66–506

106TH CONGRESS REPT. 106–711 " ! HOUSE OF REPRESENTATIVES 2d Session Part 2

COMMODITY FUTURES MODERNIZATION AND FINANCIAL

CONTRACT NETTING IMPROVEMENT ACT OF 2000

SEPTEMBER 6, 2000.—Ordered to be printed

Mr. LEACH, from the Committee on Banking and Financial

Services, submitted the following

R E P O R T

together with

ADDITIONAL VIEWS

[To accompany H.R. 4541]

[Including cost estimate of the Congressional Budget Office]

The Committee on Banking and Financial Services, to whom was

referred the bill (H.R. 4541) to reauthorize and amend the Commodity Exchange Act to promote legal certainty, enhance competition, and reduce systemic risk in markets for futures and over-thecounter derivatives, and for other purposes, having considered the

same, report favorably thereon with amendments and recommend

that the bill as amended do pass.

The amendments are as follows:

Strike all after the enacting clause and insert the following:

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

(a) SHORT TITLE.—This Act may be cited as the ‘‘Commodity Futures Modernization and Financial Contract Netting Improvement Act of 2000’’.

(b) TABLE OF CONTENTS.—The table of contents of this Act is as follows:

Sec. 1. Short title; table of contents.

TITLE I—COMMODITY FUTURES MODERNIZATION

Sec. 101. Short title.

Sec. 102. Purposes.

Sec. 103. Definitions.

Sec. 104. Agreements, contracts, and transactions in foreign currency, government securities, and certain other

commodities.

Sec. 105. Legal certainty for excluded derivative transactions.

Sec. 106. Excluded electronic trading facilities.

Sec. 107. Conformity with the Gramm-Leach-Bliley Act; hybrid instruments.

Sec. 108. Futures on securities.

Sec. 109. Transactions in exempt commodities.

Sec. 110. Swap transactions.

Sec. 111. Application of the Commodity Exchange Act.

Sec. 112. Protection of the public interest.

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Sec. 113. Prohibited transactions.

Sec. 114. Designation of boards of trade as contract markets.

Sec. 115. Derivatives transaction execution facilities.

Sec. 116. Derivatives clearing.

Sec. 117. Common provisions applicable to registered entities.

Sec. 118. Exempt boards of trade.

Sec. 119. Suspension or revocation of designation as contract market.

Sec. 120. Authorization of appropriations.

Sec. 121. Preemption.

Sec. 122. Predispute resolution agreements for institutional customers.

Sec. 123. Consideration of costs and benefits and antitrust laws.

Sec. 124. Contract enforcement.

Sec. 125. Special procedures to encourage and facilitate bona fide hedging by agricultural producers.

Sec. 126. Rule of construction.

Sec. 127. Authority of agencies to construe the term ‘‘contract market’’.

Sec. 128. Technical and conforming amendments.

Sec. 129. Report to Congress.

Sec. 130. Effective date.

Sec. 131. International activities of the Commodity Futures Trading Commission.

Sec. 132. Antifraud provisions.

Sec. 133. Retail swap customer protections.

TITLE II—FINANCIAL CONTRACT NETTING IMPROVEMENT

Sec. 201. Short title.

Sec. 202. Treatment of certain agreements by conservators or receivers of insured depository institutions.

Sec. 203. Authority of the Corporation with respect to failed and failing institutions.

Sec. 204. Amendments relating to transfers of qualified financial contracts.

Sec. 205. Amendments relating to disaffirmance or repudiation of qualified financial contracts.

Sec. 206. Clarifying amendment relating to master agreements.

Sec. 207. Federal Deposit Insurance Corporation Improvement Act of 1991.

Sec. 208. Bankruptcy code amendments.

Sec. 209. Recordkeeping requirements.

Sec. 210. Exemptions from contemporaneous execution requirement.

Sec. 211. Damage measure.

Sec. 212. SIPC stay.

Sec. 213. Asset-backed securitizations.

Sec. 214. Application of amendments.

TITLE I—COMMODITY FUTURES

MODERNIZATION

SEC. 101. SHORT TITLE.

This title may be cited as the ‘‘Commodity Futures Modernization Act of 2000’’.

SEC. 102. PURPOSES.

The purposes of this title are—

(1) to reauthorize the appropriation for the Commodity Futures Trading Commission;

(2) to streamline and eliminate unnecessary regulation for the commodity futures exchanges and other entities regulated under the Commodity Exchange

Act;

(3) to transform the role of the Commodity Futures Trading Commission to

oversight of the futures markets;

(4) to provide a statutory and regulatory framework for allowing the trading

of futures on securities;

(5) to provide the Commission jurisdiction over certain retail foreign exchange

transactions and bucket shops that may not be otherwise regulated;

(6) to promote innovation for futures and derivatives and to reduce systemic

risk by enhancing legal certainty in the markets for certain futures and derivatives transactions;

(7) to reduce systemic risk and provide greater stability to markets during

times of market disorder by allowing the clearing of transactions in over-thecounter derivatives through appropriately regulated clearing organizations; and

(8) to enhance the competitive position of United States financial institutions

and financial markets.

SEC. 103. DEFINITIONS.

Section 1a of the Commodity Exchange Act (7 U.S.C. 1a) is amended—

(1) by redesignating—

(A) paragraphs (1) through (7) as paragraphs (2) through (8), respectively;

(B) paragraphs (8) through (12) as paragraphs (16) through (20), respectively;

(C) paragraphs (13) through (15) as paragraphs (22) through (24), respectively; and

(D) paragraph (16) as paragraph (28);

(2) by inserting before paragraph (2) (as so redesignated by paragraph (1) of

this section) the following new paragraph:

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‘‘(1) BANKING PRODUCT.—

‘‘(A) IN GENERAL.—The term ‘banking product’ means any agreement,

contract, or transaction that is an identified banking product (as defined in

section 206(a) of the Gramm-Leach-Bliley Act).

‘‘(B) EXCLUSION.—The term ‘banking product’ does not include a contract

for the sale of a commodity for future delivery traded on a contract market

designated under section 5 of this Act or an agreement, contract, or transaction traded on a derivatives transaction execution facility registered

under section 5a.’’;

(3) by inserting after paragraph (8) (as so redesignated by paragraph (1) of

this section) the following new paragraphs:

‘‘(9) DERIVATIVES CLEARING ORGANIZATION.—

‘‘(A) IN GENERAL.—The term ‘derivatives clearing organization’ means a

clearinghouse, clearing association, clearing corporation, or similar entity,

facility, system, or organization that, with respect to a derivative agreement, contract, or transaction—

‘‘(i) enables each party to the derivative agreement, contract, or

transaction to substitute, through novation or otherwise, the credit of

the derivatives clearing organization for the credit of the parties;

‘‘(ii) arranges or provides, on a multilateral basis, for the settlement

or netting of obligations resulting from such agreements, contracts, or

transactions executed by parties in the derivatives clearing organization; or

‘‘(iii) otherwise provides clearing services or arrangements that mutualize or transfer among parties in the derivatives clearing organization

the credit risk arising from such agreements, contracts, or transactions

executed by the parties.

‘‘(B) EXCLUSIONS.—The term ‘derivatives clearing organization’ does not

include an entity, facility, system, or organization solely because it arranges

or provides for—

‘‘(i) settlement, netting, or novation of obligations resulting from

agreements, contracts, or transactions, on a bilateral basis and without

a centralized counterparty;

‘‘(ii) settlement or netting of cash payments through an interbank

payment system; or

‘‘(iii) settlement, netting, or novation of obligations resulting from a

sale of a commodity in a transaction in the spot market for the commodity.

‘‘(10) ELECTRONIC TRADING FACILITY.—The term ‘electronic trading facility’

means a trading facility that—

‘‘(A) operates by means of an electronic network; and

‘‘(B) maintains a real-time audit trail of bids, offers, and the matching of

orders or the execution of transactions.

‘‘(11) ELIGIBLE COMMERCIAL PARTICIPANT.—The term ‘eligible commercial participant’ means a party or entity described in paragraph (11)(A)(i), (ii), (v), or

(vii) or paragraph (11)(C), who, in connection with its business—

‘‘(A) has a demonstrable capacity or ability, directly or through separate

contractual arrangements, to make or take delivery of the underlying physical commodity;

‘‘(B) incurs risks, in addition to price risk, related to the commodity; or

‘‘(C) is a dealer that regularly provides hedging, risk management, or

market-making services to the foregoing entities.

‘‘(12) ELIGIBLE CONTRACT PARTICIPANT.—The term ‘eligible contract participant’ means—

‘‘(A) acting for its own account—

‘‘(i) a financial institution;

‘‘(ii) an insurance company regulated by a State (including a subsidiary or affiliate of such an insurance company);

‘‘(iii) an investment company subject to regulation under the Investment Company Act of 1940 (15 U.S.C. 80a–1 et seq.) or a foreign person

performing a similar role or function subject as such to foreign regulation (regardless of whether each investor in the investment company or

the foreign person is itself an eligible contract participant);

‘‘(iv) a commodity pool that— ‘‘(I) has total assets exceeding $5,000,000; and

‘‘(II) is formed and operated by a person subject to regulation

under this Act or a foreign person performing a similar role or

function subject as such to foreign regulation (regardless of whethVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00003 Fmt 6659 Sfmt 6621 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
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er each investor in the commodity pool or the foreign person is

itself an eligible contract participant);

‘‘(v) a corporation, partnership, proprietorship, organization, trust, or

other entity— ‘‘(I) that has total assets exceeding $10,000,000;

‘‘(II) the obligations of which under an agreement, contract, or

transaction are guaranteed or otherwise supported by a letter of

credit or keepwell, support, or other agreement by an entity described in subclause (I), in clause (i), (ii), (iii), (iv), or (vii), or in

subparagraph (C); or

‘‘(III) that—

‘‘(aa) has a net worth exceeding $1,000,000; and

‘‘(bb) enters into an agreement, contract, or transaction in

connection with the conduct of the entity’s business or to manage the risk associated with an asset or liability owned or incurred or reasonably likely to be owned or incurred by the entity in the conduct of the entity’s business;

‘‘(vi) an employee benefit plan subject to the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1001 et seq.) or a foreign person

performing a similar role or function subject as such to foreign

regulation—

‘‘(I) that has total assets exceeding $5,000,000; or

‘‘(II) the investment decisions of which are made by—

‘‘(aa) an investment advisor or commodity trading advisor

subject to regulation under the Investment Advisers Act of

1940 (15 U.S.C. 80b–1 et seq.) or this Act;

‘‘(bb) a foreign person performing a similar role or function

subject as such to foreign regulation;

‘‘(cc) a financial institution; or

‘‘(dd) an insurance company regulated by a State (including

a subsidiary or affiliate of such an insurance company);

‘‘(vii)(I) a governmental entity (including the United States, a State,

or a foreign government) or political subdivision of a governmental entity;

‘‘(II) a multinational or supranational government entity; or

‘‘(III) an instrumentality, agency, or department of an entity described in subclause (I) or (II);

‘‘(viii) a broker or dealer subject to regulation under the Securities

Exchange Act of 1934 (15 U.S.C. 78a et seq.) or a foreign person performing a similar role or function subject as such to foreign regulation,

except that, if the broker or dealer or foreign person is a natural person

or proprietorship, the broker or dealer or foreign person shall not be

considered to be an eligible contract participant unless the broker or

dealer or foreign person also meets the requirements of clause (v) or

(xi);

‘‘(ix) a futures commission merchant subject to regulation under this

Act or a foreign person performing a similar role or function subject as

such to foreign regulation, except that, if the futures commission merchant or foreign person is a natural person or proprietorship, the futures commission merchant or foreign person shall not be considered to

be an eligible contract participant unless the futures commission merchant or foreign person also meets the requirements of clause (v) or

(xi);

‘‘(x) a floor broker or floor trader subject to regulation under this Act

in connection with any transaction that takes place on or through the

facilities of a registered entity or an exempt board of trade, or any affiliate thereof, on which such person regularly trades; or

‘‘(xi) an individual who has total assets in an amount in excess of—

‘‘(I) $10,000,000; or

‘‘(II) $5,000,000 and who enters into the agreement, contract, or

transaction in order to manage the risk associated with an asset

owned or liability incurred, or reasonably likely to be owned or incurred, by such individual with total assets exceeding $10,000,000;

‘‘(B)(i) a person described in any of clauses (i) through (x) of subparagraph (A) or in subparagraph (C), acting as broker or performing an equivalent agency function on behalf of another person described in subparagraph

(A) or (C);

‘‘(ii) an investment adviser subject to regulation under the Investment

Advisors Act of 1940, a commodity trading advisor subject to regulation

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under this Act, a foreign person performing a similar role or function subject as such to foreign regulation, or a person described in any of clauses

(i) through (x) of subparagraph (A) or in subparagraph (C), in any such case

acting as investment manager or fiduciary (but excluding a person acting

as broker or performing an equivalent agency function) for another person

described in subparagraph (A) or (C) and who is authorized by such person

to commit such person to the transaction; or

‘‘(iii) a commodity trading advisor subject to regulation under this Act,

having assets under management of not less than $25,000,000 and acting

as investment manager or fiduciary for another person and authorized by

such person to commit such person to the transaction; or

‘‘(C) any other person that the Commission determines to be eligible in

light of the financial or other qualifications of the person.

‘‘(13) EXCLUSION-ELIGIBLE COMMODITY.—

‘‘(A) IN GENERAL.—The term ‘exclusion-eligible commodity’ means—

‘‘(i) an interest rate, exchange rate, currency, security, security index,

credit risk or measure, debt or equity instrument, index or measure of

inflation, or other macroeconomic index or measure;

‘‘(ii) any other rate, differential, index, or measure of economic or

commercial risk, return, or value that is—

‘‘(I) not based in substantial part on the value of a narrow group

of commodities not described in clause (i); or

‘‘(II) based solely on 1 or more commodities that have no cash

market;

‘‘(iii) any economic or commercial index based on prices, rates, values,

or levels that are not within the control of any party to the relevant

contract, agreement, or transaction; or

‘‘(iv) an occurrence, extent of an occurrence, or contingency (other

than a change in the price, rate, value, or level of a commodity not described in clause (i)) that is—

‘‘(I) beyond the control of the parties to the relevant contract,

agreement, or transaction; and

‘‘(II) associated with a financial, commercial, or economic consequence.

‘‘(B) REFERENCE TO EXCLUDED COMMODITY.—Any reference in this Act to

the term ‘excluded commodity’ shall be deemed to be a reference to ‘exclusion-eligible commodity’.

‘‘(14) EXEMPT COMMODITY.—The term ‘exempt commodity’ means a commodity

that is not an excluded commodity or an agricultural commodity.

‘‘(15) FINANCIAL INSTITUTION.—The term ‘financial institution’ means—

‘‘(A) a corporation operating under the fifth undesignated paragraph of

section 25 of the Federal Reserve Act (12 U.S.C. 603), commonly known as

‘an agreement corporation’;

‘‘(B) a corporation organized under section 25A of the Federal Reserve Act

(12 U.S.C. 611 et seq.), commonly known as an ‘Edge Act corporation’;

‘‘(C) an institution that is regulated by the Farm Credit Administration;

‘‘(D) a Federal credit union or State credit union (as defined in section

101 of the Federal Credit Union Act (12 U.S.C. 1752));

‘‘(E) a depository institution (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813));

‘‘(F) a foreign bank or a branch or agency of a foreign bank (each as defined in section 1(b) of the International Banking Act of 1978 (12 U.S.C.

3101(b)));

‘‘(G) any financial holding company (as defined in section 2 of the Bank

Holding Company Act of 1956);

‘‘(H) a trust company; or

‘‘(I) a similarly regulated subsidiary or affiliate of an entity described in

any of subparagraphs (A) through (H).’’;

(3) by inserting after paragraph (20) (as so redesignated by paragraph (1)) the

following new paragraph:

‘‘(21) HYBRID INSTRUMENT.—

‘‘(A) IN GENERAL.—The term ‘hybrid instrument’ means a deposit instrument offered by a financial institution, or a security, having 1 or more payments indexed to the value, level, or rate of 1 or more commodities.

‘‘(B) DEPOSIT INSTRUMENT DEFINED.—The term ‘deposit instrument’

means an instrument representing an interest described in paragraph (1),

(2), (3), (4), or (5) of section 3(l) of the Federal Deposit Insurance Act, other

than in subparagraph (A), (B), or (C) at the end of paragraph (5).’’;

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(4) by inserting after paragraph (24) (as so redesignated by paragraph (1)) the

following new paragraphs:

‘‘(25) NONEXEMPT SECURITY.—The term ‘nonexempt security’ means a security

that is not an exempted security under section 3 of the Securities Act of 1933

or section 3(a)(12) of the Securities Exchange Act of 1934 (other than any municipal security, as defined in section 3(a)(29) of the Securities Exchange Act of

1934).

‘‘(26) OPTION.—The term ‘option’ means an agreement, contract, or transaction that is of the character of, or is commonly known to the trade as, an ‘option’, ‘privilege’, ‘indemnity’, ‘bid’, ‘offer’, ‘put’, ‘call’, ‘advance guaranty’, or ‘decline guaranty’.

‘‘(27) ORGANIZED EXCHANGE.—The term ‘organized exchange’ means a trading

facility that—

‘‘(A) permits trading by persons other than—

‘‘(i) eligible contract participants trading on a principal-to-principal

basis; or

‘‘(ii) eligible contract participants described in subclause (I), (II), (III),

(IV), (V) or (VI) of section 2(c)(2)(B), acting as a broker or performing

an equivalent agency function on behalf of eligible contract participants; or

‘‘(B) has adopted (directly or through another nongovernmental entity)

rules that—

‘‘(i) govern the conduct of participants, other than rules that govern

the submission of orders or execution of transactions on the trading facility; or

‘‘(ii) include disciplinary sanctions other than the exclusion of participants from trading.’’; and

(5) by adding at the end the following new paragraphs:

‘‘(29) REGISTERED ENTITY.—The term ‘registered entity’ means—

‘‘(A) a board of trade designated as a contract market under section 5;

‘‘(B) a derivatives transaction execution facility registered under section

5a; or

‘‘(C) a derivatives clearing organization registered under section 5b.

‘‘(30) SECURITY.—The term ‘security’ has the meaning given the term in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) as in effect

on date of the enactment of this paragraph.

‘‘(31) TRADING FACILITY.—

‘‘(A) IN GENERAL.—The term ‘trading facility’ means a person or group of

persons that constitutes, maintains, or provides a physical or electronic facility or system in which multiple participants have the ability to execute

or trade agreements, contracts, or transactions by accepting bids and offers

made by other participants that are open to multiple participants in the facility or system.

‘‘(B) EXCLUSIONS.—The term ‘trading facility’ does not include—

‘‘(i) a person or group of persons solely because the person or group

of persons constitutes, maintains, or provides an electronic facility or

system that enables participants to negotiate the terms of and enter

into bilateral transactions as a result of communications exchanged by

the parties and not from interaction of multiple orders within a predetermined, nondiscretionary automated trade matching algorithm;

‘‘(ii) a government securities dealer or government securities broker,

to the extent that the dealer or broker executes or trades agreements,

contracts, or transactions in government securities, or assists persons

in communicating about, negotiating, entering into, executing, or trading an agreement, contract, or transaction in government securities (as

the terms ‘government securities dealer’, ‘government securities broker’,

and ‘government securities’ are defined in section 3(a) of the Securities

Exchange Act of 1934 (15 U.S.C. 78c(a)));

‘‘(iii) facilities on which bids and offers, and acceptances of bids and

offers effected on the facility, are not binding; or

‘‘(iv) a person or group of persons solely because the person or group

of persons constitutes, maintains, or provides an electronic facility or

system that—

‘‘(I) enables participants to enter into bilateral transactions with

other participants; and

‘‘(II) incorporates credit screens or filters that prevent any participant from executing a transaction with another participant unless

both participants have approved the extension of credit to the

other.’’.

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SEC. 104. AGREEMENTS, CONTRACTS, AND TRANSACTIONS IN FOREIGN CURRENCY, GOVERNMENT SECURITIES, AND CERTAIN OTHER COMMODITIES.

Section 2 of the Commodity Exchange Act (7 U.S.C. 2, 2a, 3, 4, 4a) is amended

by adding at the end the following:

‘‘(c) AGREEMENTS, CONTRACTS, AND TRANSACTIONS IN FOREIGN CURRENCY, GOV- ERNMENT SECURITIES, AND CERTAIN OTHER COMMODITIES.— ‘‘(1) IN GENERAL.—Except as provided in paragraph (2), nothing in this Act

(other than section 5b or 12(e)(2)(B)) governs or applies to an agreement, contract, or transaction in—

‘‘(A) foreign currency;

‘‘(B) government securities;

‘‘(C) security warrants;

‘‘(D) security rights;

‘‘(E) resales of installment loan contracts;

‘‘(F) repurchase transactions in an excluded commodity; or

‘‘(G) mortgages or mortgage purchase commitments.

‘‘(2) COMMISSION JURISDICTION.— ‘‘(A) AGREEMENTS, CONTRACTS, AND TRANSACTIONS THAT ARE FUTURES

TRADED ON AN ORGANIZED EXCHANGE.—This Act applies to, and the Commission shall have jurisdiction over, an agreement, contract, or transaction

described in paragraph (1) that is—

‘‘(i) a contract of sale of a commodity for future delivery (or an option

thereon), or an option on a commodity (other than foreign currency or

a security), that is executed or traded on an organized exchange; or

‘‘(ii) an option on foreign currency and is executed or traded on an

organized exchange that is not a national securities exchange.

‘‘(B) AGREEMENTS, CONTRACTS, AND TRANSACTIONS IN RETAIL FOREIGN

CURRENCY.—This Act applies to, and the Commission shall have jurisdiction

over, an agreement, contract, or transaction in foreign currency that—

‘‘(i) is a contract of sale for future delivery (or an option on such a

contract) or an option; and

‘‘(ii) is offered to, or entered into with, a person that is not an eligible

contract participant, unless the counterparty, or the person offering to

be the counterparty, of the person is—

‘‘(I) a financial institution;

‘‘(II) a broker or dealer registered under section 15(b) or 15C of

the Securities Exchange Act of 1934 (15 U.S.C. 78o(b), 78o–5) or a

futures commission merchant registered under this Act;

‘‘(III) an associated person of a broker or dealer registered under

section 15(b) or 15C of the Securities Exchange Act of 1934 (15

U.S.C. 78o(b), 78o–5), or an affiliated person of a futures commission merchant registered under this Act, concerning the financial

or securities activities of which the registered person makes and

keeps records under section 15C(b) or 17(h) of the Securities Exchange Act of 1934 (15 U.S.C. 78o–5(b), 78q(h)) or section

4f(c)(2)(B) of this Act;

‘‘(IV) an insurance company that is subject to State regulation

(including a subsidiary or affiliate of such an insurance company);

‘‘(V) a financial holding company (as defined in section 2 of the

Bank Holding Company Act of 1956); or

‘‘(VI) an investment bank holding company (as defined in section

17(i) of the Securities Exchange Act of 1934).’’.

SEC. 105. LEGAL CERTAINTY FOR EXCLUDED DERIVATIVE TRANSACTIONS.

Section 2 of the Commodity Exchange Act (7 U.S.C. 2, 2a, 3, 4, 4a) (as amended

by section 104) is amended by adding at the end the following:

‘‘(d) EXCLUDED DERIVATIVE TRANSACTIONS.— ‘‘(1) IN GENERAL.—Nothing in this Act (other than section 5b or 12(e)(2)(B))

governs or applies to an agreement, contract, or transaction in an excluded commodity if—

‘‘(A) the agreement, contract, or transaction is entered into only between

persons that are eligible contract participants at the time at which the persons enter into the agreement, contract, or transaction; and

‘‘(B) the agreement, contract, or transaction is not executed or traded on

a trading facility.

‘‘(2) ELECTRONIC TRADING FACILITY EXCLUSION.—Nothing in this Act (other

than section 5a, 5b, or 12(e)(2)(B)) governs or applies to an agreement, contract,

or transaction in an excluded commodity if—

‘‘(A) the agreement, contract, or transaction is—

‘‘(i) entered into—

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‘‘(I) on a principal-to-principal basis between parties trading for

their own accounts or as described in section 1a(12)(B)(ii) of this

Act; and

‘‘(II) only between eligible contract participants (as defined in

subparagraphs (A), (B)(ii), and (C) section 1a(12)) at the time at

which the persons enter into the agreement, contract, or transaction; or

‘‘(ii) entered into only between eligible contract participants described

in subclause (I), (II), (III), (IV), (V), or (VI) of section 2(c)(2)(B)(ii) acting

as a broker or performing a similar agency function on behalf of persons that are eligible contract participants at the time at which the

persons enter into the agreement, contract, or transaction; and

‘‘(B) the agreement, contract, or transaction is executed or traded on an

electronic trading facility.’’.

SEC. 106. EXCLUDED ELECTRONIC TRADING FACILITIES.

Section 2 of the Commodity Exchange Act (7 U.S.C. 2, 2a, 3, 4, 4a) (as amended

by section 105) is amended by adding at the end the following:

‘‘(e) EXCLUDED ELECTRONIC TRADING FACILITIES.—

‘‘(1) IN GENERAL.—Nothing in this Act (other than section 12(e)(2)(B)) governs

or is applicable to an electronic trading facility that limits transactions authorized to be conducted on its facilities to those satisfying the requirements of sections 2(d)(2) and 2(h)(3)(B) of this Act.

‘‘(2) EFFECT ON AUTHORITY TO ESTABLISH AND OPERATE.—Nothing in this Act

shall prohibit a board of trade designated by the Commission as a contract market or derivatives transaction execution facility, or an exempt board of trade,

from establishing and operating an electronic trading facility excluded under

this Act pursuant to paragraph (1).’’.

