglary, any

15 substantially equivalent activity however

16 denominated by the laws of the relevant

17 foreign government, or conspiracy to com18 mit any such offense;

19 (ii) arises out of the conduct of the

20 business of a derivatives dealer, broker,

21 dealer, municipal securities dealer, govern22 ment securities broker, government securi23 ties dealer, investment adviser, bank, in24 surance company, fiduciary, transfer agent,

25 foreign person performing a function sub-
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1 stantially equivalent to any of the above, or

2 entity or person required to be registered

3 under the Commodity Exchange Act (7

4 U.S.C. 1 et seq.) or any substantially

5 equivalent foreign statute or regulation;

6 (iii) involves the larceny, theft, rob7 bery, extortion, forgery, counterfeiting,

8 fraudulent concealment, embezzlement,

9 fraudulent conversion, or misappropriation

10 of funds, securities, or derivative financial

11 instruments, or substantially equivalent ac12 tivity however denominated by the laws of

13 the relevant foreign government; or

14 (iv) involves the violation of section

15 152, 1341, 1342, or 1343 or chapter 25 or

16 47 of title 18, United States Code, or a

17 violation of a substantially equivalent for18 eign statute;

19 (C) is permanently or temporarily enjoined

20 by order, judgment, or decree of any court of

21 competent jurisdiction from acting as an deriva22 tives dealer, investment adviser, underwriter,

23 broker, dealer, municipal securities dealer, gov24 ernment securities broker, government securi25 ties dealer, transfer agent, foreign person per-
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1 forming a function substantially equivalent to

2 any of the above, or entity or person required

3 to be registered under the Commodity Ex4 change Act or any substantially equivalent for5 eign statute or regulation, or as an affiliated

6 person or employee of any investment company,

7 bank, insurance company, foreign entity sub8 stantially equivalent to any of the above, or en9 tity or person required to be registered under

10 the Commodity Exchange Act or any substan11 tially equivalent foreign statute or regulation, or

12 from engaging in or continuing any conduct or

13 practice in connection with any such activity, or

14 in connection with the purchase or sale of any

15 derivative financial instrument or security;

16 (D) has willfully violated any provision of

17 any Federal banking, securities, or commodities

18 laws, this title, the rules or regulations under

19 any of such statutes, or is unable to comply

20 with any such provision;

21 (E) has willfully aided, abetted, counseled,

22 commanded, induced, or procured the violation

23 by any other person of any provision of any

24 Federal banking, securities, or commodities

25 laws, this title, the rules or regulations under
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1 any of such statutes, or has failed reasonably to

2 supervise, with a view to preventing violations

3 of the provisions of such statutes, rules, and

4 regulations, another person who commits such a

5 violation, if such other person is subject to his

6 supervision. For the purposes of this subpara7 graph (E) no person shall be deemed to have

8 failed reasonably to supervise any other person,

9 if—

10 (i) there have been established proce11 dures, and a system for applying such pro12 cedures, which would reasonably be ex13 pected to prevent and detect, insofar as

14 practicable, any such violation by such

15 other person, and

16 (ii) such person has reasonably dis17 charged the duties and obligations incum18 bent upon him by reason of such proce19 dures and system without reasonable cause

20 to believe that such procedures and system

21 were not being complied with; or

22 (F) has been found by a foreign financial

23 regulatory authority to have—

24 (i) made or caused to be made in any

25 application for registration or report re-
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1 quired to be filed with a foreign financial

2 regulatory authority, or in any proceeding

3 before a foreign financial regulatory au4 thority with respect to registration, any

5 statement that was at the time and in the

6 light of the circumstances under which it

7 was made false or misleading with respect

8 to any material fact, or has omitted to

9 state in any application or report to the

10 foreign financial regulatory authority any

11 material fact that is required to be stated

12 therein;

13 (ii) violated any foreign statute or

14 regulation regarding transactions in securi15 ties, or contracts of sale of a commodity

16 for future delivery, traded on or subject to

17 the rules of a contract market or any

18 board of trade; or

19 (iii) aided, abetted, counseled, com20 manded, induced, or procured the violation

21 by any person of any provision of any stat22 utory provisions enacted by a foreign gov23 ernment, or rules or regulations there24 under, empowering a foreign financial reg25 ulatory authority regarding transactions in
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1 securities, or contracts of sale of a com2 modity for future delivery, traded on or

3 subject to the rules of a contract market or

4 any board of trade, or has been found, by

5 a foreign financial regulatory authority, to

6 have failed reasonably to supervise, with a

7 view to preventing violations of such statu8 tory provisions, rules, and regulations, an9 other person who commits such a violation,

10 if such other person is subject to his super11 vision.

12 (3) AUTHORITY TO REMOVE OFFICERS.—The

13 Board is authorized, by order, if in its opinion such

14 action is necessary or appropriate in the public in15 terest, for the protection of investors, or otherwise in

16 furtherance of the purposes of this Act, to remove

17 from office or censure any officer or director of a

18 national derivatives association, if the Board finds,

19 on the record after notice and opportunity for hear20 ing, that such officer or director has willfully vio21 lated any provision of this Act, the rules or regula22 tions thereunder, or the rules of such national de23 rivatives association, willfully abused his or her au24 thority, or without reasonable justification or excuse

25 has failed to enforce compliance with any such provi-
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1 sion by any member or person associated with a

2 member.

3 SEC. 409. GENERAL AUTHORITY.

4 In carrying out this title, the Board is authorized—

5 (1) to conduct investigations and issue adminis6 trative subpoenas;

7 (2) to seek and obtain injunctions of violations

8 of this title and the rules and regulations there9 under;

10 (3) to issue and enforce cease and desist orders

11 with respect to such violations;

12 (4) to impose and collect civil penalties with re13 spect to such violations; and

14 (5) to issue such rules and regulations and take

15 such other actions as may be necessary and appro16 priate in furtherance of the purposes of this title.

17 TITLE V—MISCELLANEOUS

18 SEC. 501. SAVINGS PROVISION.

19 The provisions of this Act shall be in addition to and

20 not in derogation of any existing authority of a Federal

21 financial institution regulatory agency to supervise or reg22 ulate derivatives activities provided under any other appli23 cable law.

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