SEC. 107. CONFORMITY WITH THE GRAMM-LEACH-BLILEY ACT; HYBRID INSTRUMENTS.

Section 2 of the Commodity Exchange Act (7 U.S.C. 2, 2a, 3, 4, 4a) (as amended

by section 106) is amended by adding at the end the following:

‘‘(f) EXCLUSION FOR QUALIFYING HYBRID INSTRUMENTS.—

‘‘(1) IN GENERAL.—Nothing in this Act (other than section 12(e)(2)(B)) governs

or is applicable to—

‘‘(A) a banking product or security sold or provided by an entity that is

listed in any of subclauses (I) through (VI) of section 2(c)(2)(B)(ii); or

‘‘(B) a hybrid instrument that is predominantly a security or a deposit instrument.

‘‘(2) EXCEPTION.—Paragraph (1)(A) shall not apply to any swap agreement (as

defined in section 206(b) of the Gramm-Leach-Bliley Act) with any party who

is not an eligible contract participant unless such swap agreement is entered

into after final regulations have been prescribed under section 49 of the Federal

Deposit Insurance Act.

‘‘(3) PREDOMINANCE.—A hybrid instrument shall be considered to be predominantly a security or deposit instrument if—

‘‘(A) the issuer of the hybrid instrument receives payment in full of the

purchase price of the hybrid instrument, substantially contemporaneously

with delivery of the hybrid instrument;

‘‘(B) the purchaser or holder of the hybrid instrument is not required to

make any payment to the issuer in addition to the purchase price paid

under subparagraph (A), whether as margin, settlement payment, or otherwise, during the life of the hybrid instrument or at maturity;

‘‘(C) the issuer of the hybrid instrument is not subject by the terms of

the instrument to mark-to-market margining requirements; and

‘‘(D) the hybrid instrument is not marketed as a contract of sale for future delivery of a commodity (or option on such a contract) subject to this

Act.

‘‘(4) MARK-TO-MARKET MARGINING REQUIREMENTS.—For the purposes of paragraph (3)(C), mark-to-market margining requirements do not include the obligation of an issuer of a secured debt instrument to increase the amount of collateral held in pledge for the benefit of the purchaser of the secured debt instrument to secure the repayment obligations of the issuer under the secured debt

instrument.’’.

SEC. 108. FUTURES ON SECURITIES.

Section 2 of the Commodity Exchange Act (7 U.S.C. 2, 2a, 3, 4, 4a) (as amended

by section 107) is amended by adding at the end the following:

‘‘(g) Notwithstanding any other provision of law:

9

‘‘(1) This Act shall not apply to and the Commission shall have no jurisdiction

to designate a board of trade as a contract market for any transaction whereby

any party to the transaction acquires a put, call, or other option on 1 or more

securities (as defined in section 2(a)(1) of the Securities Act of 1933 or section

3(a)(10) of the Securities Exchange Act of 1934, on the date of enactment of the

Futures Trading Act of 1982), including any group or index of securities and

any interest in or based on the value of securities.

‘‘(2) Nothing in this subsection governs or applies to—

‘‘(A) an agreement, contract, or transaction in a commodity that is excluded under subsection (c) or (d);

‘‘(B) an electronic trading facility that is excluded under subsection (e); or‘‘(C) a hybrid instrument that is covered by an exclusion under subsection

(f) or an exemption granted by the Commission under section 4(c) (whether

or not the hybrid instrument is otherwise subject to this Act).

‘‘(3) Except as provided in paragraph (4) of this subsection, or unless excluded

by paragraph (2) of this subsection, a person shall not offer to enter into, enter

into, or confirm the execution of any contract of sale (or option on the contract)

for future delivery of any security or interest in or based on the value of a nonexempt security.

‘‘(4)(A) Except as excluded by paragraph (2) of this subsection, this Act shall

apply to and the Commission shall have exclusive jurisdiction with respect to

accounts, agreements (including any transaction which is of the character of, or

is commonly known to the trade as an option, privilege, indemnity, bid, offer,

put, call, advance guaranty, or decline guaranty), and transactions involving,

and may designate a board of trade as a contract market under section 5 or

register the board of trade as a derivatives transaction execution facility under

section 5a in, contracts of sale (or options on the contracts) for future delivery

of 1 or more securities (as defined in section 2(a)(1) of the Securities Act of 1933

or section 3(a)(10) of the Securities Exchange Act of 1934), including any group

or index of securities and any interest in or based on the value of securities.

‘‘(B) The Commission shall not designate a board of trade as a contract market under section 5 or register a board of trade as a derivatives transaction execution facility under section 5a with respect to any such contracts of sale (or

options on the contracts) for future delivery unless the board of trade demonstrates and the Commission expressly finds that the specific contract (or option on the contract) with respect to which the application for the designation

or recognition has been made meets the following requirements:

‘‘(i) Settlement of or delivery on the contract (or option on the contract)

shall be effected in cash or by means other than the transfer or receipt of

a nonexempt security.

‘‘(ii) SUSCEPTIBILITY TO PRICE MANIPULATION.—Trading in a contract (or

option on such a contract) described in subparagraph (A) shall not be readily susceptible to—

‘‘(I) manipulation of the price of the contract (or option on such a contract); or

‘‘(II) causing or being used in the manipulation of the price of any

underlying security, option on a security, or option on a group or index

that includes a security.

‘‘(iii) If the contract is based on a single nonexempt security, an option

on the security underlying the contract would meet all Securities and Exchange Commission requirements for listing on a national securities exchange.

‘‘(iv) If the contract is based on any group or index of nonexempt securities comprised of fewer than 5 securities, or on an index in which a single

nonexempt security predominates, an option on each security comprising

the group or index would meet all requirements for listing on a national

securities exchange.

‘‘(v)(I) IN GENERAL.—The contract will be traded on a board of trade that

establishes the level of margin for futures contracts (or options on the contracts) based on a single nonexempt security, an index of fewer than 5 nonexempt securities, or an index in which a single nonexempt security predominates, at a level consistent with the level of margin on comparable option contracts listed on any national securities exchange.

‘‘(II) CONSISTENCY.—For the purposes of subclause (I), a margin for designated futures on securities and options on securities shall be considered

to be consistent if the margin provides a similar level of protection against

defaults by counterparties, taking into account any differences in—

‘‘(aa) the price volatility of the contracts;

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‘‘(bb) the frequency with which margin requirements are made; and

‘‘(cc) the period of time within which margin calls must be met.

‘‘(vi) The contract will be traded on a board of trade that prohibits

a person who acts as a floor broker for any contract of sale (or options

on the contract) for future delivery of a nonexempt security, an index

based on fewer than 5 nonexempt securities, or an index in which a

single nonexempt security predominates, from trading that contract for

the broker’s own account during the same trading session.

‘‘(vii) The contract will be traded on a board of trade that collects, maintains, and promptly provides to the Securities and Exchange Commission

such information as the Commission and the Securities and Exchange Commission jointly consider necessary to perform the enforcement responsibilities described in paragraph (6).

‘‘(5) The Commission shall consult with the Securities and Exchange Commission with respect to any application submitted by a board of trade for designation as a contract market or derivatives transaction execution facility with respect to any contract of sale (or option on the contract) for future delivery of

a nonexempt security or a group or index of such securities. If, not later than

15 days after the consultation, the Securities and Exchange Commission objects

to the designation of a board of trade as a contract market or derivatives transaction execution facility in the contract (or option on the contract) on the ground

that any requirement of paragraph (4)(B) is not met, the Commission shall afford the Securities and Exchange Commission an opportunity for an oral hearing to be transcribed before the Commission, and shall give appropriate weight

to the views of the Securities and Exchange Commission. The oral hearing shall

be held before Commission action upon the application for the designation, and

not less than 30 nor more than 45 days after the Securities and Exchange Commission has objected. If such an oral hearing is held, the Securities and Exchange Commission fails to withdraw its objections, and the Commission issues

an order designating a board of trade as a contract market or recognizes the

board of trade as a derivatives transaction execution facility with respect to any

such contract (or option on the contract), the Securities and Exchange Commission may seek judicial review of the order in accordance with the procedural requirements set forth in section 6(c). If, pursuant to section 6, there is a hearing

on the record with respect to an application for such designation, the Securities

and Exchange Commission may participate in that hearing as an interested

party.

‘‘(6) Notwithstanding any other provision of this Act, the Securities and Exchange Commission may enforce against a person that purchases or sells any

contract of sale (or option on the contract) for future delivery of any nonexempt

security, any index comprised of fewer than 5 nonexempt securities, or any

index in which a single nonexempt security predominates to the same extent

as if the person had purchased or sold an option on the security or index under

the following provisions of the securities laws and regulations with respect to

the following categories of conduct:

‘‘(A) Section 10(b) and 21A of the Securities Exchange Act of 1934 (15

U.S.C. 78j(b), 78u–1) with respect to insider trading.

‘‘(B) Section 16(b) of such Act (15 U.S.C. 78p(b)) with respect to unfair

use of information in short swing trading by a corporate insider.

‘‘(C) Section 9 of such Act (15 U.S.C. 78i) with respect to manipulation

of securities prices.

‘‘(D) Section 10(b) of such Act (15 U.S.C. 78J(b)) and section 204A of the

Investment Adviser’s Act of 1940 (15 U.S.C. 80b–4a) with respect to

frontrunning.

‘‘(E) Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n)

with respect to the pricing and integrity of tender offers.

‘‘(F) Rule 144 of the rules of the Securities and Exchange Commission (17

C.F.R. 230.144) with respect to trading in restricted securities.

‘‘(7)(A) Notwithstanding any other provision of this Act, any contract market

or derivatives transaction execution facility in a nonexempt security or stock

index futures contract (or option thereon) shall file with the Board of Governors

of the Federal Reserve System any rule establishing or changing the levels of

margin (initial and maintenance) for the nonexempt security or stock index futures contract (or option on the contract).

‘‘(B) The Board may at any time request any contract market or derivatives

transaction execution facility to set the level of margin for any nonexempt security or stock index futures contract (or option on the contract) at such levels as

the Board in its judgment determines are appropriate to preserve the financial

integrity of the contract market or derivatives transaction execution facility or

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its clearing system or to prevent systemic risk. If the contract market or derivatives transaction execution facility fails to do so within the time specified by the

Board in its request, the Board may direct the contract market or derivatives

transaction execution facility to alter or supplement the rules of the contract

market or derivatives transaction execution facility as specified in the request.

‘‘(C) Subject to such conditions as the Board may determine, the Board may

delegate any or all of its authority under this paragraph to the Commission or

an intermarket margin board as provided in subparagraph (D).

‘‘(D) INTERMARKET MARGIN BOARD.— ‘‘(i) ESTABLISHMENT.—With the concurrence of the Securities and Exchange Commission and the Commission, the Board may establish an intermarket margin board, consisting of representatives of any or all of the three

agencies.

‘‘(ii) DUTIES.—The intermarket margin board may set and maintain margin levels and rules pertaining to margin for futures on a single nonexempt

security, an index of fewer than 5 nonexempt securities, or an index in

which a single nonexempt security predominates, listed on a contract market or derivatives transaction execution facility. In discharging these duties,

the intermarket margin board shall endeavor to make the levels of margin

for futures and options on a single nonexempt security consistent taking

into account any material differences in such contracts, including—

‘‘(I) the price volatility of the contracts;

‘‘(II) the frequency with which margin calls are made; and

‘‘(III) the period of time within which margin calls must be met.

‘‘(E) This paragraph shall not be construed to supersede or limit the authority

granted to the Commission in section 8a(9) to direct a contract market or derivatives transaction execution facility, on finding an emergency to exist, to

raise temporary emergency margin levels on any futures contract or option on

the contract covered by this paragraph.

‘‘(F) Any action taken by the Board under this paragraph, or by the Commission acting under the delegation of authority under subparagraph (C), directing

a contract market or derivatives transaction execution facility to alter or supplement a contract market or derivatives transaction execution facility rule shall

be subject to review only in the United States Court of Appeals for the judicial

circuit in which the party seeking review resides or has its principal place of

business, or in the United States Court of Appeals for the District of Columbia

Circuit. The review shall be based on the examination of all information before

the Board or the Commission, as the case may be, at the time the determination

was made. The court reviewing the action of the Board or the Commission shall

not enter a stay or order of mandamus unless the court determines, after notice

and a hearing before a panel of the court, that the agency action complained

of was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.

‘‘(8) This subsection shall not be construed to prohibit—

‘‘(A) an agreement, contract, or transaction excluded from this Act by

paragraph (2); or

‘‘(B) any hybrid instrument that is covered by the terms of any exemption

granted by the Commission under section 4(c) (whether or not any such hybrid instrument is otherwise subject to this Act).

‘‘(9)(A) No futures commission merchant, commodity trading advisor, or introducing broker shall recommend to any customer the purchase or sale of any

contract of sale for future delivery of a single nonexempt security, an index of

fewer than 5 nonexempt securities, or an index in which a single nonexempt

security predominates, unless the futures commission merchant, commodity

trading advisor, or introducing broker complies with the rules described in subparagraph (B) of a registered futures association of which such merchant, advisor, or broker is a member.

‘‘(B) Within 9 months of the date of enactment of the Commodity Futures

Modernization Act of 2000, a registered futures association shall adopt rules requiring a futures commission merchant, a commodity trading advisor, or an introducing broker which recommends to any customer the purchase or sale of

any contract of sale for future delivery of a single nonexempt security, an index

of fewer than 5 nonexempt securities, or an index in which a single nonexempt

security predominates to ascertain through reasonable due diligence that the

recommendation is suitable for that customer in light of the customer’s financial

position and trading goals. The registered futures association shall consult with

the Commission and the Securities and Exchange Commission prior to the

adoption of any such rule, and shall submit any such rule to the Commission

for approval in the manner and according to the procedures described in section

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17(j) of this Act, provided, that in such case the rule shall become effective if

the Commission fails to disapprove such rule within 90 days of submission.

‘‘(10)(A) Nothing in this Act shall be construed to require or authorize the

Commission to review or approve, directly or indirectly, any contract, rule, regulation, or action adopted by a foreign board of trade, exchange, or market, or

a clearinghouse for such a board of trade, exchange, or market, relating to any

transaction involving a contract of sale for future delivery (or option on such

a contract) in or involving any security, including any foreign government debt

security, or group or index of such securities, if—

‘‘(i)(I) in the case of a contract of sale for future delivery (or option on

such a contract) in or involving a single equity security, the United States

is not the primary trading market for the underlying security; or

‘‘(II) in the case of a contract of sale for future delivery (or option on such

a contract) in or involving a group or index of equity securities, less than

25 percent of the weighting of the group or index is derived from securities

for which the United States is the primary trading market for the securities

underlying the contract for future delivery (or option on the contract); and

‘‘(ii) settlement of or delivery on the contract for future delivery (or option

on such a contract) is to be effected in cash or by means other than the

transfer or receipt of a security in the United States other than an exempted security.

‘‘(B) Within 90 days after the date of the enactment of this paragraph, the

Commission shall adopt such procedures as it deems appropriate pursuant to

which, consistent with this Act, the Commission shall authorize the offer and

sale in the United States of any contract of sale for future delivery (or option

on such a contract) of a security, other than a security of the type described

in subparagraph (A)(i)(I) or a group or index of securities of the type described

in subparagraph (A)(i)(II), traded on or subject to the rules of a foreign board

of trade, exchange, or market, or a clearinghouse for such a board of trade, exchange, or market, except that such procedures shall not require a foreign board

of trade, exchange, or market, or a clearinghouse for such a board of trade, exchange, or market to apply for designation as a contract market under this Act

with respect to such a contract for future delivery (or option on such a contract).’’.

SEC. 109. TRANSACTIONS IN EXEMPT COMMODITIES.

Section 2 of the Commodity Exchange Act (7 U.S.C. 2, 2a, 3, 4, 4a) (as amended

by section 108) is amended by adding at the end the following.

‘‘(h) LEGAL CERTAINTY FOR CERTAIN TRANSACTIONS IN EXEMPT COMMODITIES.—

‘‘(1) Except as provided in paragraph (2) of this subsection, nothing in this

Act shall apply to a contract, agreement or transaction in an exempt commodity

which—

‘‘(A) is entered into solely between persons that are eligible contract participants at the time they enter into the agreement, contract, or transaction; and

‘‘(B) is not entered into on a trading facility.

‘‘(2) An agreement, contract, or transaction described in paragraph (1) of this

subsection shall be subject to—

‘‘(A) sections 5b and 12(e)(2)(B) of this Act;

‘‘(B) sections 4b and 4n of this Act and the regulations of the Commission

pursuant to section 4c(b) of this Act proscribing fraud in connection with

commodity option transactions, to the extent such agreement, contract, or

transaction is not between eligible commercial participants and would otherwise be subject to those provisions; and

‘‘(C) sections 6(c) and 9(a)(2) of this Act to the extent they prohibit manipulation of the market price of any commodity in interstate commerce, to the

extent such agreement, contract, or transaction would otherwise be subject

to those provisions.

‘‘(3) Except as provided in paragraph (4) of this subsection, nothing in this

Act shall apply to an agreement, contract, or transaction in an exempt commodity (other than a metal commodity enumerated in section 1a(3) of this Act)

which—

‘‘(A) is entered into solely between persons that are eligible contract participants at the time at which the persons enter into the agreement, contract, or transaction; and

‘‘(B) is executed or traded on an electronic trading facility.

‘‘(4) An agreement, contract, or transaction described in paragraph (3) shall

be subject to—

‘‘(A) sections 5b and 12(e)(2)(B) of this Act;

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‘‘(B) sections 4b and 4n of this Act and the regulations of the Commission

pursuant to section 4c(b) of this Act proscribing fraud in connection with

commodity option transactions and section 6(c) and 9(a)(2) of this Act, to

the extent these provisions prohibit manipulation of the market price of any

commodity in interstate commerce, to the extent such agreement, contract,

or transaction would otherwise be subject to those provisions; and

‘‘(C) such rules and regulations as the Commission may prescribe if necessary to ensure timely dissemination by the electronic trading facility of

price, trading volume, and other trading data to the extent appropriate, if

the Commission determines that the electronic trading facility performs a

significant price discovery function for transactions related to the commodity executed or traded on the electronic trading facility.’’.

SEC. 110. SWAP TRANSACTIONS.

Section 2 of the Commodity Exchange Act (7 U.S.C. 2, 2a, 3, 4, 4a) (as amended

by section 109) is amended by adding at the end the following new subsection:

‘‘(i) EXCLUDED SWAP TRANSACTIONS.—

‘‘(1) IN GENERAL.—No provision of this Act (other than section 5b or

12(e)(2)(B)) shall apply to or govern any agreement, contract, or transaction in

a commodity other than an agricultural commodity enumerated in section 1a(3)

if—

‘‘(A) the agreement, contract, or transaction is entered into only between

persons that are eligible contract participants at the time they enter into

the agreement, contract, or transaction; and

‘‘(B) the material economic terms of the agreement, contract, or transaction are subject to individual negotiation and are not specified by the

rules terms or conditions of a trading facility.

‘‘(2) EXCLUSION.—Paragraph (1) shall not apply to—

‘‘(A) a contract for the sale of a commodity for future delivery traded on

a contract market designated under section 5; or

‘‘(B) any agreement, contract, or transaction traded on a derivatives

transaction execution facility registered under section 5a.’’.

SEC. 111. APPLICATION OF THE COMMODITY EXCHANGE ACT.

Section 2 of the Commodity Exchange Act (7 U.S.C. 2, 2a, 3, 4, 4a) (as amended

by section 110) is amended by adding at the end the following new subsection:

‘‘(j) APPLICATION OF THE ACT.—No provision of this Act shall be construed as—

‘‘(1) implying or creating any presumption that—

‘‘(A) any agreement, contract, or transaction that is eligible for an exclusion or exemption from regulation under this Act; or

‘‘(B) any agreement, contract, or transaction that is not eligible for an exclusion or exemption from regulation under this Act,

is or would otherwise be subject to this Act; or

‘‘(2) conferring jurisdiction on the Commission with respect to any such agreement, contract, or transaction, except as expressly provided in section 5b.’’.

SEC. 112. PROTECTION OF THE PUBLIC INTEREST.

The Commodity Exchange Act is amended by striking section 3 (7 U.S.C. 5) and

inserting the following:

‘‘SEC. 3. FINDINGS AND PURPOSE.

‘‘(a) FINDINGS.—The futures contracts and options contracts that are subject to

this Act are entered into regularly in interstate and international commerce and are

affected with a national public interest by providing a means for managing and assuming price risks, discovering prices, and disseminating pricing information

through trading in liquid, fair and financially secure trading facilities.

‘‘(b) PURPOSE.—It is the purpose of this Act to serve the public interests described

in subsection (a) through a system of effective self-regulation of trading facilities,

clearing systems, market participants and market professionals under the oversight

of the Commission. To foster these public interests, it is further the purpose of this

Act to deter and prevent price manipulation or any other disruptions to market integrity; to ensure the financial integrity of all transactions subject to this Act and

the avoidance of systemic risk; to protect all market participants from fraudulent

or other abusive sales practices and misuses of customer assets; and to promote responsible innovation and fair competition among boards of trade, other markets and

market participants.’’.

SEC. 113. PROHIBITED TRANSACTIONS.

Section 4c of the Commodity Exchange Act (7 U.S.C. 6c) is amended by striking

‘‘SEC. 4c.’’ and all that follows through subsection (a) and inserting the following:

14

‘‘SEC. 4c. PROHIBITED TRANSACTIONS.

‘‘(a) IN GENERAL.—

‘‘(1) PROHIBITION.—It shall be unlawful for any person to offer to enter into,

enter into, or confirm the execution of a transaction described in paragraph (2)

involving any commodity if the transaction is used or may be used to—

‘‘(A) hedge any transaction in interstate commerce in the commodity or

the product or byproduct of the commodity;

‘‘(B) determine the price basis of any such transaction in interstate commerce in the commodity; or

‘‘(C) deliver any such commodity sold, shipped, or received in interstate

commerce for the execution of the transaction.

‘‘(2) TRANSACTION.—A transaction referred to in paragraph (1) is a transaction

that—

‘‘(A)(i) is, is of the character of, or is commonly known to the trade as,

a ‘wash sale’ or ‘accommodation trade’; or

‘‘(ii) is a fictitious sale; or

‘‘(B) is used to cause any price to be reported, registered, or recorded that

is not a true and bona fide price.’’.

SEC. 114. DESIGNATION OF BOARDS OF TRADE AS CONTRACT MARKETS.

The Commodity Exchange Act is amended—

(1) by redesignating section 5b (7 U.S.C. 7b) as section 5e; and

(2) by striking sections 5 and 5a (7 U.S.C. 7, 7a) and inserting the following:

‘‘SEC. 5. DESIGNATION OF BOARDS OF TRADE AS CONTRACT MARKETS.

‘‘(a) APPLICATIONS.—A board of trade applying to the Commission for designation

as a contract market shall submit an application to the Commission that includes

any relevant materials and records the Commission may require consistent with

this Act.

‘‘(b) CRITERIA FOR DESIGNATION.—

‘‘(1) IN GENERAL.—To be designated as a contract market, the board of trade

shall demonstrate to the Commission that the board of trade meets the criteria

specified in this subsection.

‘‘(2) PREVENTION OF MARKET MANIPULATION.—The board of trade shall have

the capacity to prevent market manipulation through market surveillance, compliance, and enforcement practices and procedures, including methods for conducting real-time monitoring of trading and comprehensive and accurate trade

reconstructions.

‘‘(3) FAIR AND EQUITABLE TRADING.—The board of trade shall establish and enforce trading rules to ensure fair and equitable trading through the facilities of

the contract market, and the capacity to detect, investigate, and discipline any

person that violates the rules. Such rules may authorize—

‘‘(A) an exchange of—

‘‘(i) futures in connection with a cash commodity transaction;

‘‘(ii) futures for cash commodities;

‘‘(iii) transfer trades or office trades; or

‘‘(iv) futures for swaps; and

‘‘(B) a futures commission merchant, acting as principal or agent, to enter

into or confirm the execution of a contract for the purchase or sale of a commodity for future delivery if the contract is reported, recorded, or cleared

in accordance with the rules of the contract market or a derivatives clearing

organization.

‘‘(4) TRADE EXECUTION FACILITY.—The board of trade shall—

‘‘(A) establish and enforce rules defining, or specifications detailing, the

manner of operation of the trade execution facility maintained by the board

of trade, including rules or specifications describing the operation of any

electronic matching platform; and

‘‘(B) demonstrate that the trading facility operates in accordance with the

rules or specifications.

‘‘(5) FINANCIAL INTEGRITY OF TRANSACTIONS.—The board of trade shall establish and enforce rules and procedures for ensuring the financial integrity of

transactions entered into by or through the facilities of the contract market.

‘‘(6) DISCIPLINARY PROCEDURES.—The board of trade shall establish and enforce disciplinary procedures that authorize the board of trade to discipline, suspend, or expel members or market participants that violate the rules of the

board of trade, or similar methods for performing the same functions, including

delegation of the functions to third parties.

‘‘(7) PUBLIC ACCESS.—The board of trade shall provide the public with access

to the rules, regulations, and contract specifications of the board of trade.

15

‘‘(8) ABILITY TO OBTAIN INFORMATION.—The board of trade shall establish and

enforce rules that will allow the board of trade to obtain any necessary information to perform any of the functions described in this subsection, including the

capacity to carry out such international information-sharing agreements as the

Commission may require.

‘‘(c) EXISTING CONTRACT MARKETS.—A board of trade that is designated as a contract market on the effective date of the Commodity Futures Modernization Act of

2000 shall be considered to be a designated contract market under this section.

‘‘(d) CORE PRINCIPLES FOR CONTRACT MARKETS.—

‘‘(1) IN GENERAL.—To maintain the designation of a board of trade as a contract market, a board of trade shall comply with the core principles specified

in this subsection.

‘‘(2) COMPLIANCE WITH RULES.—The board of trade shall monitor and enforce

compliance with the rules of the contract market, including the terms and conditions of any contracts to be traded and any limitations on access to the contract market.

‘‘(3) CONTRACTS NOT READILY SUBJECT TO MANIPULATION.—The board of trade

shall list on the contract market only contracts that are not readily susceptible

to manipulation.

‘‘(4) MONITORING OF TRADING.—The board of trade shall monitor trading to

prevent manipulation, price distortion, and disruptions of the delivery or cashsettlement process.

‘‘(5) POSITION LIMITATIONS OR ACCOUNTABILITY.—To reduce the potential

threat of market manipulation or congestion, especially during trading in the

delivery month, the board of trade shall adopt position limitations or position

accountability for speculators, where necessary and appropriate.

‘‘(6) EMERGENCY AUTHORITY.—The board of trade shall adopt rules to provide

for the exercise of emergency authority, in consultation or cooperation with the

Commission, where necessary and appropriate, including the authority to—

‘‘(A) liquidate or transfer open positions in any contract;

‘‘(B) suspend or curtail trading in any contract; and

‘‘(C) require market participants in any contract to meet special margin

requirements.

‘‘(7) AVAILABILITY OF GENERAL INFORMATION.—The board of trade shall make

available to market authorities, market participants, and the public information

concerning—

‘‘(A) the terms and conditions of the contracts of the contract market; and

‘‘(B) the mechanisms for executing transactions on or through the facilities of the contract market.

‘‘(8) DAILY PUBLICATION OF TRADING INFORMATION.—The board of trade shall

make public daily information on settlement prices, volume, open interest, and

opening and closing ranges for actively traded contracts on the contract market.

‘‘(9) EXECUTION OF TRANSACTIONS.—The board of trade shall provide a competitive, open, and efficient market and mechanism for executing transactions.

‘‘(10) TRADE INFORMATION.—The board of trade shall maintain rules and procedures to provide for the recording and safe storage of all identifying trade information in a manner that enables the contract market to use the information

for purposes of assisting in the prevention of customer and market abuses and

providing evidence of any violations of the rules of the contract market.

‘‘(11) FINANCIAL INTEGRITY OF CONTRACTS.—The board of trade shall establish

and enforce rules providing for the financial integrity of any contracts traded

on the contract market, including rules to ensure the financial integrity of any

futures commission merchants and introducing brokers and the protection of

customer funds.

‘‘(12) PROTECTION OF MARKET PARTICIPANTS.—The board of trade shall establish and enforce rules to protect market participants from abusive practices

committed by any party acting as an agent for the participants.

‘‘(13) DISPUTE RESOLUTION.—The board of trade shall establish and enforce

rules regarding and provide facilities for alternative dispute resolution as appropriate for market participants and any market intermediaries.

‘‘(14) GOVERNANCE FITNESS STANDARDS.—The board of trade shall establish

and enforce appropriate fitness standards for directors, members of any disciplinary committee, members of the contract market, and any other persons with

direct access to the facility (including any parties affiliated with any of the persons described in this paragraph).

‘‘(15) CONFLICTS OF INTEREST.—The board of trade shall establish and enforce

rules to minimize conflicts of interest in the decisionmaking process of the contract market and establish a process for resolving such conflicts of interest.

16

‘‘(16) COMPOSITION OF BOARDS OF MUTUALLY OWNED CONTRACT MARKETS.—In

the case of a mutually owned contract market, the board of trade shall ensure

that the composition of the governing board reflects market participants.

‘‘(17) RECORDKEEPING.—The board of trade shall—

‘‘(A) maintain full records of all activities related to the business of the

contract market in a form and manner acceptable to the Commission for a

period of at least 5 years;

‘‘(B) make the records readily available during at least the first 2 years

of the 5-year period and provide the records to the Commission at the expense of the person required to maintain the records; and

‘‘(C) keep the records open to inspection by any representative of the

Commission or the Department of Justice.

‘‘(18) ANTITRUST CONSIDERATIONS.—Unless necessary or appropriate to

achieve the purposes of this Act, the board of trade shall endeavor to avoid—

‘‘(A) adopting any rules or taking any actions that result in any unreasonable restraints of trade; or

‘‘(B) imposing any material anticompetitive burden on trading on the contract market.

‘‘(e) CURRENT AGRICULTURAL AND METAL COMMODITIES.—

‘‘(1) Subject to paragraph (2), a contract for purchase or sale for future delivery of an agricultural or metal commodity enumerated in section 1a(3) that is

available for trade on a contract market, as of the date of the enactment of this

subsection, may be traded only on a contract market designated under this section.

‘‘(2) In order to promote responsible economic or financial innovation and fair

competition, the Commission, on application by any person, after notice and

public comment and opportunity for hearing, may prescribe rules and regulations to provide for the offer and sale of contracts for future delivery or options

thereon to be conducted on a derivatives transaction execution facility.’’.

SEC. 115. DERIVATIVES TRANSACTION EXECUTION FACILITIES.

The Commodity Exchange Act (7 U.S.C. 1 et seq.) is amended by inserting after

section 5 (as amended by section 112(2)) the following:

‘‘SEC. 5a. DERIVATIVES TRANSACTION EXECUTION FACILITIES.

‘‘(a) IN GENERAL.—In lieu of compliance with the contract market designation requirements of section 5, a board of trade may elect to operate as a registered derivatives transaction execution facility if the facility is—

‘‘(1) designated as a contract market and meets the requirements of this section; or

‘‘(2) registered as a derivatives transaction execution facility under subsection

(c).

‘‘(b) REQUIREMENTS FOR TRADING FUTURES CONTRACTS OR OTHER DERIVATIVES

TRANSACTIONS.—

‘‘(1) IN GENERAL.—A registered derivatives transaction execution facility

under subsection (a) may trade any futures contract (or option on such a contract) on or through the facility only by satisfying the requirements of this section.

‘‘(2) REQUIREMENTS FOR UNDERLYING COMMODITIES.—A registered derivatives

transaction execution facility may trade any futures contract only if—

‘‘(A) the underlying commodity has a nearly inexhaustible deliverable

supply;

‘‘(B) the underlying commodity has a deliverable supply that is sufficiently large that the contract is highly unlikely to be susceptible to the

threat of manipulation;

‘‘(C) the underlying commodity has no cash market; or

‘‘(D) the Commission determines, based on the market characteristics,

surveillance history, self-regulatory record, and capacity of the facility that

trading in the futures contract is highly unlikely to be susceptible to the

threat of manipulation.

‘‘(3) ELIGIBLE TRADERS.—To trade on a registered derivatives transaction execution facility, a person shall—

‘‘(A) be authorized by the board of trade to trade on the facility; and

‘‘(B)(i) be an eligible contract participant; or

‘‘(ii) be a person trading through a futures commission merchant that—

‘‘(I) is registered with the Commission;

‘‘(II) is a member of a futures self-regulatory organization;

‘‘(III) is a clearing member of a derivatives clearing organization; and

‘‘(IV) has net capital of at least $20,000,000.

17

‘‘(4) TRADING BY CONTRACT MARKETS.—A board of trade that is designated as

a contract market shall, to the extent that the contract market also operates

a registered derivatives transaction execution facility—

‘‘(A) provide a physical location for the contract market trading of the

board of trade that is separate from trading on the derivatives transaction

execution facility of the board of trade; or

‘‘(B) if the board of trade uses the same electronic trading system for

trading on the contract market and derivatives transaction execution facility of the board of trade, identify whether the electronic trading is taking

place on the contract market or the derivatives transaction execution facility.

‘‘(c) CRITERIA FOR REGISTRATION.— ‘‘(1) IN GENERAL.—To be registered as a registered derivatives transaction

execution facility, the board of trade shall demonstrate to the Commission that

the board of trade meets the criteria specified in this paragraph.

‘‘(2) DETERRENCE OF ABUSES.—The board of trade shall establish and enforce

trading rules that will deter abuses and has the capacity to detect, investigate,

and enforce those rules, including means to—

‘‘(A) obtain information necessary to perform the functions required under

this section; or

‘‘(B) use technological means to—

‘‘(i) provide market participants with impartial access to the market;

and

‘‘(ii) capture information that may be used in establishing whether

rule violations have occurred.

‘‘(3) TRADING PROCEDURES.—The board of trade shall establish and enforce

rules or terms and conditions defining, or specifications detailing, trading procedures to be used in entering and executing orders traded on the facilities of the

board of trade. Such rules may authorize—

‘‘(A) an exchange of—

‘‘(i) futures in connection with a cash commodity transaction;

‘‘(ii) futures for cash commodities;

‘‘(iii) transfer trades or office trades; or

‘‘(iv) futures for swaps; and

‘‘(B) a futures commission merchant, acting as principal or agent, to enter

into or confirm the execution of a contract for the purchase or sale of a commodity for future delivery if the contract is reported, recorded, or cleared

in accordance with the rules of the registered derivatives transaction execution facility or a derivatives clearing organization.

‘‘(4) FINANCIAL INTEGRITY OF TRANSACTIONS.—The board of trade shall establish and enforce rules or terms and conditions providing for the financial integrity of transactions entered on or through the facilities of the board of trade,

including rules or terms and conditions to ensure the financial integrity of any

futures commission merchants and introducing brokers and the protection of

customer funds.

‘‘(d) CORE PRINCIPLES FOR REGISTERED DERIVATIVES TRANSACTION EXECUTION FACILITIES.—

‘‘(1) IN GENERAL.—To maintain the registration of a board of trade as a derivatives transaction execution facility, a board of trade shall comply with the

core principles specified in this subsection.

‘‘(2) COMPLIANCE WITH RULES.—The board of trade shall monitor and enforce

the rules of the facility, including any terms and conditions of any contracts

traded on or through the facility and any limitations on access to the facility.

‘‘(3) MONITORING OF TRADING.—The board of trade shall monitor trading in

the contracts of the facility to ensure orderly trading in the contract and to

maintain an orderly market while providing any necessary trading information

to the Commission to allow the Commission to discharge the responsibilities of

the Commission under the Act.

‘‘(4) DISCLOSURE OF GENERAL INFORMATION.—The board of trade shall disclose

publicly and to the Commission information concerning—

‘‘(A) contract terms and conditions;

‘‘(B) trading conventions, mechanisms, and practices;

‘‘(C) financial integrity protections; and

‘‘(D) other information relevant to participation in trading on the facility.

‘‘(5) DAILY PUBLICATION OF TRADING INFORMATION.—The board of trade shall

make public daily information on settlement prices, volume, open interest, and

opening and closing ranges for actively traded contracts on the facility.

‘‘(6) FITNESS STANDARDS.—The board of trade shall establish and enforce appropriate fitness standards for directors, members of any disciplinary comVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00017 Fmt 6659 Sfmt 6621 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
18

mittee, members, and any other persons with direct access to the facility, including any parties affiliated with any of the persons described in this paragraph.

‘‘(7) CONFLICTS OF INTEREST.—The board of trade shall establish and enforce

rules to minimize conflicts of interest in the decisionmaking process of the derivatives transaction execution facility and establish a process for resolving such

conflicts of interest.

‘‘(8) RECORDKEEPING.—The board of trade shall—

‘‘(A) maintain full records of all activities related to the business of the

derivatives transaction execution facility in a form and manner acceptable

to the Commission for a period of at least 5 years;

‘‘(B) make the records readily available during at least the first 2 years

of the 5-year period and provide the records to the Commission at the expense of the person required to maintain the records; and

‘‘(C) keep the records open to inspection by any representatives of the

Commission or the Department of Justice.

‘‘(9) ANTITRUST CONSIDERATIONS.—Unless necessary or appropriate to achieve

the purposes of this Act, the board of trade shall endeavor to avoid—

‘‘(A) adopting any rules or taking any actions that result in any unreasonable restraint of trade; or

‘‘(B) imposing any material anticompetitive burden on trading on the derivatives transaction execution facility.

‘‘(e) USE OF BROKER-DEALERS, DEPOSITORY INSTITUTIONS, AND FARM CREDIT SYSTEM INSTITUTIONS AS INTERMEDIARIES.—

‘‘(1) IN GENERAL.—A registered derivatives transaction execution facility may

by rule allow a broker-dealer, depository institution, or institution of the Farm

Credit System that meets the requirements of paragraph (2) to—

‘‘(A) act as an intermediary in transactions executed on the facility on behalf of customers of the broker-dealer, depository institution, or institution

of the Farm Credit System; and

‘‘(B) receive funds of customers to serve as margin or security for such

transactions.

‘‘(2) REQUIREMENTS.—The requirements referred to in paragraph (1) are

that—

‘‘(A) the broker-dealer be in good standing with the Securities and Exchange Commission, or the depository institution or institution of the Farm

Credit System be in good standing with Federal bank regulatory agencies

(including the Farm Credit Administration), as applicable; and

‘‘(B) if the broker-dealer, depository institution, or institution of the Farm

Credit System carries or holds customer accounts or funds for transactions

on the derivatives transaction execution facility for more than 1 business

day, the broker-dealer, depository institution, or institution of the Farm

Credit System is registered as a futures commission merchant and is a

member of a registered futures association.

‘‘(3) IMPLEMENTATION.—The Commission shall cooperate and coordinate with

the Securities and Exchange Commission, the Secretary of the Treasury, and

Federal banking regulatory agencies (including the Farm Credit Administration) in adopting rules and taking any other appropriate action to facilitate the

implementation of this subsection.

‘‘(f) SEGREGATION OF CUSTOMER FUNDS.—Not later than 180 days after the effective date of the Commodity Futures Modernization Act of 2000, consistent with regulations adopted by the Commission, a registered derivatives transaction execution

facility may authorize a futures commission merchant to offer any customer of the

futures commission merchant that is an eligible contract participant the right to not

segregate the customer funds of the futures commission merchant for purposes of

trading on or through the facilities of the registered derivatives transaction execution facility.

‘‘(g) ELECTION TO TRADE EXCLUDED COMMODITIES.—

‘‘(1) IN GENERAL.—A board of trade that is a registered derivatives transaction

execution facility may trade on the facility any agreements, contracts, or transactions involving excluded commodities that are otherwise excluded from this

Act under section 2(c), 2(d), or 2(h).

‘‘(2) EXCLUSIVE JURISDICTION OF THE COMMISSION.—The Commission shall

have exclusive jurisdiction over agreements, contracts, or transactions described

in paragraph (1) to the extent that the agreements, contracts, or transactions

are traded on a derivatives transaction execution facility.’’.

19

SEC. 116. DERIVATIVES CLEARING.

(a) IN GENERAL.—Subtitle A of title IV of the Federal Deposit Insurance Corporation Improvement Act of 1991 is amended—

(1) by inserting before the section heading for section 401, the following new

heading:

‘‘CHAPTER 1—BILATERAL AND CLEARING ORGANIZATION NETTING’’;

(2) in section 402, by striking ‘‘this subtitle’’ and inserting ‘‘this chapter’’; and

(3) by inserting after section 407, the following new chapter:

‘‘CHAPTER 2—MULTILATERAL CLEARING ORGANIZATIONS

‘‘SEC. 408. DEFINITIONS.

‘‘For purposes of this chapter, the following definitions shall apply:

‘‘(1) MULTILATERAL CLEARING ORGANIZATION.—The term ‘multilateral clearing

organization’ means a system utilized by more than 2 participants in which the

bilateral credit exposures of participants arising from the transactions cleared

are effectively eliminated and replaced by a system of guarantees, insurance,

or mutualized risk of loss.

‘‘(2) OVER-THE-COUNTER DERIVATIVE INSTRUMENT.—The term ‘over-the-counter

derivative instrument’ means—

‘‘(A) any agreement, contract, or transaction, including the terms and conditions incorporated by reference in any such agreement, contract, or transaction, which is an interest rate swap, option, or forward agreement, including a rate floor, rate cap, rate collar, cross-currency rate swap, basis swap,

and forward rate agreement; a spot, same day-tomorrow, tomorrow-next,

forward, or other foreign exchange or precious metals agreement; a currency swap, option, or forward agreement; an equity index or equity swap,

option, or forward agreement; a debt index or debt swap, option, or forward

agreement; a credit spread or credit swap, option, or forward agreement; a

commodity index or commodity swap, option, or forward agreement; and a

weather swap, weather derivative, or weather option;

‘‘(B) any agreement, contract or transaction similar to any other agreement, contract, or transaction referred to in this clause that is presently,

or in the future becomes, regularly entered into by parties that participate

in swap transactions (including terms and conditions incorporated by reference in such agreement) and that is a forward, swap, or option on 1 or

more occurrences of any event, rates, currencies, commodities, equity securities or other equity instruments, debt securities or other debt instruments, economic or other indices or measures of economic or other risk or

value;

‘‘(C) any contract of sale of a commodity for future delivery or commodity

option described in subsection (c), (d), (f), (h), or (i) of section 2 of the Commodity Exchange Act or exempted under section 4(c) of such Act; and

‘‘(D) any option to enter into any, or any combination of, agreements, contracts or transactions referred to in this subparagraph.

‘‘(3) OTHER DEFINITIONS.—The terms ‘State member bank’ and ‘affiliate’ have

the meanings given the terms in section 3 of the Federal Deposit Insurance Act.

‘‘SEC. 409. MULTILATERAL CLEARING ORGANIZATIONS.

‘‘(a) IN GENERAL.—Except with respect to clearing organizations described in subsection (b), no person may operate a multilateral clearing organization for over-thecounter derivative instruments, or otherwise engage in activities that constitute

such a multilateral clearing organization unless the person is a national bank, State

member bank, an affiliate of a national bank or a State member bank, or a corporation chartered under section 25A of the Federal Reserve Act.

‘‘(b) CLEARING ORGANIZATIONS.—Subsection (a) shall not apply to any clearing organization that—

‘‘(1) is registered as a clearing agency under the Securities Exchange Act of

1934;

‘‘(2) performs clearing functions for a contract market designated pursuant to

the Commodity Exchange Act; or

‘‘(3) is supervised by a foreign financial regulator that an appropriate Federal

financial regulatory agency has determined satisfies appropriate standards.’’.

(b) ENFORCEMENT POWERS OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM.—Section 9 of the Federal Reserve Act (12 U.S.C. 221) is amended

by adding at the end the following new paragraph:

‘‘(24) ENFORCEMENT AUTHORITY.—Section 3(u), subsections (j) and (k) of section 7, subsections (b) through (n), (s), (u), and (v) of section 8, and section 19

20

of the Federal Deposit Insurance Act shall apply to a State member bank which

is not an insured depository institution (as defined in section 3 of the Federal

Deposit Insurance Act) in the same manner and to the same extent as such provisions apply to State member insured banks, and any reference in such sections to an insured depository institution shall be deemed to include a reference

to any such noninsured State member bank.’’.

(c) RESOLUTION OF CLEARING BANKS.—The Federal Reserve Act (12 U.S.C. 221 et

seq.) is amended by inserting after section 9A the following new section:

‘‘SEC. 9B. RESOLUTION OF CLEARING BANKS.

‘‘(a) CONSERVATORSHIP OR RECEIVERSHIP.—

‘‘(1) APPOINTMENT.—The Board may appoint a conservator or receiver to take

possession and control of any uninsured State member bank which operates, or

operates as, a multilateral clearing organization pursuant to section 409 of the

Federal Deposit Insurance Corporation Improvement Act of 1991 to the same

extent and in the same manner as the Comptroller of the Currency may appoint

a conservator or receiver for a national bank.

‘‘(2) POWERS.—The conservator or receiver for an uninsured State member

bank referred to in paragraph (1) shall exercise the same powers, functions, and

duties, subject to the same limitations, as a conservator or receiver for a national bank.

‘‘(b) BOARD AUTHORITY.—The Board shall have the same authority with respect

to any conservator or receiver appointed under subsection (a), and the uninsured

State member bank for which the conservator or receiver has been appointed, as the

Comptroller of the Currency has with respect to a conservator or receiver for a national bank and the national bank for which the conservator or receiver has been

appointed.

‘‘(c) BANKRUPTCY PROCEEDINGS.—The Board (in the case of an uninsured State

member bank which operates, or operates as, such a multilateral clearing organization) may direct a conservator or receiver appointed for such bank to file a petition

pursuant to title 11, United States Code, in which case, title 11, United States Code,

shall apply to such bank in lieu of otherwise applicable Federal or State insolvency

law.’’.

(d) TECHNICAL AND CONFORMING AMENDMENTS TO TITLE 11, UNITED STATES

CODE.—

(1) BANKRUPTCY CODE DEBTORS.—Section 109(b)(2) of title 11, United States

Code, is amended by striking ‘‘; or’’ and inserting the following: ‘‘, except that

an uninsured State member bank, or a corporation organized under section 25A

of the Federal Reserve Act, which operates, or operates as, a multilateral clearing organization pursuant to section 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991 may be a debtor if a petition is filed at the

direction of the Board of Governors of the Federal Reserve System; or’’.

(2) CHAPTER 7 DEBTORS.—Section 109(d) of title 11, United States Code, is

amended to read as follows:

‘‘(d) Only a railroad, a person that may be a debtor under chapter 7 of this title

(except a stockbroker or a commodity broker), and an uninsured State member

bank, or a corporation organized under section 25A of the Federal Reserve Act,

which operates, or operates as, a multilateral clearing organization pursuant to section 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991

may be a debtor under chapter 11 of this title.’’.

(3) DEFINITION OF FINANCIAL INSTITUTION.—Section 101(22) of title 11, United

States Code, is amended to read as follows:

‘‘(22) the term ‘financial institution’—

‘‘(A) means a Federal reserve bank or an entity (domestic or foreign) that

is a commercial or savings bank, industrial savings bank, savings and loan

association, trust company, a bank or a corporation organized under section

25A of the Federal Reserve Act and, when any such bank or entity is acting

as agent or custodian for a customer in connection with a securities contract, as defined in section 741, such customer; and

‘‘(B) includes any person described in subparagraph (A) which operates,

or operates as, a multilateral clearing organization pursuant to section 409

of the Federal Deposit Insurance Corporation Improvement Act of 1991;’’.

(4) DEFINITION OF UNINSURED STATE MEMBER BANK.—Section 101 of title 11,

United States Code, is amended by inserting after paragraph (54) the following

new paragraph—

‘‘(54A) the term ‘uninsured State member bank’ means a State member bank (as

defined in section 3 of the Federal Deposit Insurance Act) the deposits of which are

not insured by the Federal Deposit Insurance Corporation; and’’.

(5) SUBCHAPTER V OF CHAPTER 7.—

21

(A) IN GENERAL.—Section 103 of title 11, United States Code, is

amended—

(i) by redesignating subsections (e) through (i) as subsections (f)

through (j), respectively; and

(ii) by inserting after subsection (d) the following new subsection:

‘‘(e) SCOPE OF APPLICATION.—Subchapter V of chapter 7 of this title shall apply

only in a case under such chapter concerning the liquidation of an uninsured State

member bank, or a corporation organized under section 25A of the Federal Reserve

Act, which operates, or operates as, a multilateral clearing organization pursuant

to section 409 of the Federal Deposit Insurance Corporation Improvement Act of

1991.’’.

(B) CLEARING BANK LIQUIDATION.—Chapter 7 of title 11, United States

Code, is amended by adding at the end the following new subchapter:

‘‘SUBCHAPTER V—CLEARING BANK LIQUIDATION

‘‘§ 781. Definitions

‘‘For purposes of this subchapter, the following definitions shall apply:

‘‘(1) BOARD.—The term ‘Board’ means the Board of Governors of the Federal

Reserve System.

‘‘(2) DEPOSITORY INSTITUTION.—The term ‘depository institution’ has the same

meaning as in section 3 of the Federal Deposit Insurance Act, and includes any

wholesale bank.

‘‘(3) CLEARING BANK.—The term ‘clearing bank’ means an uninsured State

member bank, or a corporation organized under section 25A of the Federal Reserve Act, which operates, or operates as, a multilateral clearing organization

pursuant to section 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991.

‘‘§ 782. Selection of trustee

‘‘(a) IN GENERAL.—

‘‘(1) APPOINTMENT.—Notwithstanding any other provision of this title, the

conservator or receiver who files the petition shall be the trustee under this

chapter, unless the Board designates an alternative trustee.

‘‘(2) SUCCESSOR.—The Board may designate a successor trustee if required.

‘‘(b) AUTHORITY OF TRUSTEE.—Whenever the Board appoints or designates a trustee, chapter 3 and sections 704 and 705 of this title shall apply to the Board in the

same way and to the same extent that they apply to a United States trustee.

‘‘§ 783. Additional powers of trustee

‘‘(a) DISTRIBUTION OF PROPERTY NOT OF THE ESTATE.—The trustee under this subchapter has power to distribute property not of the estate, including distributions

to customers that are mandated by subchapters III and IV of this chapter.

‘‘(b) DISPOSITION OF INSTITUTION.—The trustee under this subchapter may, after

notice and a hearing—

‘‘(1) sell the clearing bank to a depository institution or consortium of depository institutions (which consortium may agree on the allocation of the clearing

bank among the consortium);

‘‘(2) merge the clearing bank with a depository institution;

‘‘(3) transfer contracts to the same extent as could a receiver for a depository

institution under paragraphs (9) and (10) of section 11(e) of the Federal Deposit

Insurance Act;

‘‘(4) transfer assets or liabilities to a depository institution;

‘‘(5) transfer assets and liabilities to a bridge bank as provided in paragraphs

(1), (3)(A), (5), (6), of section 11(n) of the Federal Deposit Insurance Act, paragraphs (9) through (13) of such section, and subparagraphs (A) through (H) and

subparagraph (K) of paragraph (4) of such section 11(n), except that—

‘‘(A) the bridge bank to which such assets or liabilities are transferred

shall be treated as a clearing bank for the purpose of this subsection; and

‘‘(B) any references in any such provision of law to the Federal Deposit

Insurance Corporation shall be construed to be references to the appointing

agency and that references to deposit insurance shall be omitted.

‘‘(c) CERTAIN TRANSFERS INCLUDED.—Any reference in this section to transfers of

liabilities includes a ratable transfer of liabilities within a priority class.

‘‘§ 784. Right to be heard

‘‘The Board or a Federal reserve bank (in the case of a clearing bank that is a

member of that bank) may raise and may appear and be heard on any issue in a

case under this subchapter.’’.

22

(e) CLERICAL AMENDMENT.—The table of sections for chapter 7 of title 11, United

States Code, is amended by adding at the end the following new items:

‘‘SUBCHAPTER V—CLEARING BANK LIQUIDATION

‘‘Sec.

‘‘781. Definitions.

‘‘782. Selection of trustee.

‘‘783. Additional powers of trustee.

‘‘784. Right to be heard.’’.

(f) RESOLUTION OF EDGE ACT CORPORATIONS.—The 16th undesignated paragraph

of section 25A of the Federal Reserve Act (12 U.S.C. 624) is amended to read as

follows:

‘‘(16) APPOINTMENT OF RECEIVER OR CONSERVATOR.— ‘‘(A) IN GENERAL.—The Board may appoint a conservator or receiver for

a corporation organized under the provisions of this section to the same extent and in the same manner as the Comptroller of the Currency may appoint a conservator or receiver for a national bank, and the conservator or

receiver for such corporation shall exercise the same powers, functions, and

duties, subject to the same limitations, as a conservator or receiver for a

national bank.

‘‘(B) EQUIVALENT AUTHORITY.—The Board shall have the same authority

with respect to any conservator or receiver appointed for a corporation organized under the provisions of this section under this paragraph and any

such corporation as the Comptroller of the Currency has with respect to a

conservator or receiver of a national bank and the national bank for which

a conservator or receiver has been appointed.

‘‘(C) TITLE 11 PETITIONS.—The Board may direct the conservator or receiver of a corporation organized under the provisions of this section to file

a petition pursuant to title 11, United States Code, in which case, title 11,

United States Code, shall apply to the corporation in lieu of otherwise applicable Federal or State insolvency law.’’.

(g) DERIVATIVES CLEARING ORGANIZATIONS.—The Commodity Exchange Act (7

U.S.C. 1 et seq.) is amended by inserting after section 5a (as added by section 15)

the following new section:

‘‘SEC. 5b. DERIVATIVES CLEARING ORGANIZATIONS.

‘‘(a) REGISTRATION REQUIREMENT.—Except as provided in subsection (b), it shall

be unlawful for a derivatives clearing organization, unless registered with the Commission, directly or indirectly to make use of the mails or any means or instrumentality of interstate commerce to perform the functions of a derivatives clearing organization described in section 1a(8) with respect to a contract of sale of a commodity

for future delivery, option on a contract of sale of a commodity for future delivery,

or option on a commodity that is not an exclusion-eligible commodity (unless the

contract or option is described in subsection (c), (d), (f), (h), or (i) of section 2 or exempted under section 4(c)).

‘‘(b) VOLUNTARY REGISTRATION.—A derivatives clearing organization that clears

agreements, contracts, or transactions described in subsection (c), (d), (f), (h), or (i)

of section 2 or exempted under section 4(c) may register with the Commission as

a derivatives clearing organization.

‘‘(c) REGISTRATION OF DERIVATIVES CLEARING ORGANIZATIONS.—

‘‘(1) APPLICATION.—A person desiring to register as a derivatives clearing organization shall submit to the Commission an application in such form and containing such information as the Commission may require for the purpose of

making the determinations required for approval under paragraph (2).

‘‘(2) CORE PRINCIPLES.—

‘‘(A) IN GENERAL.—To be registered and to maintain registration as a derivatives clearing organization, an applicant shall demonstrate to the Commission that the applicant complies with the core principles specified in this

paragraph. 

‘‘(B) FINANCIAL RESOURCES.—The applicant shall demonstrate that the

applicant has adequate financial, operational, and managerial resources to

discharge the responsibilities of a derivatives clearing organization without

interruption in various market conditions.

‘‘(C) PARTICIPANT AND PRODUCT ELIGIBILITY.—The applicant shall

establish—

‘‘(i) appropriate admission and continuing eligibility standards (including appropriate minimum financial requirements) for members of

and participants in the organization; and

‘‘(ii) appropriate standards for determining eligibility of agreements,

contracts, or transactions submitted to the applicant.

23

‘‘(D) RISK MANAGEMENT.—The applicant shall have the ability to manage

the risks associated with discharging the responsibilities of a derivatives

clearing organization through the use of appropriate tools and procedures.

‘‘(E) SETTLEMENT PROCEDURES.—The applicant shall have the ability to—

‘‘(i) complete settlements on a timely basis under varying circumstances;

‘‘(ii) maintain an adequate record of the flow of funds associated with

each transaction that the applicant clears; and

‘‘(iii) comply with the terms and conditions of any permitted netting

or offset arrangements with other clearing organizations.

‘‘(F) TREATMENT OF FUNDS.—The applicant shall have standards and procedures designed to protect and ensure the safety of member and participant funds.

‘‘(G) DEFAULT RULES AND PROCEDURES.—The applicant shall have rules

and procedures designed to allow for efficient, fair, and safe management

of events when members or participants become insolvent or otherwise default on their obligations to the derivatives clearing organization.

‘‘(H) RULE ENFORCEMENT.—The applicant shall—

‘‘(i) maintain adequate arrangements and resources for the effective

monitoring and enforcement of compliance with rules of the applicant

and for resolution of disputes; and

‘‘(ii) have the authority and ability to discipline, limit, suspend, or

terminate a member’s or participant’s activities for violations of rules

of the applicant.

‘‘(I) SYSTEM SAFEGUARDS.—The applicant shall demonstrate that the

applicant—

‘‘(i) has established and will maintain a program of oversight and

risk analysis to ensure that the automated systems of the applicant

function properly and have adequate capacity and security; and

‘‘(ii) has established and will maintain emergency procedures and a

plan for disaster recovery, and will periodically test backup facilities

sufficient to ensure daily processing, clearing, and settlement of transactions.

‘‘(J) REPORTING.—The applicant shall provide to the Commission all information necessary for the Commission to conduct the oversight function of

the applicant with respect to the activities of the derivatives clearing organization.

‘‘(K) RECORDKEEPING.—The applicant shall—

‘‘(i) maintain full records of all activities related to the business of the

applicant as a derivatives clearing organization in a form and manner

acceptable to the Commission for a period of at least 5 years;

‘‘(ii) make the records readily available during at least the first 2

years of the 5-year period and provide the records to the Commission

at the expense of the person required to maintain the records; and

‘‘(iii) keep the records open to inspection by any representative of the

Commission or the Department of Justice.

‘‘(L) PUBLIC INFORMATION.—The applicant shall make information concerning the rules and operating procedures governing the clearing and settlement systems (including default procedures) available to market participants.

‘‘(M) INFORMATION SHARING.—The applicant shall—

‘‘(i) enter into and abide by the terms of all appropriate and applicable domestic and international information-sharing agreements; and

‘‘(ii) use relevant information obtained from the agreements in carrying out the clearing organization’s risk management program.

‘‘(N) ANTITRUST CONSIDERATIONS.—Unless appropriate to achieve the purposes of this Act, the derivatives clearing organization shall avoid—

‘‘(i) adopting any rule or taking any action that results in any unreasonable restraint of trade; or

‘‘(ii) imposing any material anticompetitive burden on trading on the

contract market.

‘‘(3) ORDERS CONCERNING COMPETITION.—A derivatives clearing organization

may request the Commission to issue an order concerning whether a rule or

practice of the applicant is the least anticompetitive means of achieving the objectives, purposes, and policies of this Act.

‘‘(d) EXISTING DERIVATIVES CLEARING ORGANIZATIONS.—A derivatives clearing organization shall be deemed to be registered under this section to the extent that—

‘‘(1) the derivatives clearing organization clears agreements, contracts, or

transactions for a board of trade that has been designated by the Commission

24

as a contract market for such agreements, contracts, or transactions before the

date of enactment of this section; and

‘‘(2) the Commission has reviewed and approved the rules of the derivatives

clearing organization before that date.

‘‘(e) APPOINTMENT OF TRUSTEE.—

‘‘(1) IN GENERAL.—If a proceeding under section 5e results in the suspension

or revocation of the registration of a derivatives clearing organization, or if a

derivatives clearing organization withdraws from registration, the Commission,

on notice to the derivatives clearing organization, may apply to the appropriate

United States district court where the derivatives clearing organization is located for the appointment of a trustee.

‘‘(2) ASSUMPTION OF JURISDICTION.—If the Commission applies for appointment of a trustee under paragraph (1)—

‘‘(A) the court may take exclusive jurisdiction over the derivatives clearing organization and the records and assets of the derivatives clearing organization, wherever located; and

‘‘(B) if the court takes jurisdiction under subparagraph (A), the court

shall appoint the Commission, or a person designated by the Commission,

as trustee with power to take possession and continue to operate or terminate the operations of the derivatives clearing organization in an orderly

manner for the protection of participants, subject to such terms and conditions as the court may prescribe.

‘‘(f) LINKING OF REGULATED CLEARING FACILITIES.—

‘‘(1) IN GENERAL.—The Commission shall facilitate the linking or coordination

of derivatives clearing organizations registered under this Act with other regulated clearance facilities for the coordinated settlement of cleared transactions.

‘‘(2) COORDINATION.—In carrying out paragraph (1), the Commission shall coordinate with the Federal banking agencies and the Securities and Exchange

Commission.’’.

SEC. 117. COMMON PROVISIONS APPLICABLE TO REGISTERED ENTITIES.

The Commodity Exchange Act (7 U.S.C. 1 et seq.) is amended by inserting after

section 5b (as added by section 14) the following:

‘‘SEC. 5c. COMMON PROVISIONS APPLICABLE TO REGISTERED ENTITIES.

‘‘(a) ACCEPTABLE BUSINESS PRACTICES UNDER CORE PRINCIPLES.—

‘‘(1) IN GENERAL.—Consistent with the purposes of this Act, the Commission

may issue interpretations, or approve interpretations submitted to the Commission, of sections 5(d), 5a(d), and 5b(d)(2) to describe what would constitute an

acceptable business practice under such sections.

‘‘(2) EFFECT OF INTERPRETATION.—An interpretation issued under paragraph

(1) shall not provide the exclusive means for complying with such sections.

‘‘(b) DELEGATION OF FUNCTIONS UNDER CORE PRINCIPLES.—

‘‘(1) IN GENERAL.—A contract market or derivatives transaction execution facility may comply with any applicable core principle through delegation of any

relevant function to a registered futures association or another registered entity.

‘‘(2) RESPONSIBILITY.—A contract market or derivatives transaction execution

facility that delegates a function under paragraph (1) shall remain responsible

for carrying out the function.

‘‘(c) NEW CONTRACTS, NEW RULES, AND RULE AMENDMENTS.—

‘‘(1) IN GENERAL.—Subject to paragraph (2), a registered entity may elect to

list for trading any new contract or other instrument, or may elect to approve

and implement any new rule or rule amendment, by providing to the Commission (and the Secretary of the Treasury, in the case of a contract of sale for future delivery of a government security (or option thereon) or a rule or rule

amendment specifically related to such a contract) a written certification that

the new contract, new rule, or rule amendment complies with this Act (including regulations under this Act).

‘‘(2) PRIOR APPROVAL.—

‘‘(A) IN GENERAL.—A registered entity may request that the Commission

grant prior approval to any new contract or other instrument, new rule, or

rule amendment.

‘‘(B) PRIOR APPROVAL REQUIRED.—Notwithstanding any other provision of

this section, a designated contract market shall submit to the Commission

for prior approval each rule amendment that materially changes the terms

and conditions, as determined by the Commission, in any contract of sale

for future delivery of a commodity specifically enumerated in section 1a(3)

of this Act (or any option thereon) traded through its facilities if such rule

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amendment applies to contracts and delivery months which have already

been listed for trading and have open interest.

‘‘(C) DEADLINE.—If prior approval is requested under subparagraph (A),

the Commission shall take final action on the request not later than 90

days after submission of the request, unless the person submitting the request agrees to an extension of the time limitation established under this

subparagraph.

‘‘(3) APPROVAL.—The Commission shall approve any such new contract or instrument, new rule, or rule amendment unless the Commission finds that the

new contract or instrument, new rule, or rule amendment would violate this

Act.

‘‘(d) VIOLATION OF CORE PRINCIPLES.—

‘‘(1) IN GENERAL.—If the Commission has reason to believe that a registered

entity is violating any applicable provision specified in section 5(d), 5a(d), or

5b(d)(2), the Commission shall notify the registered entity in writing of the reasons for the preliminary determination by the Commission of a violation, including any data, materials, and facts the Commission relied on in making the preliminary determination.

‘‘(2) INJUNCTIVE OR ADMINISTRATIVE ACTION.—The Commission may initiate

an action for an injunction under section 6c or an administrative proceeding,

to demonstrate, by the preponderance of the evidence, that—

‘‘(A) the registered entity is violating any applicable provision specified in

section 5(d), 5a(d), or 5b(d)(2); and

‘‘(B) the Commission has recommended an appropriate remedial action to

remove the deficiency based on an analysis of the costs and benefits in the

public interest of the Commission recommendation.

‘‘(3) BURDEN OF PROOF.—In making a determination that a registered entity

is violating any applicable provision specified in section 5(d), 5a(d), or 5b(d)(2),

the Commission shall have the burden of proving that the registered entity is

violating the applicable core principle.

‘‘(e) RESERVATION OF EMERGENCY AUTHORITY.—Nothing in this section shall limit

or in any way affect the emergency powers of the Commission provided in section

8a(9) of this Act.’’.

SEC. 118. EXEMPT BOARDS OF TRADE.

The Commodity Exchange Act (7 U.S.C. 1 et seq.) is amended by inserting after

section 5c (as added by section 115) the following:

‘‘SEC. 5d. EXEMPT BOARDS OF TRADE.

‘‘(a) IN GENERAL.—Except as otherwise provided in this section, a contract of sale

(or option on such a contract) of a commodity for future delivery traded on or

through the facilities of an exempt board of trade shall be exempt from all provisions of this Act, other than section 2(g).

‘‘(b) CRITERIA FOR EXEMPTION.—To qualify for an exemption under subsection (a),

a board of trade shall limit trading on or through the facilities of the board of trade

to contracts of sale of a commodity for future delivery (or options on such contracts)—

‘‘(1) that have—

‘‘(A) a nearly inexhaustible deliverable supply;

‘‘(B) a deliverable supply that is sufficiently large, and a cash market sufficiently liquid, to render any contract traded on the commodity highly unlikely to be susceptible to the threat of manipulation; or

‘‘(C) no cash market;

‘‘(2) that are entered into only between persons that are eligible contract participants at the time at which the persons enter into the contract; and

‘‘(3) that are not contracts of sale (or options on the contract) for future delivery of any security, including any group or index of securities or any interest

in, or interest that is based on the value of, any security.

‘‘(c) ANTIMANIPULATION REQUIREMENTS.—A party to a futures contract or related

option that is traded on an exempt board of trade shall be subject to sections 4b,

4n, 6(c), and 9(a)(2), and the Commission shall enforce those provisions with respect

to any such trading.

‘‘(d) PRICE DISCOVERY.—If the Commission finds that an exempt board of trade

is a significant source of price discovery for any underlying commodity in any transaction traded on or through the facilities of the board of trade, the board of trade

shall disseminate publicly on a daily basis trading volume, opening and closing price

ranges, open interest, and other trading data as appropriate to the market.

‘‘(e) JURISDICTION.—The Commission shall have exclusive jurisdiction over any account, agreement, or transaction involving a contract of sale of a commodity for fuVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00025 Fmt 6659 Sfmt 6621 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
26

ture delivery, or related option, to the extent that such account, agreement, or

transaction is traded on an exempt board of trade.

‘‘(f) SUBSIDIARIES.—A board of trade that is designated as a contract market or

registered as a derivatives transaction execution facility may operate an exempt

board of trade by establishing a separate subsidiary or other legal entity and otherwise satisfying the requirements of this section.’’.

SEC. 119. SUSPENSION OR REVOCATION OF DESIGNATION AS CONTRACT MARKET.

Section 5e of the Commodity Exchange Act (7 U.S.C. 7b) (as redesignated by section 112(1)) is amended to read as follows:

‘‘SEC. 5e. SUSPENSION OR REVOCATION OF DESIGNATION AS REGISTERED ENTITY.

‘‘The failure of a registered entity to comply with any provision of this Act, or any

regulation or order of the Commission under this Act, shall be cause for the suspension of the registered entity for a period not to exceed 180 days, or revocation of

designation as a registered entity in accordance with the procedures and subject to

the judicial review provided in section 6(b).’’.

SEC. 120. AUTHORIZATION OF APPROPRIATIONS.

Section 12(d) of the Commodity Exchange Act (7 U.S.C. 16(d)) is amended by

striking ‘‘2000’’ and inserting ‘‘2005’’.

SEC. 121. PREEMPTION.

Section 12(e) of the Commodity Exchange Act (7 U.S.C. 16(e)) is amended by

striking paragraph (2) and inserting the following:

‘‘(2) the application of any Federal or State law (including any regulation) to

an agreement, contract, or transaction in or involving any commodity, product,

right, service, or interest, except that this Act shall supersede and preempt—

‘‘(A) in the case of any such agreement, contract, or transaction—

‘‘(i) that is conducted on or subject to the rules of a registered entity

or exempt board of trade;

‘‘(ii) that is conducted on or subject to the rules of any board of trade,

exchange, or market located outside the United States, or any territory

or possession of the United States (in accordance with any terms or

conditions specified by the Commission by regulation); and

‘‘(iii) that is subject to regulation by the Commission under section

4c or 19; and

‘‘(B) any State or local law that prohibits or regulates gaming or the operation of bucket shops (other than antifraud provisions of general applicability) in the case of—

‘‘(i) an electronic trading facility under section 2(e); or

‘‘(ii) an agreement, contract, or transaction that is excluded or exempt under section 2(c), 2(d), 2(f), or 2(h) or is covered by the terms

of an exemption granted by the Commission under section 4(c) (regardless of whether any such agreement, contract, or transaction is otherwise subject to this Act); or’’.

SEC. 122. PREDISPUTE RESOLUTION AGREEMENTS FOR INSTITUTIONAL CUSTOMERS.

Section 14 of the Commodity Exchange Act (7 U.S.C. 18) is amended by striking

subsection (g) and inserting the following:

‘‘(g) PREDISPUTE RESOLUTION AGREEMENTS FOR INSTITUTIONAL CUSTOMERS.— Nothing in this section prohibits a registered futures commission merchant from requiring a customer that is an eligible contract participant, as a condition to the commission merchant’s conducting a transaction for the customer, to enter into an

agreement waiving the right to file a claim under this section.’’.

SEC. 123. CONSIDERATION OF COSTS AND BENEFITS AND ANTITRUST LAWS.

Section 15 of the Commodity Exchange Act (7 U.S.C. 19) is amended by striking

‘‘SEC. 15. The Commission’’ and inserting the following:

‘‘SEC. 15. CONSIDERATION OF COSTS AND BENEFITS AND ANTITRUST LAWS.

‘‘(a) COSTS AND BENEFITS.—

‘‘(1) IN GENERAL.—Before promulgating a regulation under this Act or issuing

an order (except as provided in paragraph (3)), the Commission shall consider

the costs and benefits of the action of the Commission.

‘‘(2) CONSIDERATIONS.—The costs and benefits of the proposed Commission action shall be evaluated in light of—

‘‘(A) considerations of protection of market participants and the public;

‘‘(B) considerations of the efficiency, competitiveness, and financial integrity of futures markets;

‘‘(C) considerations of price discovery;

‘‘(D) considerations of sound risk management practices; and

27

‘‘(E) other public interest considerations.

‘‘(3) APPLICABILITY.—This subsection does not apply to the following actions

of the Commission:

‘‘(A) An order that initiates, is part of, or is the result of an adjudicatory

or investigative process of the Commission.

‘‘(B) An emergency action.

‘‘(C) A finding of fact regarding compliance with a requirement of the

Commission.

‘‘(b) ANTITRUST LAWS.—The Commission’’.

SEC. 124. CONTRACT ENFORCEMENT.

Section 22(a) of the Commodity Exchange Act (7 U.S.C. 25(a)) is amended by adding at the end the following:

‘‘(4) CONTRACT ENFORCEMENT BETWEEN ELIGIBLE COUNTERPARTIES.— ‘‘(A) IN GENERAL.—No agreement, contract, or transaction involving a party

described in subclauses (I) through (VI) of section 2(c)(2)(B)(ii) or between eligible contract participants shall be void, voidable, or unenforceable, and no such

counterparty or eligible contract participant shall be entitled to rescind, or recover any payment made with respect to, such an agreement, contract, or transaction, under this section or any other provision of Federal or State law based

solely on the failure of the agreement, contract, or transaction to comply with

the terms or conditions of an exemption or exclusion from any provision of this

Act or regulations of the Commission.

‘‘(B) EXCEPTION.—This paragraph shall not apply to any swap agreement (as

defined in section 206(b) of the Gramm-Leach-Bliley Act) with any party who

is not an eligible contract participant unless such swap agreement is entered

into after final regulations have been prescribed under section 49 of the Federal

Deposit Insurance Act.

SEC. 125. SPECIAL PROCEDURES TO ENCOURAGE AND FACILITATE BONA FIDE HEDGING BY

AGRICULTURAL PRODUCERS.

The Commodity Exchange Act, as otherwise amended by this Act, is amended by

inserting after section 4o the following:

‘‘SEC. 4p. SPECIAL PROCEDURES TO ENCOURAGE AND FACILITATE BONA FIDE HEDGING BY

AGRICULTURAL PRODUCERS.

‘‘(a) AUTHORITY.—The Commission shall consider issuing rules or orders which—

‘‘(1) prescribe procedures under which each contract market is to provide for

orderly delivery, including temporary storage costs, of any agricultural commodity enumerated in section 1a(3) which is the subject of a contract for purchase or sale for future delivery;

‘‘(2) increase the ease with which domestic agricultural producers may participate in contract markets, including by addressing cost and margin requirements, so as to better enable such producers to hedge price risk associated with

their production;

‘‘(3) provide flexibility in the minimum quantities of such agricultural commodities that may be the subject of a contract for purchase or sale for future

delivery that is traded on a contract market, to better allow domestic agricultural producers to hedge such price risk; and

‘‘(4) encourage exchanges to provide information and otherwise facilitate the

participation of domestic agricultural producers in contract markets.

‘‘(b) REPORT.—Within 1 year after the date of enactment of this section, the Commission shall submit to the Committee on Agriculture of the House of Representatives and the Committee on Agriculture, Nutrition, and Forestry of the Senate a report on the steps it has taken to implement this section and on the activities of contract markets pursuant to this section.’’.

SEC. 126. RULE OF CONSTRUCTION.

Except as expressly provided in this title or an amendment made by this title,

nothing in this title or an amendment made by the title supersedes, affects, or otherwise limits or expands the scope and applicability of laws governing the Securities

and Exchange Commission.

SEC. 127. AUTHORITY OF AGENCIES TO CONSTRUE THE TERM ‘‘CONTRACT MARKET’’.

Each executive agency of the United States Government that has authority to prescribe regulations under a statute that uses the term ‘‘contract market’’ may prescribe regulations construing such term as referring to any contract market, derivatives transaction execution facility, or derivatives clearing organization that is registered with the Commodity Futures Trading Commission.

SEC. 128. TECHNICAL AND CONFORMING AMENDMENTS.

(a) COMMODITY EXCHANGE ACT.—

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(1) Section 1a of the Commodity Exchange Act (7 U.S.C. 1a) is amended—

(A) in paragraph (3), by inserting ‘‘aluminum, copper, gold, palladium,

platinum, silver,’’ after ‘‘orange juice,’’;

(B) in paragraphs (4), (5), (8), (9), (12), and (14), by inserting ‘‘or derivatives transaction execution facility’’ after ‘‘contract market’’ each place it appears; and

(C) in paragraph (15)—

(i) in the paragraph heading, by striking ‘‘CONTRACT MARKET’’ and inserting ‘‘REGISTERED ENTITY’’; and

(ii) by striking ‘‘contract market’’ each place it appears and inserting

‘‘registered entity’’.

(2) Section 2 of the Commodity Exchange Act (7 U.S.C. 2, 2a, 4, 4a, 3) is

amended—

(A) by striking ‘‘SEC. 2. (a)(1)(A)(i) The’’ and inserting the following:

‘‘SEC. 2. JURISDICTION OF COMMISSION; LIABILITY OF PRINCIPAL FOR ACT OF AGENT; COMMODITY FUTURES TRADING COMMISSION; TRANSACTION IN INTERSTATE COMMERCE.

‘‘(a) JURISDICTION OF COMMISSION; COMMODITY FUTURES TRADING COMMISSION.— ‘‘(1) JURISDICTION OF COMMISSION.— ‘‘(A) IN GENERAL.—The’’; and

(B) in subsection (a)—

(i) in paragraph (1) (as amended by subparagraph (A))—

(I) by striking subparagraph (B);

(II) by striking ‘‘subparagraph (B) of this paragraph’’ and inserting ‘‘subsection (c), (d), (e), (f), (g), or (i)’’;

(III) by striking ‘‘contract market designated pursuant to section

5 of this Act’’ and inserting ‘‘contract market designated or derivatives transaction execution facility registered pursuant to section 5

or 5a’’;

(IV) by redesignating subclauses (I) and (II) as clauses (i) and

(ii);

(V) by striking clause (ii); and

(VI) in clause (iii), by striking ‘‘(iii) The’’ and inserting the following:

‘‘(B) LIABILITY OF PRINCIPAL FOR ACT OF AGENT.—The’’;

(ii) in paragraph (7), by striking ‘‘contract market’’ and inserting ‘‘registered entity’’;

(iii) in paragraph (8)(B)(ii)—

(I) in the first sentence, by striking ‘‘designation as a contract

market’’ and inserting ‘‘designation or registration as a contract

market or derivatives transaction execution facility’’;

(II) in the second sentence, by striking ‘‘designate a board of

trade as a contract market’’ and inserting ‘‘designate or register a

board of trade as a contract market or derivatives transaction execution facility’’; and

(III) in the fourth sentence, by striking ‘‘designating, or refusing,

suspending, or revoking the designation of, a board of trade as a

contract market involving transactions for future delivery referred

to in this clause or in considering possible emergency action under

section 8a(9) of this Act’’ and inserting ‘‘designating, registering, or

refusing, suspending, or revoking the designation or registration of,

a board of trade as a contract market or derivatives transaction

execution facility involving transactions for future delivery referred

to in this clause or in considering any possible action under this

Act (including without limitation emergency action under section

8a(9))’’, and by striking ‘‘designation, suspension, revocation, or

emergency action’’ and inserting ‘‘designation, registration, suspension, revocation, or action’’; and

(iv) by moving paragraphs (2) through (11) 2 ems to the right.

(3) Section 4 of the Commodity Exchange Act (7 U.S.C. 6) is amended—

(A) in subsection (a)—

(i) in paragraph (1), by striking ‘‘designated by the Commission as a

‘contract market’ for’’ and inserting ‘‘designated or registered by the

Commission as a contract market or derivatives transaction execution

facility for’’;

(ii) in paragraph (2), by striking ‘‘member of such’’; and

(iii) in paragraph (3), by inserting ‘‘or derivatives transaction execution facility’’ after ‘‘contract market’’; and

(B) in subsection (c)—

29

(i) in paragraph (1)—

(I) by striking ‘‘designated as a contract market’’ and inserting

‘‘designated or registered as a contract market or derivatives transaction execution facility’’; and

(II) by striking ‘‘section 2(a)(1)(B)’’ and inserting ‘‘section 2(g)’’;

and

(ii) in paragraph (2)(B)(ii), by inserting ‘‘or derivatives transaction

execution facility’’ after ‘‘contract market’’.

(4) Section 4a of the Commodity Exchange Act (7 U.S.C. 6a) is amended—

(A) in subsection (a)—

(i) in the first sentence, by inserting ‘‘or derivatives transaction execution facilities’’ after ‘‘contract markets’’; and

(ii) in the second sentence, by inserting ‘‘or derivatives transaction

execution facility’’ after ‘‘contract market’’;

(B) in subsection (b)—

(i) in paragraph (1), by inserting ‘‘, or derivatives transaction execution facility or facilities,’’ after ‘‘markets’’; and

(ii) in paragraph (2), by inserting ‘‘or derivatives transaction execution facility’’ after ‘‘contract market’’; and

(C) in subsection (e)—

(i) by striking ‘‘contract market or’’ each place it appears and inserting ‘‘contract market, derivatives transaction execution facility, or’’;

(ii) by striking ‘‘licensed or designated’’ each place it appears and inserting ‘‘licensed, designated, or registered’’; and

(iii) by striking ‘‘contract market, or’’ and inserting ‘‘contract market

or derivatives transaction execution facility, or’’.

(5) Section 4b(a) of the Commodity Exchange Act (7 U.S.C. 6b(a)) is amended

by striking ‘‘contract market’’ each place it appears and inserting ‘‘registered entity’’.

(6) Sections 4c(g), 4d, 4e, and 4f of the Commodity Exchange Act (7 U.S.C.

6c(g), 6d, 6e, 6f) are amended by inserting ‘‘or derivatives transaction execution

facility’’ after ‘‘contract market’’ each place it appears.

(7) Section 4g of the Commodity Exchange Act (7 U.S.C. 6g) is amended—

(A) in subsection (b), by striking ‘‘clearinghouse and contract market’’ and

inserting ‘‘registered entity’’; and

(B) in subsection (f), by striking ‘‘clearinghouses, contract markets, and

exchanges’’ and inserting ‘‘registered entities’’.

(8) Section 4h of the Commodity Exchange Act (7 U.S.C. 6h) is amended by

striking ‘‘contract market’’ each place it appears and inserting ‘‘registered entity’’.

(9) Section 4i of the Commodity Exchange Act (7 U.S.C. 6i) is amended in the

first sentence by inserting ‘‘or derivatives transaction execution facility’’ after

‘‘contract market’’.

(10) Section 4j of the Commodity Exchange Act (7 U.S.C. 6j) is repealed.

(11) Section 4l of the Commodity Exchange Act (7 U.S.C. 6l) is amended by

inserting ‘‘or derivatives transaction execution facilities’’ after ‘‘contract markets’’ each place it appears.

(12) Section 4p of the Commodity Exchange Act (7 U.S.C. 6p) (as determined

before the redesignation by paragraph (13) of this subsection) is amended—

(A) in the third sentence of subsection (a), by striking ‘‘Act or contract

markets’’ and inserting ‘‘Act, contract markets, or derivatives transaction

execution facilities’’; and

(B) in subsection (b), by inserting ‘‘derivatives transaction execution facility,’’ after ‘‘contract market,’’.

(13) The Commodity Exchange Act (as amended by paragraphs (10), (11), and

(12)) is amended by redesignating section 4k through 4p (7 U.S.C. 6k through

6p) as sections 4j through 4o, respectively.

(14) Section 6 of the Commodity Exchange Act (7 U.S.C. 8, 9, 9a, 9b, 13b, 15)

is amended—

(A) in subsection (a)—

(i) in the first sentence—

(I) by striking ‘‘board of trade desiring to be designated a ‘contract market’ shall make application to the Commission for such

designation’’ and inserting ‘‘person desiring to be designated or registered as a contract market or derivatives transaction execution

facility shall make application to the Commission for such designation or registration’’;

(II) by striking ‘‘above conditions’’ and inserting ‘‘conditions set

forth in this Act’’; and

30

(III) by striking ‘‘above requirements’’ and inserting ‘‘the requirements of this Act’’;

(ii) in the second sentence, by striking ‘‘designation as a contract

market within one year’’ and inserting ‘‘designation or registration as

a contract market or derivatives transaction execution facility within

180 days’’;

(iii) in the third sentence—

(I) by striking ‘‘board of trade’’ and inserting ‘‘person’’; and

(II) by striking ‘‘one-year period’’ and inserting ‘‘180-day period’’;

and

(iv) in the last sentence, by striking ‘‘designate as a ‘contract market’

any board of trade that has made application therefor, such board of

trade’’ and inserting ‘‘designate or register as a contract market or derivatives transaction execution facility any person that has made application therefor, such person’’;

(B) in subsection (b)—

(i) in the first sentence—

(I) by striking ‘‘designation of any board of trade as a ‘contract

market’ upon’’ and inserting ‘‘designation or registration of any

contract market or derivatives transaction execution facility on’’;

(II) by striking ‘‘board of trade’’ each place it appears and inserting ‘‘contract market or derivatives transaction execution facility’’;

and

(III) by striking ‘‘designation as set forth in section 5 of this Act’’

and inserting ‘‘designation or registration as set forth in sections

5 through 5b’’;

(ii) in the second sentence—

(I) by striking ‘‘board of trade’’ the first place it appears and inserting ‘‘contract market or derivatives transaction execution facility’’; and

(II) by striking ‘‘board of trade’’ the second and third places it appears and inserting ‘‘person’’; and

(iii) in the last sentence, by striking ‘‘board of trade’’ each place it appears and inserting ‘‘person’’;

(C) in subsection (c)—

(i) by striking ‘‘contract market’’ each place it appears and inserting

‘‘registered entity’’;

(ii) by striking ‘‘contract markets’’ each place it appears and inserting

‘‘registered entities’’; and

(iii) by striking ‘‘trading privileges’’ each place it appears and inserting ‘‘privileges’’;

(D) in subsection (d), by striking ‘‘contract market’’ each place it appears

and inserting ‘‘registered entity’’; and

(E) in subsection (e), by striking ‘‘trading on all contract markets’’ each

place it appears and inserting ‘‘the privileges of all registered entities’’.

(15) Section 6a of the Commodity Exchange Act (7 U.S.C. 10a) is amended—

(A) in the first sentence of subsection (a), by striking ‘‘designated as a

‘contract market’ shall’’ and inserting ‘‘designated or registered as a contract market or a derivatives transaction execution facility’’; and

(B) in subsection (b), by striking ‘‘designated as a contract market’’ and

inserting ‘‘designated or registered as a contract market or a derivatives

transaction execution facility’’.

(16) Section 6b of the Commodity Exchange Act (7 U.S.C. 13a) is amended—

(A) by striking ‘‘contract market’’ each place it appears and inserting ‘‘registered entity’’;

(B) in the first sentence, by striking ‘‘designation as set forth in section

5 of this Act’’ and inserting ‘‘designation or registration as set forth in sections 5 through 5c’’; and

(C) in the last sentence, by striking ‘‘the contract market’s ability’’ and

inserting ‘‘the ability of the registered entity’’.

(17) Section 6c(a) of the Commodity Exchange Act (7 U.S.C. 13a–1(a)) by

striking ‘‘contract market’’ and inserting ‘‘registered entity’’.

(18) Section 6d(1) of the Commodity Exchange Act (7 U.S.C. 13a–2(1)) is

amended by inserting ‘‘derivatives transaction execution facility,’’ after ‘‘contract

market,’’.

(19) Section 7 of the Commodity Exchange Act (7 U.S.C. 11) is amended—

(A) in the first sentence—

(i) by striking ‘‘board of trade’’ and inserting ‘‘person’’;

(ii) by inserting ‘‘or registered’’ after ‘‘designated’’;

31

(iii) by inserting ‘‘or registration’’ after ‘‘designation’’ each place it appears; and

(iv) by striking ‘‘contract market’’ each place it appears and inserting

‘‘registered entity’’;

(B) in the second sentence—

(i) by striking ‘‘designation of such board of trade as a contract market’’ and inserting ‘‘designation or registration of the registered entity’’;

and

(ii) by striking ‘‘contract markets’’ and inserting ‘‘registered entities’’;

and

(C) in the last sentence—

(i) by striking ‘‘board of trade’’ and inserting ‘‘person’’; and

(ii) by striking ‘‘designated again a contract market’’ and inserting

‘‘designated or registered again a registered entity’’.

(20) Section 8(c) of the Commodity Exchange Act (7 U.S.C. 12(c)) is amended

in the first sentence by striking ‘‘board of trade’’ and inserting ‘‘registered entity’’.

(21) Section 8a of the Commodity Exchange Act (7 U.S.C. 12a) is amended—

(A) by striking ‘‘contract market’’ each place it appears and inserting ‘‘registered entity’’; and

(B) in paragraph (2)(F), by striking ‘‘trading privileges’’ and inserting

‘‘privileges’’.

(22) Sections 8b and 8c(e) of the Commodity Exchange Act (7 U.S.C. 12b,

12c(e)) are amended by striking ‘‘contract market’’ each place it appears and inserting ‘‘registered entity’’.

(23) Section 8e of the Commodity Exchange Act (7 U.S.C. 12e) is amended—

(A) by striking ‘‘contract market’’ each place it appears and inserting ‘‘registered entity’’;

(B) in subsection (a), by striking ‘‘section 5a(b)’’ and inserting ‘‘sections

5 through 5c’’;

(C) in subsection (b)—

(i) in paragraph (1), by striking ‘‘a contract market’s trade monitoring

system implemented pursuant to section 5a(b)’’ and inserting ‘‘the trade

monitoring system of a registered entity implemented pursuant to sections 5 through 5c’’;

(ii) by striking paragraph (3) and inserting the following:

‘‘(3) REMEDIES.—On becoming final, the Commission deficiency order may require the registered entity to—

‘‘(A) institute appropriate improvements in its trade monitoring system

necessary to correct the deficiencies in the order;

‘‘(B) satisfy stated objective performance criteria to correct the deficiencies;

‘‘(C) upgrade or reconfigure existing systems for collecting or processing

relevant data on trading and trader or broker activity, including, where appropriate, the commitment of additional resources.’’; and

(iii) in paragraph (5)—

(I) in the paragraph heading, by striking ‘‘DESIGNATION AS CONTRACT MARKET’’ and inserting ‘‘DESIGNATION OR REGISTRATION AS

REGISTERED ENTITY’’;

(II) by inserting ‘‘or registration’’ after ‘‘designation’’; and

(III) by striking ‘‘board of trade’’ and inserting ‘‘person’’;

(D) in subsection (d)(2), by striking ‘‘section 5b’’ and inserting ‘‘section

5e’’; and

(E) in the paragraph heading of subsection (e)(2), by striking ‘‘CONTRACT

MARKETS’’ and inserting ‘‘REGISTERED ENTITIES’’.

(24) Section 9 of the Commodity Exchange Act (7 U.S.C. 13) is amended—

(A) by striking ‘‘contract market’’ each place it appears and inserting ‘‘registered entity’’; and

(B) in subsection (a)(2), by striking ‘‘section 4o(1),’’ and inserting ‘‘section

4n(1),’’.

(25) Section 14 of the Commodity Exchange Act (7 U.S.C. 18) is amended—

(A) in subsection (a)(1)(B), by striking ‘‘contract market’’ and inserting

‘‘registered entity’’; and

(B) in subsection (f), by striking ‘‘contract markets’’ and inserting ‘‘registered entities’’.

(26) Section 17 of the Commodity Exchange Act (7 U.S.C. 21) is amended by

striking ‘‘contract market’’ each place it appears and inserting ‘‘registered entity’’.

(27) Section 22 of the Commodity Exchange Act (7 U.S.C. 25) is amended—

32

(A) in subsection (a)—

(i) in paragraph (1)—

(I) by striking ‘‘contract market, clearing organization of a contract market, licensed board of trade,’’ and inserting ‘‘registered entity’’; and

(II) in subparagraph (C)(i), by striking ‘‘contract market’’ and inserting ‘‘registered entity’’;

(ii) in paragraph (2), by striking ‘‘sections 5a(11),’’ and inserting ‘‘sections 5(d)(13), 5b(b)(1)(E),’’; and

(iii) in paragraph (3), by striking ‘‘contract market’’ and inserting

‘‘registered entity’’; and

(B) in subsection (b)—

(i) in paragraph (1)—

(I) by striking ‘‘contract market or clearing organization of a contract market’’ and inserting ‘‘registered entity’’;

(II) by striking ‘‘section 5a(8) and section 5a(9) of this Act’’ and

inserting ‘‘sections 5 through 5c’’;

(III) by striking ‘‘contract market, clearing organization of a contract market, or licensed board of trade’’ and inserting ‘‘registered

entity’’; and

(IV) by striking ‘‘contract market or licensed board of trade’’ and

inserting ‘‘registered entity’’;

(ii) in paragraph (3)—

(I) by striking ‘‘contract market, clearing organization, licensed

board of trade,’’ and inserting ‘‘registered entity’’; and

(II) by striking ‘‘contract market, licensed board of trade’’ and inserting ‘‘registered entity’’;

(iii) in paragraph (4), by striking ‘‘contract market, licensed board of

trade, clearing organization’’ and inserting ‘‘registered entity’’; and

(iv) in paragraph (5), by striking ‘‘contract market, licensed board of

trade, clearing organization,’’ and inserting ‘‘registered entity’’.

(b) FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991.—Section 402(2) of the Federal Deposit Insurance Corporation Improvement Act of 1991

(12 U.S.C. 4402(2)) is amended by striking subparagraph (B) and inserting the following:

‘‘(B) that is registered as a derivatives clearing organization under section

5b of the Commodity Exchange Act.’’.

SEC. 129. REPORT TO CONGRESS.

(a) The Commodity Futures Trading Commission (in this section referred to as the

‘‘Commission’’) shall undertake and complete a study of the Commodity Exchange

Act (in this section referred to as ‘‘the Act’’) and the Commission’s rules, regulations

and orders governing the conduct of persons required to be registered under the Act,

not later than 1 year after the date of the enactment of this Act. The study shall

identify—

(1) the core principles and interpretations of acceptable business practices

that the Commission has adopted or intends to adopt to replace the provisions

of the Act and the Commission’s rules and regulations thereunder;

(2) the rules and regulations that the Commission has determined must be

retained and the reasons therefor;

(3) the extent to which the Commission believes it can effect the changes

identified in paragraph (1) of this subsection through its exemptive authority

under section 4(c) of the Act; and

(4) the regulatory functions the Commission currently performs that can be

delegated to a registered futures association (within the meaning of the Act)

and the regulatory functions that the Commission has determined must be retained and the reasons therefor.

(b) In conducting the study, the Commission shall solicit the views of the public

as well as Commission registrants, registered entities, and registered futures associations (all within the meaning of the Act).

(c) The Commission shall transmit to the Committee on Agriculture of the House

of Representatives and the Committee on Agriculture, Nutrition, and Forestry of the

Senate a report of the results of its study, which shall include an analysis of comments received.

SEC. 130. EFFECTIVE DATE.

(a) IN GENERAL.—Except as provided in subsection (b), this title shall take effect

on the date of enactment of this Act.

(b) JURISDICTION OF COMMISSION.—Section 108, and the amendments made by

that section, shall take effect 1 year after the date of enactment of this Act.

33

SEC. 131. INTERNATIONAL ACTIVITIES OF THE COMMODITY FUTURES TRADING COMMISSION.

(a) FINDINGS.—The Congress finds that—

(1) derivatives markets serving United States industry are increasingly global

in scope;

(2) developments in data processing and communications technologies enable

users of risk management services to analyze and compare those services on a

worldwide basis;

(3) financial services regulatory policy must be flexible to account for rapidly

changing derivatives industry business practices;

(4) regulatory impediments to the operation of global business interests can

compromise the competitiveness of United States businesses;

(5) events that disrupt financial markets and economies are often global in

scope, require rapid regulatory response, and coordinated regulatory effort

across international jurisdictions;

(6) through its membership in the International Organisation of Securities

Commissions, the Commodity Futures Trading Commission has promoted beneficial communication among market regulators and international regulatory cooperation; and

(7) the Commodity Futures Trading Commission and other United States financial regulators and self-regulatory organizations should continue to foster

productive and cooperative working relationships with their counterparts in foreign jurisdictions.

(b) SENSE OF THE CONGRESS.—It is the sense of the Congress that, consistent with

its responsibilities under the Commodity Exchange Act, the Commodity Futures

Trading Commission should, as part of its international activities, continue to coordinate with foreign regulatory authorities, to participate in international regulatory organizations and forums, and to provide technical assistance to foreign government authorities, in order to encourage—

(1) the facilitation of cross-border transactions through the removal or lessening of any unnecessary legal or practical obstacles;

(2) the development of internationally accepted regulatory standards of best

practice;

(3) the enhancement of international supervisory cooperation and emergency

procedures;

(4) the strengthening of international cooperation for customer and market

protection; and

(5) improvements in the quality and timeliness of international information

sharing.

SEC. 132. ANTIFRAUD PROVISIONS.

(a) IN GENERAL.—It shall be unlawful to commit retail derivatives fraud by the

use of any means or instruments of transportation or communication in interstate

commerce or of the mails.

(b) DEFINITIONS.—For purposes of this section, the following definitions shall

apply:

(1) ELIGIBLE CONTRACT PARTICIPANT.—The term ‘‘eligible contract participant’’

has the same meaning as in section 1a of the Commodity Exchange Act.

(2) FEDERAL FINANCIAL INSTITUTION REGULATOR.—The term ‘‘Federal financial

institution regulator’’ means—

(A) any Federal functional regulator (as defined in section 509(2) of the

Gramm-Leach-Bliley Act) in the case of any financial institution described

in paragraph (3)(A); and

(B) the Commodity Futures Trading Commission, in the case of a financial institution described in paragraph (3)(B).

(3) FINANCIAL INSTITUTION.—The term ‘‘financial institution’’—

(A) has the meaning given to such term in subparagraph (A) of section

509(3) of the Gramm-Leach-Bliley Act; and

(B) includes any person or entity described in subparagraph (B) of such

section 509(3).

(4) RETAIL DERIVATIVES FRAUD.—The term ‘‘retail derivatives fraud’’ means

any fraud perpetrated by a party on a counterparty (other than a counterparty

that is an eligible contract participant) to any agreement, contract, transaction,

warrant, note or option (other than a contract of sale of a commodity for future

delivery or an option on such contract (unless such contract or option has been

excluded from the Commodity Exchange Act under subsection (c), (d), (f), or (i)

of section 2 of such Act), or a security) that is based, in whole or in part, on

the value of any interest in, or a quantitative measure relating to 1 or more

commodities, securities, currencies, interest or other rates, indices, or other assets, or the occurrence of any event.

34

(5) SECURITY.—The term ‘‘security’’ has the same meaning as in section 3 of

the Securities Exchange Act of 1934.

(c) ENFORCEMENT.—This section shall be enforced by the appropriate Federal financial institution regulator, any appropriate State insurance authority, and the

Federal Trade Commission with respect to financial institutions and other persons

subject to the jurisdiction of such agency or authority under applicable law, as follows:

(1) Under section 8 of the Federal Deposit Insurance Act, in the case of—

(A) national banks, Federal branches and Federal agencies of foreign

banks, and any subsidiaries of such entities (except brokers, dealers, futures commission merchants, persons providing insurance, investment companies, and investment advisers), by the office of the Comptroller of the

Currency;

(B) member banks of the Federal Reserve System (other than national

banks), branches and agencies of foreign banks (other than Federal

branches, Federal agencies, and insured State branches of foreign banks),

commercial lending companies owned or controlled by foreign banks, organizations operating under section 25 or 25A of the Federal Reserve Act, and

bank holding companies and their nonbank affiliates (other than financial

institutions of whom the Securities and Exchange Commission is the federal functional regulator), by the Board of Governors of the Federal Reserve

System;

(C) banks insured by the Federal Deposit Insurance Corporation (other

than members of the Federal Reserve System), insured State branches of

foreign banks, and any subsidiaries of such entities (other than subsidiaries

of whom the Securities and Exchange Commission is the Federal functional

regulator), by the Board of Directors of the Federal Deposit Insurance Corporation; and

(D) savings associations the deposits of which are insured by the Federal

Deposit Insurance Corporation, and any subsidiaries of such savings associations (other than a subsidiary of whom the Securities and Exchange

Commission is the Federal functional regulator), by the Director of the Office of Thrift Supervision.

(2) Under the Federal Credit Union Act, by the Board of the National Credit

Union Administration with respect to any federally insured credit union, and

any subsidiary of any such credit union (other than a subsidiary of whom the

Securities and Exchange Commission is the Federal functional regulator).

(3) Under the Securities Exchange Act of 1934, by the Securities and Exchange Commission with respect to—

(A) any broker, dealer, or investment bank holding company; or

(B) any associated person of a broker or dealer, concerning the financial

or securities activities of which the broker or dealer makes and keeps

records under section 15C(b) or 17(h) of the Securities Exchange Act of

1934.

(4) Under the Investment Company Act of 1940, by the Securities and Exchange Commission with respect to investment companies.

(5) Under the Investment Advisers Act of 1940, by the Securities and Exchange Commission with respect to investment advisers.

(6) Under the Commodity Exchange Act, by the Commodity Futures Trading

Commission with respect to a commodity trading adviser, commodity pool operator, or futures commission merchant.

(7) Under State insurance law, in the case of any person engaged in providing

insurance, by the applicable State insurance authority of the State in which the

defrauded person is domiciled.

(8) Under the Federal Trade Commission Act, by the Federal Trade Commission for any other financial institution or other person that is not subject to the

jurisdiction of any agency or authority under any other paragraph of this subsection.

(d) CRIMINAL PENALTIES.—Any person who willfully violates subsection (a) shall

be fined not more than $1,000,000, in the case of an individual, or $2,500,000 in

the case of any person other than an individual, or imprisoned not more than 10

years, or both.

SEC. 133. RETAIL SWAP CUSTOMER PROTECTIONS.

(a) IN GENERAL.—The Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.) is

amended by adding at the end the following new section:

‘‘SEC. 49. RETAIL SWAP CUSTOMER PROTECTIONS.

‘‘(a) REGULATIONS AUTHORIZED.—The Board of Governors of the Federal Reserve

System and the Secretary of the Treasury may, in consultation with appropriate

35

Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, jointly prescribe customer protection regulations that apply to sales practices relating to swap agreements (as defined in section

206(b) of the Gramm-Leach-Bliley Act) between financial institutions and retail customers.

‘‘(b) SALES PRACTICE REGULATIONS.—The regulations prescribed under subsection

(a) may address—

‘‘(1) the information that financial institutions shall obtain from retail customers in order to determine whether swap agreements recommended by the financial institution to retail customers are appropriate in light of the retail customer’s net worth, ability and willingness to incur losses, risk management

needs, financial goals, investment experience and history, and other indicia of

appropriateness;

‘‘(2) information that financial institutions shall provide to retail customers to

help the retail customers understand the economic characteristics and risks of

swap agreements recommended by financial institutions;

‘‘(3) measures to protect retail customers against fraudulent, deceptive, and

manipulative acts and practices;

‘‘(4) the extent to which access of retail customers to particular classes of

swap agreements should be restricted; and

‘‘(5) such other matters as the Secretary of the Treasury and the Board of

Governors of the Federal Reserve System determine are necessary or appropriate for the protection of retail customers of swap agreements.

‘‘(c) DEFINITIONS.—

‘‘(1) FINANCIAL INSTITUTION.—The term ‘financial institution’ means a person

described in subclause (I), (II), (III), (IV), (V), or (VI) of section 2(c)(2)(B)(ii) of

the Commodity Exchange Act.

‘‘(2) RETAIL CUSTOMER.—The term ‘retail customer’ means a person other

than an eligible contract participant (as defined in section 1a(11) of the Commodity Exchange Act).

‘‘(d) ENFORCEMENT.—The regulations prescribed under subsection (a) shall be enforced as follows:

‘‘(1) Subject to section 45 of the Federal Deposit Insurance Act, under section

8 of the Federal Deposit Insurance Act, in the case of—

‘‘(A) any national bank, Federal branch or Federal agency of a foreign

bank, or any subsidiary of a national bank (other than any broker, dealer,

investment company or investment adviser) by the Comptroller of the Currency;

‘‘(B) any member bank (other than a national bank), branch or agency of

a foreign bank (other than a Federal branch, Federal agency, or insured

State branch of a foreign bank), commercial lending company owned or controlled by a foreign bank, organization operating under section 25 or 25A

of the Federal Reserve Act, any subsidiary of any such entity (other than

any broker, dealer, investment company or investment adviser) and any

bank holding company and any nonbank affiliate of any such company

(other than any broker, dealer, investment company or investment adviser)

by the Board of Governors of the Federal Reserve System;

‘‘(C) any insured State nonmember bank, insured State branch of a foreign bank, or any subsidiary of any such entity (other than any broker,

dealer, investment company, or investment adviser) by the Board of Directors of the Federal Deposit Insurance Corporation; and

‘‘(D) any savings association the deposits of which are insured by the Corporation, any savings and loan holding company, or any subsidiary of any

such savings association or holding company (other than any broker, dealer,

investment company or investment adviser) by the Director of the Office of

Thrift Supervision.

‘‘(2) Under the Federal Credit Union Act, by the National Credit Union Administration Board with respect to any federally insured credit union, and any

subsidiaries of such an entity.

‘‘(3) Under the Securities Exchange Act of 1934, by the Securities and Exchange Commission with respect to any registered broker or dealer, or any associated person thereof that is not otherwise regulated.

‘‘(4) Under the Commodity Exchange Act, by the Commodity Futures Trading

Commission, with respect to any registered futures commission merchant, or

any affiliated person of any such futures commission merchant that is not otherwise regulated.

‘‘(5) Under State insurance law, in the case of any person engaged in providing insurance, or any affiliate of any such person that is not otherwise reguVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00035 Fmt 6659 Sfmt 6621 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
36

lated, by the applicable State insurance authority of the State in which the person is domiciled.’’.

(b) REPORT.—If regulations authorized under the amendment made by subsection

(a) have not been prescribed in final form before the end of the 1-year period beginning on the date of the enactment of this Act, the Board of Governors of the Federal

Reserve System and the Secretary of the Treasury shall each submit a report to the

Congress within 15 days after the end of such period containing an explanation of

why such regulations were not prescribed in final form by the end of such period.

TITLE II—FINANCIAL CONTRACT NETTING

IMPROVEMENT

SEC. 201. SHORT TITLE.

This title may be cited as the ‘‘Financial Contract Netting Improvement Act of

2000’’.

SEC. 202. TREATMENT OF CERTAIN AGREEMENTS BY CONSERVATORS OR RECEIVERS OF INSURED DEPOSITORY INSTITUTIONS.

(a) DEFINITION OF QUALIFIED FINANCIAL CONTRACT.—Section 11(e)(8)(D)(i) of the

Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)(D)(i)) is amended by inserting

‘‘, resolution or order’’ after ‘‘any similar agreement that the Corporation determines

by regulation’’.

(b) DEFINITION OF SECURITIES CONTRACT.—Section 11(e)(8)(D)(ii) of the Federal

Deposit Insurance Act (12 U.S.C. 1821(e)(8)(D)(ii)) is amended to read as follows:

‘‘(ii) SECURITIES CONTRACT.—The term ‘securities contract’—

‘‘(I) means a contract for the purchase, sale, or loan of a security,

a certificate of deposit, a mortgage loan, or any interest in a mortgage loan, a group or index of securities, certificates of deposit, or

mortgage loans or interests therein (including any interest therein

or based on the value thereof) or any option on any of the foregoing, including any option to purchase or sell any such security,

certificate of deposit, loan, interest, group or index, or option;

‘‘(II) does not include any purchase, sale, or repurchase obligation

under a participation in a commercial mortgage loan unless the

Corporation determines by regulation, resolution, or order to include any such agreement within the meaning of such term;

‘‘(III) means any option entered into on a national securities exchange relating to foreign currencies;

‘‘(IV) means the guarantee by or to any securities clearing agency

of any settlement of cash, securities, certificates of deposit, mortgage loans or interests therein, group or index of securities, certificates of deposit, or mortgage loans or interests therein (including

any interest therein or based on the value thereof) or option on any

of the foregoing, including any option to purchase or sell any such

security, certificate of deposit, loan, interest, group or index, or option;

‘‘(V) means any margin loan;

‘‘(VI) means any other agreement or transaction that is similar

to any agreement or transaction referred to in this clause;

‘‘(VII) means any combination of the agreements or transactions

referred to in this clause;

‘‘(VIII) means any option to enter into any agreement or transaction referred to in this clause;

‘‘(IX) means a master agreement that provides for an agreement

or transaction referred to in subclause (I), (III), (IV), (V), (VI), (VII),

or (VIII), together with all supplements to any such master agreement, without regard to whether the master agreement provides

for an agreement or transaction that is not a securities contract

under this clause, except that the master agreement shall be considered to be a securities contract under this clause only with respect to each agreement or transaction under the master agreement that is referred to in subclause (I), (III), (IV), (V), (VI), (VII),

or (VIII); and

‘‘(X) means any security agreement or arrangement or other

credit enhancement related to any agreement or transaction referred to in this clause.’’.

(c) DEFINITION OF COMMODITY CONTRACT.—Section 11(e)(8)(D)(iii) of the Federal

Deposit Insurance Act (12 U.S.C. 1821(e)(8)(D)(iii)) is amended to read as follows:

37

‘‘(iii) COMMODITY CONTRACT.—The term ‘commodity contract’ means—

‘‘(I) with respect to a futures commission merchant, a contract for

the purchase or sale of a commodity for future delivery on, or subject to the rules of, a contract market or board of trade;

‘‘(II) with respect to a foreign futures commission merchant, a

foreign future;

‘‘(III) with respect to a leverage transaction merchant, a leverage

transaction;

‘‘(IV) with respect to a clearing organization, a contract for the

purchase or sale of a commodity for future delivery on, or subject

to the rules of, a contract market or board of trade that is cleared

by such clearing organization, or commodity option traded on, or

subject to the rules of, a contract market or board of trade that is

cleared by such clearing organization;

‘‘(V) with respect to a commodity options dealer, a commodity option;

‘‘(VI) any other agreement or transaction that is similar to any

agreement or transaction referred to in this clause;

‘‘(VII) any combination of the agreements or transactions referred to in this clause;

‘‘(VIII) any option to enter into any agreement or transaction referred to in this clause;

‘‘(IX) a master agreement that provides for an agreement or

transaction referred to in subclause (I), (II), (III), (IV), (V), (VI),

(VII), or (VIII), together with all supplements to any such master

agreement, without regard to whether the master agreement provides for an agreement or transaction that is not a commodity contract under this clause, except that the master agreement shall be

considered to be a commodity contract under this clause only with

respect to each agreement or transaction under the master agreement that is referred to in subclause (I), (II), (III), (IV), (V), (VI),

(VII), or (VIII); or

‘‘(X) any security agreement or arrangement or other credit enhancement related to any agreement or transaction referred to in

this clause.’’.

(d) DEFINITION OF FORWARD CONTRACT.—Section 11(e)(8)(D)(iv) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)(D)(iv)) is amended to read as follows:

‘‘(iv) FORWARD CONTRACT.—The term ‘forward contract’ means—

‘‘(I) a contract (other than a commodity contract) for the purchase, sale, or transfer of a commodity or any similar good, article,

service, right, or interest which is presently or in the future becomes the subject of dealing in the forward contract trade, or product or byproduct thereof, with a maturity date more than 2 days

after the date the contract is entered into, including a repurchase

transaction, reverse repurchase transaction, consignment, lease,

swap, hedge transaction, deposit, loan, option, allocated transaction, unallocated transaction, or any other similar agreement;

‘‘(II) any combination of agreements or transactions referred to

in subclauses (I) and (III);

‘‘(III) any option to enter into any agreement or transaction referred to in subclause (I) or (II);

‘‘(IV) a master agreement that provides for an agreement or

transaction referred to in subclause (I), (II), or (III), together with

all supplements to any such master agreement, without regard to

whether the master agreement provides for an agreement or transaction that is not a forward contract under this clause, except that

the master agreement shall be considered to be a forward contract

under this clause only with respect to each agreement or transaction under the master agreement that is referred to in subclause

(I), (II), or (III); or

‘‘(V) any security agreement or arrangement or other credit enhancement related to any agreement or transaction referred to in

subclause (I), (II), (III), or (IV).’’.

(e) DEFINITION OF REPURCHASE AGREEMENT.—Section 11(e)(8)(D)(v) of the Federal

Deposit Insurance Act (12 U.S.C. 1821(e)(8)(D)(v)) is amended to read as follows:

‘‘(v) REPURCHASE AGREEMENT.—The term ‘repurchase agreement’

(which definition also applies to the term ‘reverse repurchase agreement’)—

38

‘‘(I) means an agreement, including related terms, which provides

for the transfer of 1 or more certificates of deposit, mortgage-related securities (as such term is defined in the Securities Exchange

Act of 1934), mortgage loans, interests in mortgage-related securities or mortgage loans, eligible bankers’ acceptances, qualified foreign government securities or securities that are direct obligations

of, or that are fully guaranteed by, the United States or any agency

of the United States against the transfer of funds by the transferee

of such certificates of deposit, eligible bankers’ acceptances, securities, loans, or interests with a simultaneous agreement by such

transferee to transfer to the transferor thereof certificates of deposit, eligible bankers’ acceptances, securities, loans, or interests as

described above, at a date certain not later than 1 year after such

transfers or on demand, against the transfer of funds, or any other

similar agreement;

‘‘(II) does not include any repurchase obligation under a participation in a commercial mortgage loan unless the Corporation determines by regulation, resolution, or order to include any such

participation within the meaning of such term;

‘‘(III) means any combination of agreements or transactions referred to in subclauses (I) and (IV);

‘‘(IV) means any option to enter into any agreement or transaction referred to in subclause (I) or (III);

‘‘(V) means a master agreement that provides for an agreement

or transaction referred to in subclause (I), (III), or (IV), together

with all supplements to any such master agreement, without regard to whether the master agreement provides for an agreement

or transaction that is not a repurchase agreement under this

clause, except that the master agreement shall be considered to be

a repurchase agreement under this subclause only with respect to

each agreement or transaction under the master agreement that is

referred to in subclause (I), (III), or (IV); and

‘‘(VI) means any security agreement or arrangement or other

credit enhancement related to any agreement or transaction referred to in subclause (I), (III), (IV), or (V).

For purposes of this clause, the term ‘qualified foreign government security’ means a security that is a direct obligation of, or that is fully

guaranteed by, the central government of a member of the Organization for Economic Cooperation and Development (as determined by regulation or order adopted by the appropriate Federal banking authority).’’.

(f) DEFINITION OF SWAP AGREEMENT.—Section 11(e)(8)(D)(vi) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)(D)(vi)) is amended to read as follows:

‘‘(vi) SWAP AGREEMENT.—The term ‘swap agreement’ means—

‘‘(I) any agreement, including the terms and conditions incorporated by reference in any such agreement, which is an interest

rate swap, option, future, or forward agreement, including a rate

floor, rate cap, rate collar, cross-currency rate swap, and basis

swap; a spot, same day-tomorrow, tomorrow-next, forward, or other

foreign exchange or precious metals agreement; a currency swap,

option, future, or forward agreement; an equity index or equity

swap, option, future, or forward agreement; a debt index or debt

swap, option, future, or forward agreement; a credit spread or credit swap, option, future, or forward agreement; a commodity index

or commodity swap, option, future, or forward agreement; or a

weather swap, weather derivative, or a weather option;

‘‘(II) any agreement or transaction similar to any other agreement or transaction referred to in this clause that is presently, or

in the future becomes, regularly entered into in the swap market

(including terms and conditions incorporated by reference in such

agreement) and that is a forward, swap, future, or option on 1 or

more rates, currencies, commodities, equity securities or other equity instruments, debt securities or other debt instruments, or economic indices or measures of economic risk or value;

‘‘(III) any combination of agreements or transactions referred to

in this clause;

‘‘(IV) any option to enter into any agreement or transaction referred to in this clause;

39

‘‘(V) a master agreement that provides for an agreement or

transaction referred to in subclause (I), (II), (III), or (IV), together

with all supplements to any such master agreement, without regard to whether the master agreement contains an agreement or

transaction that is not a swap agreement under this clause, except

that the master agreement shall be considered to be a swap agreement under this clause only with respect to each agreement or

transaction under the master agreement that is referred to in subclause (I), (II), (III), or (IV); and

‘‘(VI) any security agreement or arrangement or other credit enhancement related to any agreements or transactions referred to in

subparagraph (I), (II), (III), (IV), or (V).

Such term is applicable for purposes of this title only and shall not be

construed or applied so as to challenge or affect the characterization,

definition, or treatment of any swap agreement under any other statute, regulation, or rule, including the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of

1935, the Trust Indenture Act of 1939, the Investment Company Act

of 1940, the Investment Advisers Act of 1940, the Securities Investor

Protection Act of 1970, the Commodity Exchange Act, and the regulations promulgated by the Securities and Exchange Commission or the

Commodity Futures Trading Commission.’’.

(g) DEFINITION OF TRANSFER.—Section 11(e)(8)(D)(viii) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)(D)(viii)) is amended to read as follows:

‘‘(viii) TRANSFER.—The term ‘transfer’ means every mode, direct or

indirect, absolute or conditional, voluntary or involuntary, of disposing

of or parting with property or with an interest in property, including

retention of title as a security interest and foreclosure of the depository

institutions’s equity of redemption.’’.

(h) TREATMENT OF QUALIFIED FINANCIAL CONTRACTS.—Section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)) is amended—

(1) in subparagraph (A), by striking ‘‘paragraph (10)’’ and inserting ‘‘paragraphs (9) and (10)’’;

(2) in subparagraph (A)(i), by striking ‘‘to cause the termination or liquidation’’ and inserting ‘‘such person has to cause the termination, liquidation, or

acceleration’’;

(3) by amending subparagraph (A)(ii) to read as follows:

‘‘(ii) any right under any security agreement or arrangement or other

credit enhancement related to 1 or more qualified financial contracts

described in clause (i);’’; and

(4) by amending subparagraph (E)(ii) to read as follows:

‘‘(ii) any right under any security agreement or arrangement or other

credit enhancement related to 1 or more qualified financial contracts

described in clause (i);’’.

(i) AVOIDANCE OF TRANSFERS.—Section 11(e)(8)(C)(i) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)(C)(i)) is amended by inserting ‘‘section 5242 of the

Revised Statutes of the United States (12 U.S.C. 91) or any other Federal or State

law relating to the avoidance of preferential or fraudulent transfers,’’ before ‘‘the

Corporation’’.

SEC. 203. AUTHORITY OF THE CORPORATION WITH RESPECT TO FAILED AND FAILING INSTITUTIONS.

(a) IN GENERAL.—Section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C.

1821(e)(8)) is amended—

(1) in subparagraph (E), by striking ‘‘other than paragraph (12) of this subsection, subsection (d)(9)’’ and inserting ‘‘other than subsections (d)(9) and

(e)(10)’’; and

(2) by adding at the end the following new subparagraphs:

‘‘(F) CLARIFICATION.—No provision of law shall be construed as limiting

the right or power of the Corporation, or authorizing any court or agency

to limit or delay, in any manner, the right or power of the Corporation to

transfer any qualified financial contract in accordance with paragraphs (9)

and (10) of this subsection or to disaffirm or repudiate any such contract

in accordance with paragraph (1).

‘‘(G) WALKAWAY CLAUSES NOT EFFECTIVE.—

‘‘(i) IN GENERAL.—Notwithstanding the provisions of subparagraphs

(A) and (E), and sections 403 and 404 of the Federal Deposit Insurance

Corporation Improvement Act of 1991, no walkaway clause shall be enforceable in a qualified financial contract of an insured depository institution in default.

40

‘‘(ii) WALKAWAY CLAUSE DEFINED.—For purposes of this subparagraph, the term ‘walkaway clause’ means a provision in a qualified financial contract that, after calculation of a value of a party’s position

or an amount due to or from 1 of the parties in accordance with its

terms upon termination, liquidation, or acceleration of the qualified financial contract, either does not create a payment obligation of a party

or extinguishes a payment obligation of a party in whole or in part solely because of such party’s status as a nondefaulting party.’’.

(b) TECHNICAL AND CONFORMING AMENDMENT.—Section 11(e)(12)(A) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(12)(A)) is amended by inserting ‘‘or

the exercise of rights or powers’’ after ‘‘the appointment’’.

SEC. 204. AMENDMENTS RELATING TO TRANSFERS OF QUALIFIED FINANCIAL CONTRACTS.

(a) TRANSFERS OF QUALIFIED FINANCIAL CONTRACTS TO FINANCIAL INSTITUTIONS.—Section 11(e)(9) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(9))

is amended to read as follows:

‘‘(9) TRANSFER OF QUALIFIED FINANCIAL CONTRACTS.—

‘‘(A) IN GENERAL.—In making any transfer of assets or liabilities of a depository institution in default which includes any qualified financial contract, the conservator or receiver for such depository institution shall

either—

‘‘(i) transfer to 1 financial institution, other than a financial institution for which a conservator, receiver, trustee in bankruptcy, or other

legal custodian has been appointed or which is otherwise the subject

of a bankruptcy or insolvency proceeding—

‘‘(I) all qualified financial contracts between any person or any

affiliate of such person and the depository institution in default;

‘‘(II) all claims of such person or any affiliate of such person

against such depository institution under any such contract (other

than any claim which, under the terms of any such contract, is

subordinated to the claims of general unsecured creditors of such

institution);

‘‘(III) all claims of such depository institution against such person

or any affiliate of such person under any such contract; and

‘‘(IV) all property securing or any other credit enhancement for

any contract described in subclause (I) or any claim described in

subclause (II) or (III) under any such contract; or

‘‘(ii) transfer none of the qualified financial contracts, claims, property or other credit enhancement referred to in clause (i) (with respect

to such person and any affiliate of such person).

‘‘(B) TRANSFER TO FOREIGN BANK, FOREIGN FINANCIAL INSTITUTION, OR

BRANCH OR AGENCY OF A FOREIGN BANK OR FINANCIAL INSTITUTION.—In

transferring any qualified financial contracts and related claims and property pursuant to subparagraph (A)(i), the conservator or receiver for such

depository institution shall not make such transfer to a foreign bank, financial institution organized under the laws of a foreign country, or a branch

or agency of a foreign bank or financial institution unless, under the law

applicable to such bank, financial institution, branch or agency, to the

qualified financial contracts, and to any netting contract, any security

agreement or arrangement or other credit enhancement related to 1 or

more qualified financial contracts, the contractual rights of the parties to

such qualified financial contracts, netting contracts, security agreements or

arrangements, or other credit enhancements are enforceable substantially

to the same extent as permitted under this section.

‘‘(C) TRANSFER OF CONTRACTS SUBJECT TO THE RULES OF A CLEARING ORGANIZATION.—In the event that a conservator or receiver transfers any

qualified financial contract and related claims, property and credit enhancements pursuant to subparagraph (A)(i) and such contract is subject to the

rules of a clearing organization, the clearing organization shall not be required to accept the transferee as a member by virtue of the transfer.

‘‘(D) DEFINITION.—For purposes of this section, the term ‘financial institution’ means a broker or dealer, a depository institution, a futures commission merchant, or any other institution as determined by the Corporation

by regulation to be a financial institution.’’.

(b) NOTICE TO QUALIFIED FINANCIAL CONTRACT COUNTERPARTIES.—Section

11(e)(10)(A) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(10)(A)) is

amended by amending the flush material following clause (ii) to read as follows: ‘‘the

conservator or receiver shall notify any person who is a party to any such contract

of such transfer by 5:00 p.m. (eastern time) on the business day following the date

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of the appointment of the receiver, in the case of a receivership, or the business day

following such transfer, in the case of a conservatorship.’’.

(c) RIGHTS AGAINST RECEIVER AND TREATMENT OF BRIDGE BANKS.—Section

11(e)(10) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(10)) is further

amended—

(1) by redesignating subparagraph (B) as subparagraph (D); and

(2) by inserting after subparagraph (A) the following new subparagraphs:

‘‘(B) CERTAIN RIGHTS NOT ENFORCEABLE.—

‘‘(i) RECEIVERSHIP.—A person who is a party to a qualified financial

contract with an insured depository institution may not exercise any

right such person has to terminate, liquidate, or net such contract

under paragraph (8)(A) or section 403 or 404 of the Federal Deposit Insurance Corporation Improvement Act of 1991 solely by reason of or incidental to the appointment of a receiver for the depository institution

(or the insolvency or financial condition of the depository institution for

which the receiver has been appointed)—

‘‘(I) until 5:00 p.m. (eastern time) on the business day following

the date of the appointment of the receiver; or

‘‘(II) after the person has received notice that the contract has

been transferred pursuant to paragraph (9)(A).

‘‘(ii) CONSERVATORSHIP.—A person who is a party to a qualified financial contract with an insured depository institution may not exercise

any right such person has to terminate, liquidate, or net such contract

under paragraph (8)(E) or section 403 or 404 of the Federal Deposit Insurance Corporation Improvement Act of 1991, solely by reason of or

incidental to the appointment of a conservator for the depository institution (or the insolvency or financial condition of the depository institution for which the conservator has been appointed).

‘‘(iii) NOTICE.—For purposes of this subsection, the Corporation as receiver or conservator of an insured depository institution shall be

deemed to have notified a person who is a party to a qualified financial

contract with such depository institution if the Corporation has taken

steps reasonably calculated to provide notice to such person by the time

specified in subparagraph (A) of this subsection.

‘‘(C) TREATMENT OF BRIDGE BANKS.—The following institutions shall not

be considered a financial institution for which a conservator, receiver, trustee in bankruptcy, or other legal custodian has been appointed or which is

otherwise the subject of a bankruptcy or insolvency proceeding for purposes

of paragraph (9)—

‘‘(i) a bridge bank; or

‘‘(ii) a depository institution organized by the Corporation, for which

a conservator is appointed either—

‘‘(I) immediately upon the organization of the institution; or

‘‘(II) at the time of a purchase and assumption transaction between such institution and the Corporation as receiver for a depository institution in default.’’.

SEC. 205. AMENDMENTS RELATING TO DISAFFIRMANCE OR REPUDIATION OF QUALIFIED FINANCIAL CONTRACTS.

(a) IN GENERAL.—Section 11(e) of the Federal Deposit Insurance Act (12 U.S.C.

1821(e)) is further amended—

(1) by redesignating paragraphs (11) through (15) as paragraphs (12) through

(16), respectively; and

(2) by inserting after paragraph (10) the following new paragraph:

‘‘(11) DISAFFIRMANCE OR REPUDIATION OF QUALIFIED FINANCIAL CONTRACTS.—

In exercising the rights of disaffirmance or repudiation of a conservator or receiver with respect to any qualified financial contract to which an insured depository institution is a party, the conservator or receiver for such institution

shall either—

‘‘(A) disaffirm or repudiate all qualified financial contracts between—

‘‘(i) any person or any affiliate of such person; and

‘‘(ii) the depository institution in default; or

‘‘(B) disaffirm or repudiate none of the qualified financial contracts referred to in subparagraph (A) (with respect to such person or any affiliate

of such person).’’.

(b) TECHNICAL AND CONFORMING AMENDMENTS.—Section 11(e)(8) of the Federal

Deposit Insurance Act (12 U.S.C. 1821(e)(8)) is amended in subparagraph (C)(i), by

striking ‘‘(11)’’ and inserting ‘‘(12)’’.

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SEC. 206. CLARIFYING AMENDMENT RELATING TO MASTER AGREEMENTS.

Section 11(e)(8)(D)(vii) of the Federal Deposit Insurance Act (12 U.S.C.

1821(e)(8)(D)(vii)) is amended to read as follows:

‘‘(vii) TREATMENT OF MASTER AGREEMENT AS 1 AGREEMENT.—Any

master agreement for any contract or agreement described in any preceding clause of this subparagraph (or any master agreement for such

master agreement or agreements), together with all supplements to

such master agreement, shall be treated as a single agreement and a

single qualified financial contract. If a master agreement contains provisions relating to agreements or transactions that are not themselves

qualified financial contracts, the master agreement shall be deemed to

be a qualified financial contract only with respect to those transactions

that are themselves qualified financial contracts.’’.

SEC. 207. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991.

(a) DEFINITIONS.—Section 402 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4402) is amended—

(1) in paragraph (2)—

(A) by inserting ‘‘or exempt from such registration pursuant to an order

of the Securities and Exchange Commission’’ before the semicolon at the

end of subparagraph (A)(ii); and

(B) by inserting ‘‘or that has been granted an exemption pursuant to section 4(c)(1) of such Act’’ before the period at the end of subparagraph (B);

(2) in paragraph (6)—

(A) by redesignating subparagraphs (B) through (D) as subparagraphs (C)

through (E), respectively;

(B) by inserting after subparagraph (A) the following new subparagraph:

‘‘(B) an uninsured national bank or an uninsured State bank that is a

member of the Federal Reserve System if the national bank or State member bank is not eligible to make application to become an insured bank

under section 5 of the Federal Deposit Insurance Act;’’; and

(C) by amending subparagraph (C) (as redesignated) to read as follows:

‘‘(C) a branch or agency of a foreign bank, a foreign bank and any branch

or agency of the foreign bank, or the foreign bank that established the

branch or agency, as those terms are defined in section 1(b) of the International Banking Act of 1978;’’;

(3) in paragraph (11), by adding before the period ‘‘and any other clearing organization with which such clearing organization has a netting contract’’;

(4) by amending paragraph (14)(A)(i) to read as follows:

‘‘(i) means a contract or agreement between two or more financial institutions, clearing organizations, or members that provides for netting

present or future payment obligations or payment entitlements (including liquidation or closeout values relating to such obligations or entitlements) among the parties to the agreement; and’’; and

(5) by adding at the end the following new paragraph:

‘‘(15) PAYMENT.—The term ‘payment’ means a payment of United States dollars, another currency, or a composite currency, and a noncash delivery, including a payment or delivery to liquidate an unmatured obligation.’’.

(b) ENFORCEABILITY OF BILATERAL NETTING CONTRACTS.—Section 403 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4403) is

amended—

(1) by amending subsection (a) to read as follows:

‘‘(a) GENERAL RULE.—Notwithstanding any other provision of State or Federal law

(other than paragraphs (8)(E), (8)(F), and (10)(B) of section 11(e) of the Federal Deposit Insurance Act or any order authorized under section 5(b)(2) of the Securities

Investor Protection Act of 1970), the covered contractual payment obligations and

the covered contractual payment entitlements between any two financial institutions shall be netted in accordance with, and subject to the conditions of, the terms

of any applicable netting contract (except as provided in section 561(b)(2) of title 11,

United States Code).’’; and

(2) by adding at the end the following new subsection:

‘‘(f) ENFORCEABILITY OF SECURITY AGREEMENTS.—The provisions of any security

agreement or arrangement or other credit enhancement related to 1 or more netting

contracts between any two financial institutions shall be enforceable in accordance

with their terms (except as provided in section 561(b)(2) of title 11, United States

Code) and shall not be stayed, avoided, or otherwise limited by any State or Federal

law (other than paragraphs (8)(E), (8)(F), and (10)(B) of section 11(e) of the Federal

Deposit Insurance Act and section 5(b)(2) of the Securities Investor Protection Act

of 1970).’’.

43

(c) ENFORCEABILITY OF CLEARING ORGANIZATION NETTING CONTRACTS.—Section

404 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12

U.S.C. 4404) is amended—

(1) by amending subsection (a) to read as follows:

‘‘(a) GENERAL RULE.—Notwithstanding any other provision of State or Federal law

(other than paragraphs (8)(E), (8)(F), and (10)(B) of section 11(e) of the Federal Deposit Insurance Act and any order authorized under section 5(b)(2) of the Securities

Investor Protection Act of 1970), the covered contractual payment obligations and

the covered contractual payment entitlements of a member of a clearing organization to and from all other members of a clearing organization shall be netted in accordance with and subject to the conditions of any applicable netting contract (except as provided in section 561(b)(2) of title 11, United States Code).’’; and

(2) by adding at the end the following new subsection:

‘‘(h) ENFORCEABILITY OF SECURITY AGREEMENTS.—The provisions of any security

agreement or arrangement or other credit enhancement related to 1 or more netting

contracts between any two members of a clearing organization shall be enforceable

in accordance with their terms (except as provided in section 561(b)(2) of title 11,

United States Code) and shall not be stayed, avoided, or otherwise limited by any

State or Federal law (other than paragraphs (8)(E), (8)(F), and (10)(B) of section

11(e) of the Federal Deposit Insurance Act and section 5(b)(2) of the Securities Investor Protection Act of 1970).’’.

(d) ENFORCEABILITY OF CONTRACTS WITH UNINSURED NATIONAL BANKS AND UNIN- SURED FEDERAL BRANCHES AND AGENCIES.—The Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401 et seq.) is amended—

(1) by redesignating section 407 as section 407A; and

(2) by adding after section 406 the following new section:

‘‘SEC. 407. TREATMENT OF CONTRACTS WITH UNINSURED NATIONAL BANKS AND UNINSURED

FEDERAL BRANCHES AND AGENCIES.

‘‘(a) IN GENERAL.—Notwithstanding any other provision of law, paragraphs (8),

(9), (10), and (11) of section 11(e) of the Federal Deposit Insurance Act shall apply

to an uninsured national bank or uninsured Federal branch or Federal agency

except—

‘‘(1) any reference to the ‘Corporation as receiver’ or ‘the receiver or the Corporation’ shall refer to the receiver of an uninsured national bank or uninsured

Federal branch or Federal agency appointed by the Comptroller of the Currency;

‘‘(2) any reference to the ‘Corporation’ (other than in section 11(e)(8)(D) of

such Act), the ‘Corporation, whether acting as such or as conservator or receiver’, a ‘receiver’, or a ‘conservator’ shall refer to the receiver or conservator

of an uninsured national bank or uninsured Federal branch or Federal agency

appointed by the Comptroller of the Currency; and

‘‘(3) any reference to an ‘insured depository institution’ or ‘depository institution’ shall refer to an uninsured national bank or an uninsured Federal branch

or Federal agency.

‘‘(b) LIABILITY.—The liability of a receiver or conservator of an uninsured national

bank or uninsured Federal branch or agency shall be determined in the same manner and subject to the same limitations that apply to receivers and conservators of

insured depository institutions under section 11(e) of the Federal Deposit Insurance

Act.

‘‘(c) REGULATORY AUTHORITY.—

‘‘(1) IN GENERAL.—The Comptroller of the Currency, in consultation with the

Federal Deposit Insurance Corporation, may promulgate regulations to implement this section.

‘‘(2) SPECIFIC REQUIREMENT.—In promulgating regulations to implement this

section, the Comptroller of the Currency shall ensure that the regulations generally are consistent with the regulations and policies of the Federal Deposit Insurance Corporation adopted pursuant to the Federal Deposit Insurance Act.

‘‘(d) DEFINITIONS.—For purposes of this section, the terms ‘Federal branch’, ‘Federal agency’, and ‘foreign bank’ have the same meaning as in section 1(b) of the

International Banking Act.’’.

SEC. 208. BANKRUPTCY CODE AMENDMENTS.

(a) DEFINITIONS OF FORWARD CONTRACT, REPURCHASE AGREEMENT, SECURITIES

CLEARING AGENCY, SWAP AGREEMENT, COMMODITY CONTRACT, AND SECURITIES CONTRACT.—Title 11, United States Code, is amended—

(1) in section 101—

(A) in paragraph (25)—

(i) by striking ‘‘means a contract’’ and inserting ‘‘means—

‘‘(A) a contract’’;

44

(ii) by striking ‘‘, or any combination thereof or option thereon;’’ and

inserting ‘‘, or any other similar agreement;’’; and

(iii) by adding at the end the following:

‘‘(B) any combination of agreements or transactions referred to in subparagraphs (A) and (C);

‘‘(C) any option to enter into an agreement or transaction referred to in

subparagraph (A) or (B);

‘‘(D) a master agreement that provides for an agreement or transaction

referred to in subparagraph (A), (B), or (C), together with all supplements

to any such master agreement, without regard to whether such master

agreement provides for an agreement or transaction that is not a forward

contract under this paragraph, except that such master agreement shall be

considered to be a forward contract under this paragraph only with respect

to each agreement or transaction under such master agreement that is referred to in subparagraph (A), (B) or (C); or

‘‘(E) any security agreement or arrangement, or other credit enhancement

related to any agreement or transaction referred to in subparagraph (A),

(B), (C), or (D), but not to exceed the actual value of such contract on the

date of the filing of the petition;’’;

(B) in paragraph (46), by striking ‘‘on any day during the period beginning 90 days before the date of’’ and replacing it with ‘‘at any time before’’;

(C) by amending paragraph (47) to read as follows:

‘‘(47) ‘repurchase agreement’ (which definition also applies to a ‘reverse repurchase agreement’)—

‘‘(A) means—

‘‘(i) an agreement, including related terms, which provides for the

transfer of 1 or more certificates of deposit, mortgage-related securities

(as defined in the Securities Exchange Act of 1934), mortgage loans, interests in mortgage-related securities or mortgage loans, eligible bankers’ acceptances, qualified foreign government securities, or securities

that are direct obligations of, or that are fully guaranteed by, the

United States or any agency of the United States against the transfer

of funds by the transferee of such certificates of deposit, eligible bankers’ acceptances, securities, loans, or interests, with a simultaneous

agreement by such transferee to transfer to the transferor thereof certificates of deposit, eligible bankers’ acceptance, securities, loans, or interests of the kind described above, at a date certain not later than 1

year after such transfer or on demand, against the transfer of funds;

‘‘(ii) any combination of agreements or transactions referred to in

clauses (i) and (iii);

‘‘(iii) an option to enter into an agreement or transaction referred to

in clause (i) or (ii);

‘‘(iv) a master agreement that provides for an agreement or transaction referred to in clause (i), (ii), or (iii), together with all supplements to any such master agreement, without regard to whether such

master agreement provides for an agreement or transaction that is not

a repurchase agreement under this paragraph, except that such master

agreement shall be considered to be a repurchase agreement under this

paragraph only with respect to each agreement or transaction under

the master agreement that is referred to in clause (i), (ii), or (iii); or

‘‘(v) any security agreement or arrangement or other credit enhancement related to any agreement or transaction referred to in clause (i),

(ii), (iii), or (iv), but not to exceed the actual value of such contract on

the date of the filing of the petition; and

‘‘(B) does not include a repurchase obligation under a participation in a

commercial mortgage loan,

and, for purposes of this paragraph, the term ‘qualified foreign government security’ means a security that is a direct obligation of, or that is fully guaranteed

by, the central government of a member of the Organization for Economic Cooperation and Development;’’;

(D) in paragraph (48) by inserting ‘‘or exempt from such registration

under such section pursuant to an order of the Securities and Exchange

Commission’’ after ‘‘1934’’; and

(E) by amending paragraph (53B) to read as follows:

‘‘(53B) ‘swap agreement’—

‘‘(A) means—

‘‘(i) any agreement, including the terms and conditions incorporated

by reference in such agreement, which is an interest rate swap, option,

future, or forward agreement, including a rate floor, rate cap, rate colVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00044 Fmt 6659 Sfmt 6621 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
45

lar, cross-currency rate swap, and basis swap; a spot, same day-tomorrow, tomorrow-next, forward, or other foreign exchange or precious

metals agreement; a currency swap, option, future, or forward agreement; an equity index or an equity swap, option, future, or forward

agreement; a debt index or a debt swap, option, future, or forward

agreement; a credit spread or a credit swap, option, future, or forward

agreement; a commodity index or a commodity swap, option, future, or

forward agreement; or a weather swap, weather derivative, or weather

option;

‘‘(ii) any agreement or transaction similar to any other agreement or

transaction referred to in this paragraph that—

‘‘(I) is presently, or in the future becomes, regularly entered into

in the swap market (including terms and conditions incorporated

by reference therein); and

‘‘(II) is a forward, swap, future, or option on 1 or more rates, currencies, commodities, equity securities, or other equity instruments, debt securities or other debt instruments, or economic indices or measures of economic risk or value;

‘‘(iii) any combination of agreements or transactions referred to in

this paragraph;

‘‘(iv) any option to enter into an agreement or transaction referred to

in this paragraph;

‘‘(v) a master agreement that provides for an agreement or transaction referred to in clause (i), (ii), (iii), or (iv), together with all supplements to any such master agreement, and without regard to whether

the master agreement contains an agreement or transaction that is not

a swap agreement under this paragraph, except that the master agreement shall be considered to be a swap agreement under this paragraph

only with respect to each agreement or transaction under the master

agreement that is referred to in clause (i), (ii), (iii), or (iv); or

‘‘(B) any security agreement or arrangement or other credit enhancement

related to any agreements or transactions referred to in subparagraph (A),

but not to exceed the actual value of such contract on the date of the filing

of the petition; and

‘‘(C) is applicable for purposes of this title only and shall not be construed

or applied so as to challenge or affect the characterization, definition, or

treatment of any swap agreement under any other statute, regulation, or

rule, including the Securities Act of 1933, the Securities Exchange Act of

1934, the Public Utility Holding Company Act of 1935, the Trust Indenture

Act of 1939, the Investment Company Act of 1940, the Investment Advisers

Act of 1940, the Securities Investor Protection Act of 1970, the Commodity

Exchange Act, and the regulations prescribed by the Securities and Exchange Commission or the Commodity Futures Trading Commission.’’;

(2) by amending section 741(7) to read as follows:

‘‘(7) ‘securities contract’—

‘‘(A) means—

‘‘(i) a contract for the purchase, sale, or loan of a security, a certificate of deposit, a mortgage loan or any interest in a mortgage loan, a

group or index of securities, certificates of deposit or mortgage loans or

interests therein (including an interest therein or based on the value

thereof), or option on any of the foregoing, including an option to purchase or sell any such security, certificate of deposit, loan, interest,

group or index, or option;

‘‘(ii) any option entered into on a national securities exchange relating to foreign currencies;

‘‘(iii) the guarantee by or to any securities clearing agency of a settlement of cash, securities, certificates of deposit, mortgage loans or interests therein, group or index of securities, or mortgage loans or interests

therein (including any interest therein or based on the value thereof),

or option on any of the foregoing, including an option to purchase or

sell any such security, certificate of deposit, loan, interest, group or

index, or option;

‘‘(iv) any margin loan;

‘‘(v) any other agreement or transaction that is similar to an agreement or transaction referred to in this paragraph;

‘‘(vi) any combination of the agreements or transactions referred to

in this paragraph;

‘‘(vii) any option to enter into any agreement or transaction referred

to in this paragraph;

46

‘‘(viii) a master agreement that provides for an agreement or transaction referred to in clause (i), (ii), (iii), (iv), (v), (vi), or (vii), together

with all supplements to any such master agreement, without regard to

whether the master agreement provides for an agreement or transaction that is not a securities contract under this paragraph, except

that such master agreement shall be considered to be a securities contract under this paragraph only with respect to each agreement or

transaction under such master agreement that is referred to in clause

(i), (ii), (iii), (iv), (v), (vi), or (vii); or

‘‘(ix) any security agreement or arrangement or other credit enhancement related to any agreement or transaction referred to in this paragraph, but not to exceed the actual value of such contract on the date

of the filing of the petition; and

‘‘(B) does not include any purchase, sale, or repurchase obligation under

a participation in a commercial mortgage loan.’’; and

(3) in section 761(4)—

(A) by striking ‘‘or’’ at the end of subparagraph (D); and

(B) by adding at the end the following:

‘‘(F) any other agreement or transaction that is similar to an agreement

or transaction referred to in this paragraph;

‘‘(G) any combination of the agreements or transactions referred to in this

paragraph;

‘‘(H) any option to enter into an agreement or transaction referred to in

this paragraph;

‘‘(I) a master agreement that provides for an agreement or transaction referred to in subparagraph (A), (B), (C), (D), (E), (F), (G), or (H), together

with all supplements to such master agreement, without regard to whether

the master agreement provides for an agreement or transaction that is not

a commodity contract under this paragraph, except that the master agreement shall be considered to be a commodity contract under this paragraph

only with respect to each agreement or transaction under the master agreement that is referred to in subparagraph (A), (B), (C), (D), (E), (F), (G), or

(H); or

‘‘(J) any security agreement or arrangement or other credit enhancement

related to any agreement or transaction referred to in this paragraph, but

not to exceed the actual value of such contract on the date of the filing of

the petition;’’.

(b) DEFINITIONS OF FINANCIAL PARTICIPANT AND FORWARD CONTRACT MERCHANT.—Section 101 of title 11, United States Code, is amended—

(1) by inserting after paragraph (22) the following:

‘‘(22A) ‘financial participant’ means an entity that, at the time it enters into

a securities contract, commodity contract or forward contract, or at the time of

the filing of the petition, has 1 or more agreements or transactions described

in paragraph (1), (2), (3), (4), (5), or (6) of section 561(a) with the debtor or any

other entity (other than an affiliate) of a total gross dollar value of at least

$1,000,000,000 in notional or actual principal amount outstanding on any day

during the previous 15-month period, or has gross mark-to-market positions of

at least $100,000,000 (aggregated across counterparties) in 1 or more such

agreement or transaction with the debtor or any other entity (other than an affiliate) on any day during the previous 15-month period;’’; and

(2) by amending paragraph (26) to read as follows:

‘‘(26) ‘forward contract merchant’ means a Federal reserve bank, or an entity

whose business consists in whole or in part of entering into forward contracts

as or with merchants or in a commodity, as defined or in section 761, or any

similar good, article, service, right, or interest which is presently or in the future becomes the subject of dealing or in the forward contract trade;’’.

(c) DEFINITION OF MASTER NETTING AGREEMENT AND MASTER NETTING AGREEMENT PARTICIPANT.—Section 101 of title 11, United States Code, is amended by inserting after paragraph (38) the following new paragraphs:

‘‘(38A) ‘master netting agreement’ means an agreement providing for the exercise of rights, including rights of netting, setoff, liquidation, termination, acceleration, or closeout, under or in connection with 1 or more contracts that are

described in any 1 or more of paragraphs (1) through (5) of section 561(a), or

any security agreement or arrangement or other credit enhancement related to

1 or more of the foregoing. If a master netting agreement contains provisions

relating to agreements or transactions that are not contracts described in paragraphs (1) through (5) of section 561(a), the master netting agreement shall be

deemed to be a master netting agreement only with respect to those agreements

47

or transactions that are described in any 1 or more of the paragraphs (1)

through (5) of section 561(a);

‘‘(38B) ‘master netting agreement participant’ means an entity that, at any

time before the filing of the petition, is a party to an outstanding master netting

agreement with the debtor;’’.

(d) SWAP AGREEMENTS, SECURITIES CONTRACTS, COMMODITY CONTRACTS, FORWARD CONTRACTS, REPURCHASE AGREEMENTS, AND MASTER NETTING AGREEMENTS

UNDER THE AUTOMATIC-STAY.—

(1) IN GENERAL.—Section 362(b) of title 11, United States Code, is amended—

(A) in paragraph (6), by inserting ‘‘, pledged to and under the control of,’’

after ‘‘held by’’;

(B) in paragraph (7), by inserting ‘‘, pledged to and under the control of,’’

after ‘‘held by’’;

(C) by amending paragraph (17) to read as follows:

‘‘(17) under subsection (a), of the setoff by a swap participant of a mutual debt

and claim under or in connection with 1 or more swap agreements that constitutes the setoff of a claim against the debtor for any payment or other transfer of property due from the debtor under or in connection with any swap agreement against any payment due to the debtor from the swap participant under

or in connection with any swap agreement or against cash, securities, or other

property held by, pledged to and under the control of, or due from such swap

participant to margin, guarantee, secure, or settle any swap agreement;’’;

(D) in paragraph (18) by striking the period at the end and inserting ‘‘;

or’’; and

(E) by inserting after paragraph (18) the following new paragraph:

‘‘(19) under subsection (a), of the setoff by a master netting agreement participant of a mutual debt and claim under or in connection with 1 or more master

netting agreements or any contract or agreement subject to such agreements

that constitutes the setoff of a claim against the debtor for any payment or

other transfer of property due from the debtor under or in connection with such

agreements or any contract or agreement subject to such agreements against

any payment due to the debtor from such master netting agreement participant

under or in connection with such agreements or any contract or agreement subject to such agreements or against cash, securities, or other property held by,

pledged to and under the control of, or due from such master netting agreement

participant to margin, guarantee, secure, or settle such agreements or any contract or agreement subject to such agreements, to the extent such participant

is eligible to exercise such offset rights under paragraph (6), (7), or (17) for each

individual contract covered by the master netting agreement in issue.’’.

(2) LIMITATION.—Section 362 of title 11, United States Code, is amended by

adding at the end the following:

‘‘(i) LIMITATION.—The exercise of rights not subject to the stay arising under subsection (a) pursuant to paragraph (6), (7), or (17), or (32) of subsection (b) shall not

be stayed by any order of a court or administrative agency in any proceeding under

this title.’’.

(e) LIMITATION OF AVOIDANCE POWERS UNDER MASTER NETTING AGREEMENT.—

Section 546 of title 11, United States Code, is amended—

(1) in subsection (g) (as added by section 103 of Public Law 101–311)—

(A) by striking ‘‘under a swap agreement’’; and

(B) by striking ‘‘in connection with a swap agreement’’ and inserting

‘‘under or in connection with any swap agreement’’; and

(2) by adding at the end the following:

‘‘(j) Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b), the trustee

may not avoid a transfer made by or to a master netting agreement participant

under or in connection with any master netting agreement or any individual contract covered thereby that is made before the commencement of the case, except

under section 548(a)(1)(A), and except to the extent the trustee could otherwise

avoid such a transfer made under an individual contract covered by such master

netting agreement.’’.

(f) FRAUDULENT TRANSFERS OF MASTER NETTING AGREEMENTS.—Section 548(d)(2)

of title 11, United States Code, is amended—

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

(2) in subparagraph (D), by striking the period and inserting ‘‘; and’’; and

(3) by adding at the end the following new subparagraph:

‘‘(E) a master netting agreement participant that receives a transfer in connection with a master netting agreement or any individual contract covered

thereby takes for value to the extent of such transfer, except, with respect to

a transfer under any individual contract covered thereby, to the extent such

48

master netting agreement participant otherwise did not take (or is otherwise

not deemed to have taken) such transfer for value.’’.

(g) TERMINATION OR ACCELERATION OF SECURITIES CONTRACTS.—Section 555 of

title 11, United States Code, is amended—

(1) by amending the section heading to read as follows:

‘‘§ 555. Contractual right to liquidate, terminate, or accelerate a securities

contract’’;

and

(2) in the first sentence, by striking ‘‘liquidation’’ and inserting ‘‘liquidation,

termination, or acceleration’’.

(h) TERMINATION OR ACCELERATION OF COMMODITIES OR FORWARD CONTRACTS.—

Section 556 of title 11, United States Code, is amended—

(1) by amending the section heading to read as follows:

‘‘§ 556. Contractual right to liquidate, terminate, or accelerate a commodities contract or forward contract’’;

and

(2) in the first sentence, by striking ‘‘liquidation’’ and inserting ‘‘liquidation,

termination, or acceleration’’.

(i) TERMINATION OR ACCELERATION OF REPURCHASE AGREEMENTS.—Section 559 of

title 11, United States Code, is amended—

(1) by amending the section heading to read as follows:

‘‘§ 559. Contractual right to liquidate, terminate, or accelerate a repurchase

agreement’’;

and

(2) in the first sentence, by striking ‘‘liquidation’’ and inserting ‘‘liquidation,

termination, or acceleration’’.

(j) LIQUIDATION, TERMINATION, OR ACCELERATION OF SWAP AGREEMENTS.—Section

560 of title 11, United States Code, is amended—

(1) by amending the section heading to read as follows:

‘‘§ 560. Contractual right to liquidate, terminate, or accelerate a swap agreement’’;

(2) in the first sentence, by striking ‘‘termination of a swap agreement’’ and

inserting ‘‘liquidation, termination, or acceleration of 1 or more swap agreements’’; and

(3) by striking ‘‘in connection with any swap agreement’’ and inserting ‘‘in

connection with the termination, liquidation, or acceleration of 1 or more swap

agreements’’.

(k) LIQUIDATION, TERMINATION, ACCELERATION, OR OFFSET UNDER A MASTER NETTING AGREEMENT AND ACROSS CONTRACTS.—(1) Title 11, United States Code, is

amended by inserting after section 560 the following:

‘‘§ 561. Contractual right to terminate, liquidate, accelerate, or offset under

a master netting agreement and across contracts

‘‘(a) IN GENERAL.—Subject to subsection (b), the exercise of any contractual right,

because of a condition of the kind specified in section 365(e)(1), to cause the termination, liquidation, or acceleration of or to offset or net termination values, payment

amounts or other transfer obligations arising under or in connection with 1 or more

(or the termination, liquidation, or acceleration of 1 or more)—

‘‘(1) securities contracts, as defined in section 741(7);

‘‘(2) commodity contracts, as defined in section 761(4);

‘‘(3) forward contracts;

‘‘(4) repurchase agreements;

‘‘(5) swap agreements; or

‘‘(6) master netting agreements,

shall not be stayed, avoided, or otherwise limited by operation of any provision of

this title or by any order of a court or administrative agency in any proceeding

under this title.

‘‘(b) EXCEPTION.—

‘‘(1) A party may exercise a contractual right described in subsection (a) to

terminate, liquidate, or accelerate only to the extent that such party could exercise such a right under section 555, 556, 559, or 560 for each individual contract

covered by the master netting agreement in issue.

‘‘(2) If a debtor is a commodity broker subject to subchapter IV of chapter 7—

‘‘(A) a party may not net or offset an obligation to the debtor arising

under, or in connection with, a commodity contract against any claim arising under, or in connection with, other instruments, contracts, or agreeVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00048 Fmt 6659 Sfmt 6621 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
49

ments listed in subsection (a), except to the extent the party has positive

net equity in the commodity accounts at the debtor, as calculated under

such subchapter; and

‘‘(B) another commodity broker may not net or offset an obligation to the

debtor arising under, or in connection with, a commodity contract entered

into or held on behalf of a customer of the debtor against any claim arising

under, or in connection with, other instruments, contracts, or agreements

listed in subsection (a).

‘‘(c) RULE OF APPLICATION.—Subparagraphs (A) and (B) of subsection (b)(2) shall

not be construed as prohibiting the offset of claims and obligations arising pursuant

to—

‘‘(1) a cross-margining arrangement that has been approved by the Commodity Futures Trading Commission or that has been submitted to such Commission pursuant to section 5a(a)(12) of the Commodity Exchange Act and has

been permitted to go into effect; or

‘‘(2) another netting arrangement, between a clearing organization (as defined

in section 761) and another entity, that has been approved by the Commodity

Futures Trading Commission.

‘‘(d) DEFINITION.—As used in this section, the term ‘contractual right’ includes a

right set forth in a rule or bylaw of a national securities exchange, a national securities association, or a securities clearing agency, a right set forth in a bylaw of a

clearing organization or contract market or in a resolution of the governing board

thereof, and a right, whether or not evidenced in writing, arising under common

law, under law merchant, or by reason of normal business practice.’’.

(2) CONFORMING AMENDMENT.—The table of sections of chapter 5 of title 11,

United States Code, is amended by inserting after the item relating to section 560

the following:

‘‘561. Contractual right to terminate, liquidate, accelerate, or offset under a master netting agreement and

across contracts.’’.

(l) MUNICIPAL BANKRUPTCIES.—Section 901(a) of title 11, United States Code, is

amended—

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

(2) by inserting ‘‘559, 560, 561, 562,’’ after ‘‘557,’’.

(m) ANCILLARY PROCEEDINGS.—Section 304 of title 11, United States Code, is

amended by adding at the end the following new subsection:

‘‘(d) Any provisions of this title relating to securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements, or master netting agreements shall apply in a case ancillary to a foreign proceeding under this

section or any other section of this title so that enforcement of contractual provisions of such contracts and agreements in accordance with their terms will not be

stayed or otherwise limited by operation of any provision of this title or by order

of a court in any proceeding under this title, and to limit avoidance powers to the

same extent as in a proceeding under chapter 7 or 11 (such enforcement not to be

limited based on the presence or absence of assets of the debtor in the United

States).’’.

(n) COMMODITY BROKER LIQUIDATIONS.—Title 11, United States Code, is amended

by inserting after section 766 the following:

‘‘§ 767. Commodity broker liquidation and forward contract merchants,

commodity brokers, stockbrokers, financial institutions, financial

participants, securities clearing agencies, swap participants, repo

participants, and master netting agreement participants

‘‘Notwithstanding any other provision of this title, the exercise of rights by a forward contract merchant, commodity broker, stockbroker, financial institution, financial participant, securities clearing agency, swap participant, repo participant, or

master netting agreement participant under this title shall not affect the priority

of any unsecured claim it may have after the exercise of such rights.’’.

(o) STOCKBROKER LIQUIDATIONS.—Title 11, United States Code, is amended by inserting after section 752 the following:

‘‘§ 753. Stockbroker liquidation and forward contract merchants, commodity brokers, stockbrokers, financial institutions, financial participants, securities clearing agencies, swap participants, repo participants, and master netting agreement participants

‘‘Notwithstanding any other provision of this title, the exercise of rights by a forward contract merchant, commodity broker, stockbroker, financial institution, securities clearing agency, swap participant, repo participant, financial participant, or

master netting agreement participant under this title shall not affect the priority

of any unsecured claim it may have after the exercise of such rights.’’.

50

(p) SETOFF.—Section 553 of title 11, United States Code, is amended—

(1) in subsection (a)(3)(C), by inserting ‘‘(except for a setoff of a kind described

in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(32), 555, 556, 559, 560 or 561)’’

before the period; and

(2) in subsection (b)(1), by striking ‘‘362(b)(14)’’ and inserting ‘‘362(b)(17),

362(b)(32), 555, 556, 559, 560, 561’’.

(q) SECURITIES CONTRACTS, COMMODITY CONTRACTS, AND FORWARD CONTRACTS.—

Title 11, United States Code, is amended—

(1) in section 362(b)(6), by striking ‘‘financial institutions,’’ each place such

term appears and inserting ‘‘financial institution, financial participant’’;

(2) in section 546(e), by inserting ‘‘financial participant,’’ after ‘‘financial institution,’’;

(3) in section 548(d)(2)(B), by inserting ‘‘financial participant,’’ after ‘‘financial

institution,’’;

(4) in section 555—

(A) by inserting ‘‘financial participant,’’ after ‘‘financial institution,’’; and

(B) by inserting before the period at the end ‘‘, a right set forth in a bylaw

of a clearing organization or contract market or in a resolution of the governing board thereof, and a right, whether or not in writing, arising under

common law, under law merchant, or by reason of normal business practice’’; and

(5) in section 556, by inserting ‘‘, financial participant’’ after ‘‘commodity

broker’’.

(r) CONFORMING AMENDMENTS.—Title 11, United States Code, is amended—

(1) in the table of sections of chapter 5—

(A) by amending the items relating to sections 555 and 556 to read as

follows:

‘‘555. Contractual right to liquidate, terminate, or accelerate a securities contract.

‘‘556. Contractual right to liquidate, terminate, or accelerate a commodities contract or forward contract.’’;

and

(B) by amending the items relating to sections 559 and 560 to read as

follows:

‘‘559. Contractual right to liquidate, terminate, or accelerate a repurchase agreement.

‘‘560. Contractual right to liquidate, terminate, or accelerate a swap agreement.’’;

and

(2) in the table of sections of chapter 7—

(A) by inserting after the item relating to section 766 the following:

‘‘767. Commodity broker liquidation and forward contract merchants, commodity brokers, stockbrokers, financial

institutions, financial participants, securities clearing agencies, swap participants, repo participants,

and master netting agreement participants.’’;

and

(B) by inserting after the item relating to section 752 the following:

‘‘753. Stockbroker liquidation and forward contract merchants, commodity brokers, stockbrokers, financial institutions, financial participants, securities clearing agencies, swap participants, repo participants, and

master netting agreement participants.’’.

SEC. 209. RECORDKEEPING REQUIREMENTS.

Section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)) is

amended by adding at the end the following new subparagraph:

‘‘(H) RECORDKEEPING REQUIREMENTS.—The Corporation, in consultation

with the appropriate Federal banking agencies, may prescribe regulations

requiring more detailed recordkeeping with respect to qualified financial

contracts (including market valuations) by insured depository institutions.’’.

SEC. 210. EXEMPTIONS FROM CONTEMPORANEOUS EXECUTION REQUIREMENT.

Section 13(e)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1823(e)(2)) is

amended to read as follows:

‘‘(2) EXEMPTIONS FROM CONTEMPORANEOUS EXECUTION REQUIREMENT.—An

agreement to provide for the lawful collateralization of—

‘‘(A) deposits of, or other credit extension by, a Federal, State, or local

governmental entity, or of any depositor referred to in section 11(a)(2), including an agreement to provide collateral in lieu of a surety bond;

‘‘(B) bankruptcy estate funds pursuant to section 345(b)(2) of title 11,

United States Code;

‘‘(C) extensions of credit, including any overdraft, from a Federal reserve

bank or Federal home loan bank; or

‘‘(D) 1 or more qualified financial contracts, as defined in section

11(e)(8)(D),

51

shall not be deemed invalid pursuant to paragraph (1)(B) solely because such

agreement was not executed contemporaneously with the acquisition of the collateral or because of pledges, delivery, or substitution of the collateral made in

accordance with such agreement.’’.

SEC. 211. DAMAGE MEASURE.

(a) IN GENERAL.—Title 11, United States Code, is amended—

(1) by inserting after section 561 the following:

‘‘§ 562. Damage measure in connection with swap agreements, securities

contracts, forward contracts, commodity contracts, repurchase

agreements, or master netting agreements

‘‘If the trustee rejects a swap agreement, securities contract as defined in section

741, forward contract, commodity contract (as defined in section 761) repurchase

agreement, or master netting agreement pursuant to section 365(a), or if a forward

contract merchant, stockbroker, financial institution, securities clearing agency, repo

participant, financial participant, master netting agreement participant, or swap

participant liquidates, terminates, or accelerates such contract or agreement, damages shall be measured as of the earlier of—

‘‘(1) the date of such rejection; or

‘‘(2) the date of such liquidation, termination, or acceleration.’’; and

(2) in the table of sections of chapter 5 by inserting after the item relating

to section 561 the following:

‘‘562. Damage measure in connection with swap agreements, securities contracts, forward contracts, commodity

contracts, repurchase agreements, or master netting agreements.’’.

(b) CLAIMS ARISING FROM REJECTION.—Section 502(g) of title 11, United States

Code, is amended—

(1) by designating the existing text as paragraph (1); and

(2) by adding at the end the following:

‘‘(2) A claim for damages calculated in accordance with section 562 shall be allowed under subsection (a), (b), or (c), or disallowed under subsection (d) or (e), as

if such claim had arisen before the date of the filing of the petition.’’.

SEC. 212. SIPC STAY.

Section 5(b)(2) of the Securities Investor Protection Act of 1970 (15 U.S.C.

78eee(b)(2)) is amended by adding after subparagraph (B) the following new subparagraph:

‘‘(C) EXCEPTION FROM STAY.—

‘‘(i) Notwithstanding section 362 of title 11, United States Code, neither the filing of an application under subsection (a)(3) nor any order

or decree obtained by the Securities Investor Protection Corporation

from the court shall operate as a stay of any contractual rights of a

creditor to liquidate, terminate, or accelerate a securities contract, commodity contract, forward contract, repurchase agreement, swap agreement, or master netting agreement, each as defined in title 11, United

States Code, to offset or net termination values, payment amounts, or

other transfer obligations arising under or in connection with 1 or more

of such contracts or agreements, or to foreclose on any cash collateral

pledged by the debtor whether or not with respect to 1 or more of such

contracts or agreements.

‘‘(ii) Notwithstanding clause (i), such application, order, or decree

may operate as a stay of the foreclosure on or disposition of securities

collateral pledged by the debtor, whether or not with respect to 1 or

more of such contracts or agreements, securities sold by the debtor

under a repurchase agreement or securities lent under a securities

lending agreement.

‘‘(iii) As used in this section, the term ‘contractual right’ includes a

right set forth in a rule or bylaw of a national securities exchange, a

national securities association, or a securities clearing agency, a right

set forth in a bylaw of a clearing organization or contract market or in

a resolution of the governing board thereof, and a right, whether or not

in writing, arising under common law, under law merchant, or by reason of normal business practice.’’.

SEC. 213. ASSET-BACKED SECURITIZATIONS.

Section 541 of title 11, United States Code, is amended—

(1) in subsection (b)—

(A) by striking ‘‘or’’ at the end of paragraph (4)(B)(ii);

(B) by redesignating paragraph (5) as paragraph (6); and

(C) by inserting after paragraph (4) the following new paragraph:

52

‘‘(5) any eligible asset (or proceeds thereof), to the extent that such eligible

asset was transferred by the debtor before the date of commencement of the

case, to an eligible entity in connection with an asset-backed securitization, except to the extent such asset (or proceeds or value thereof) may be recovered

by the trustee under section 550 by virtue of avoidance under section 548(a)(1);

or’’; and

(2) by adding at the end the following new subsection:

‘‘(e) For purposes of this section, the following definitions shall apply:

‘‘(1) the term ‘asset-backed securitization’ means a transaction in which eligible assets transferred to an eligible entity are used as the source of payment

on securities, including all securities issued by governmental units, at least 1

class or tranche of which is rated investment grade by 1 or more nationally recognized securities rating organizations, when the securities are initially issued

by an issuer;

‘‘(2) the term ‘eligible asset’ means—

‘‘(A) financial assets (including interests therein and proceeds thereof), either fixed or revolving, whether or not such assets are in existence as of

the date of the transfer, including residential and commercial mortgage

loans, consumer receivables, trade receivables, assets of governmental units

(including payment obligations relating to taxes, receipts, fines, tickets, and

other sources of revenue), and lease receivables, that, by their terms, convert into cash within a finite time period, plus any residual interest in

property subject to receivables included in such financial assets plus any

rights or other assets designed to assure the servicing or timely distribution

of proceeds to security holders;

‘‘(B) cash; and

‘‘(C) securities, including all securities issued by governmental units.

‘‘(3) the term ‘eligible entity’ means—

‘‘(A) an issuer; or

‘‘(B) a trust, corporation, partnership, governmental unit, limited liability

company (including a single member limited liability company), or other entity engaged exclusively in the business of acquiring and transferring eligible assets directly or indirectly to an issuer and taking actions ancillary

thereto;

‘‘(4) the term ‘issuer’ means a trust, corporation, partnership, governmental

unit, limited liability company (including a single member limited liability company), or other entity engaged exclusively in the business of acquiring and holding eligible assets, issuing securities backed by eligible assets, and taking actions ancillary thereto; and

‘‘(5) the term ‘transferred’ means the debtor, pursuant to a written agreement,

represented and warranted that eligible assets were sold, contributed, or otherwise conveyed with the intention of removing them from the estate of the debtor

pursuant to subsection (b)(5) (whether or not reference is made to this title or

any section of this title), irrespective, without limitation, of—

‘‘(A) whether the debtor directly or indirectly obtained or held an interest

in the issuer or in any securities issued by the issuer;

‘‘(B) whether the debtor had an obligation to repurchase or to service or

supervise the servicing of all or any portion of such eligible assets; or

‘‘(C) the characterization of such sale, contribution, or other conveyance

for tax, accounting, regulatory reporting, or other purposes.’’.

SEC. 214. APPLICATION OF AMENDMENTS.

The amendments made by this title shall apply with respect to cases commenced

or appointments made under any Federal or State law after the date of the enactment of this Act, but shall not apply with respect to cases commenced or appointments made under any Federal or State law before the date of the enactment of

this Act.

Amend the title so as to read:

A bill to reauthorize and amend the Commodity Exchange Act to promote legal

certainty, enhance competition, and reduce systemic risk in markets for futures and

over-the-counter derivatives, to revise the banking and bankruptcy insolvency laws

with respect to the termination and netting of financial contracts, and for other purposes.

53

1The President’s Working Group on Financial Markets (PWG) is composed of the Secretary

of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, the

Chairman of the Securities and Exchange Commission (SEC), and the Chairman of the Commodity Trading Commission (CFTC), In addition, the Federal Deposit Insurance Corporation

(FDIC), the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency

(OCC), and the Office of Thrift Supervision (OTS) participated in the Working Group reports. 2On July 27, 2000, the Committee also ordered to be reported H.R. 1161, the ‘‘Financial Contract Netting Improvement Act of 2000.’’ Title II incorporates the provisions of H.R. 1161 as reported by the Committee. See the report accompanying H.R. 1161 for further explanation of the

purpose and summary of these provisions. 3 As noted in the PWG report on Over-the-Counter Derivatives Markets and the Commodity

Exchange Act the terminology used to describe derivative instruments is not precise. As in the

PWG report, the term ‘‘OTC derivatives’’ is meant to include swaps with both terms to be construed broadly.

PURPOSE OF SUMMARY

H.R. 4541, ‘‘Commodity Futures Modernization and Financial

Contract Netting Improvement Act of 2000’’, as amended by the

Committee on Banking and Financial Services, is intended to reduce systemic risk to the Nation’s financial markets by providing

legal certainty to certain over-the-counter (OTC) derivatives and to

update Federal insolvency laws concerning the treatment of derivatives contracts. Both aspects of the legislation are responsive to recommendations from the President’s Working Group on Financial

Markets.1

The purpose of Title I, the ‘‘Commodity Futures Modernization

Act of 2000’’, is threefold. First, Title I reauthorizes the CFTC, the

regulatory body established under the Commodity Exchange Act

(CEA), for five years. Second, it modernizes the regulatory structure of U.S. futures markets by providing regulatory relief for futures exchanges and their markets and by allowing futures on securities. Third, and of most importance to the Committee, it provides greater legal certainty to certain OTC transactions by explicitly excluding such transactions from the CEA and by providing for

the clearing of derivatives contracts by banks and other regulated

entities. The purpose of Title II, the ‘‘Financial Contract Netting

Improvement Act of 2000’’, is to update bank insolvency laws and

the Bankruptcy Code to minimize risk of a disruption with or between financial markets upon the insolvency of a market participant.2

BACKGROUND AND NEED FOR LEGISLATION

TITLE I—THE COMMODITY FUTURES MODERNIZATION ACT OF 2000

In modernizing the CEA, Title I ensures that as banks and other

financial institutions continue to reinvent the risk management

business, consumers are protected and the safety and soundness of

the financial system are enhanced without diminishing the competitiveness of U.S. markets.

Over the past ten years there has been enormous growth in the

use of swaps 3 and related off-exchange derivatives. This phenomenal growth can be attributed to the fact that swaps offer genuine economic value to the parties that use them. The overwhelming majority of the trillions of dollars of swaps are financial

transactions engaged in by banks. According to recent figures from

the OCC, the notional measure of U.S. commercial banks’ derivatives transactions is almost $35 trillion, and of this amount $31

trillion represents OTC derivatives activities, yielding some $2.5

54

billion in revenues. The most recent total of banks’ credit exposure

from off-balance sheet derivatives contracts is $396 billion.

OTC derivatives have become essential to banks’ risk management strategies, their propriety trading activities, and the services

they provide their customers. Large banks have made customized

risk management readily available to a wide range of enterprises,

providing liquid and creditworthy contracts. At the same time,

banks of all sizes in communities across the country have used

swaps to insulate themselves against the vicissitudes of interest

rate and other economic risks. In sum, banks are central to financial OTC derivatives markets and these markets have become central to a wide range of banking activities.

The United States has been at the forefront of innovation in

swap activity to the great benefit of global financial markets. U.S.

leadership in swaps, however, has been periodically threatened by

the peculiarities of the CEA, which governs the trading of futures

contracts on futures exchanges. The CEA does not contain a definition of ‘‘futures contract,’’ referring instead to ‘‘contracts of sale of

a commodity for future delivery.’’ The CEA requires that futures

contracts must be traded on a CFTC regulated exchange, unless a

statutory exclusion or regulatory exemption from such requirement

can be found. A futures contract that must be traded on an exchange under the CEA, but is instead traded over-the-counter, is

illegal and unenforceable. The risk that the CFTC or a court might

determine that a particular group swap agreement is an illegal offexchange futures contract is known as ‘‘legal uncertainty.’’

Legal uncertainty raised the prospect that a banking product

might be found to be a futures contract, thus subject to commodity

futures law and regulation. In the unlikely event that the CFTC

or a court determines that a swap is an illegal off-exchange futures

contract, systemic difficulties could result. A determination that a

swap is a future contract could jeopardize the value of billions of

dollars worth of swaps on the books of banks. Legal uncertainty is

a potential impediment to the growth of the swaps business in the

United States and poses unwarranted and unnecessary risk on the

financial system as a whole.

Legal uncertainty for derivatives has for years been of particular

concern to the Committee. Outdated statutes that raise questions

about the enforceability of contracts with banks and bar improvements in the ways banks reduce risk pose a palpable threat to the

safety and soundness of the financial system. U.S. banking regulators warn that uncertainties and unintended consequences associated with the CEA could potentially turn financial disruptions in

the global system into financial disasters.

The CFTC itself has tried to address these serious concerns. In

1989 the CFTC established, in its Swaps Policy Statement, that

swaps are not appropriately regulated as futures. Since then, the

CFTC has generally adhered to this policy in its actions. In addition, no Federal agency, no court, and no Congress has ever found

that swaps are futures. As a result, the de facto reality is that

swaps have never been regulated as futures under the CEA. Every

day banks write an enormous volume of swaps contracts that are

sustained by this consensus.

On November 9, 1999, the PWG transmitted its report entitled

Over-the-Counter Derivatives Markets and the Commodity ExVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00054 Fmt 6659 Sfmt 6602 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
55

change Act. The report made a number of legislative recommendations to clarify that certain off-exchange transactions are not subject to the CEA. H.R. 4541, as reported by the Committee on Agriculture, implements the PWG’s legislative recommendations. The

Banking Committee amendment builds on the PWG recommendations by expanding the kinds of derivative transactions that are excluded from the CEA and, thus, provides legal certainty.

To address concerns that consumers are adequately protected as

these complex financial products become more readily available to

a broader class of end users, the Committee amendment also provides a regulatory framework in which these markets can develop.

First, retail derivatives fraud is made a criminal offense and relevant agencies are provided with clear civil enforcement powers to

pursue fraud. Second, certain swaps provided to retail customers

are not given the legal certainty afforded swaps to more sophisticated customers unless the Federal Reserve and the Treasury Department jointly prescribe customer protection regulations.

TITLE II—FINANCIAL CONTRACT NETTING IMPROVEMENT ACT OF 2000

Title II amends the U.S. Bankruptcy Code and a number of Federal banking laws to address the treatment of certain financial

transactions following the insolvency of a party to such transactions. The amendments clarify and improve consistency between

the applicable statutes and minimize risk of a disruption within or

between financial markets upon the insolvency of a market participant. The near failure of Long-Term Capital Management in the

fall of 1998 highlights the need for the U.S. to further refine its

bankruptcy and insolvency laws in order to avoid systemic risk to

the nation’s financial system in the event of a failure of a large

bank, hedge fund, or securities firm with substantial exposures to

interest rate and currency swaps and other complex financial instruments.

EXPLANATION

The Committee on Agriculture reported to the full House its

amendment to H.R. 4541 on June 29, 2000. The Committee on

Banking and Financial Services (Committee) in its consideration of

H.R. 4541 used as the base text the Agriculture Committee amendment, with the committee modifying those provisions in the bill

providing legal certainty to OTC transactions, describing margin

requirements on futures on securities, making retail derivatives

fraud illegal and incorporating the PWG’s recommendations on netting. Specifically, H.R. 4541, as reported by the Committee on Agriculture, is amended as follows.

1. In section 107, banking products and securities (when either

are offered by banks, broker-dealers, insurance companies, or affiliates of any of these institutions) are excluded from the CEA. The

CEA exclusion for swaps (as defined in the Gramm-Leach-Bliley

Act) involving counterparties other than eligible contract participants does not take effect unless and until the Federal Reserve

Board and the Department of Treasury jointly prescribe retail customer protection regulations as provided for in new section 133.

2. A new anti-fraud section (section 132) is added that: (1) defines retail derivatives fraud in connection with certain derivatives

56

transactions that are neither futures nor securities as fraud perpetrated on parties that are not eligible contract participants; (2)

clarifies which agencies exercise civil enforcement authority over

retail derivatives fraud; and (3) imposes criminal penalties for retail derivatives fraud.

3. A new section (section 110) is added which excludes from the

CEA nonagricultural swaps if the swap is entered into between

persons that are eligible participants and the terms of the swap are

subject to individual negotiation and not specified by terms of a

trading facility. This new section does not apply to swaps executed

on a CFTC-designated or CFTC-registered facility.

4. A new section (Section 111) is added to clarify that nothing in

the CEA is to imply or create any presumption that a transaction

is or is not subject to the CEA or CFTC jurisdiction because it is

or is not eligible for an exclusion or exemption provided for under

the CEA or by the CFTC.

5. The section on Contract Enforcement (section 124) is amended

to provide that a transaction shall not be unenforceable under Federal or State law based solely on the failure of the transaction to

comply with the terms of an exemption or exclusion provided for

under the CEA or by the CFTC. The provision applies to transactions between eligible contract participants or involving institutions excluded under the retail foreign exchange provisions of section 104.

6. The definition of ‘‘eligible contract participant’’ is amended to

include an individual (acting for his or her own account) with total

assets of $5 million and who enters into a transaction in order to

manage the risk associated with an asset or liability owned or incurred or reasonably likely to be owned or incurred by such person.

7. The definition of ‘‘financial institution’’ is amended to include

a financial holding company, a new category of financial services

firm authorized under provisions of the Gramm-Leach-Bliley Act.

8. The term ‘‘excluded commodity’’ is renamed ‘‘exclusion-eligible

commodity’’ and the definition for such term is conformed to the

scope of the PWG recommendation to exclude from the CEA certain

derivatives with a non-finite supply.

9. The exclusive jurisdiction clause of the CEA is amended to ensure that this clause may not be construed to apply to any transaction that is excluded from the CEA by H.R. 4541.

10. The section on futures on securities (section 108) is amended

to clarify what criteria are to be taken into consideration when determining if a margin requirement for a futures on securities is

consistent with a margin requirement for a comparable options

contract listed on any national securities exchange. Because the

Committee was working under tight time constraints the Committee devoted most of its consideration to the provisions of the bill

relating to legal certainty rather than these provisions relating to

futures contracts on non-exempt securities traded on CFTC regulated markets.

11. The section on derivatives clearing (section 116) is modified

to include amendments to banking and other laws to allow the Federal Reserve to supervise derivatives clearing by multilateral clearing organizations and clarify the laws that govern the resolution of

insolvent clearing banks. These amendments also allow clearing orVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00056 Fmt 6659 Sfmt 6602 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
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ganizations supervised as banks to clear the full range of transactions that are exclusion- or exemption-eligible.

12. The definition of ‘‘trading facility’’ is amended to exclude electronic systems that facilitate bilateral transactions and prevent any

participant from executing a transaction with another participant

unless both participants have approved the extension of credit to

the other.

13. The principal-to-principal requirement for the exclusions in

sections 104, 105, and 106 is modified to clarify that financial institutions, broker-dealers and their affiliates, insurance companies

and their affiliates, financial holding companies, and investment

bank holding companies can act as agents for eligible contract participants in an excluded trading facility.

14. A new title (Title II) is added incorporating the PWG’s legislative recommendations to clarify the treatment and cross-product

netting of derivatives contracts upon the insolvency of a counter

party.

HEARINGS

On April 11, 2000, the Committee held a hearing on the Working

Group legislative recommendations concerning OTC derivatives,

hedge funds, and netting provisions. Appearing before the Committee were: The Honorable Richard H. Baker, Chairman, Subcommittee on Capital Markets, Securities, and Government-Sponsored Enterprises; Lewis A. Sachs, Assistant Secretary for Financial Markets, Department of the Treasury; Patrick M. Parkinson,

Associate Director, Division of Research and Statistics, Board of

Governors of the Federal Reserve System; Annette L. Nazareth, Director, Division of Market Regulation, U.S. Securities and Exchange Commission; C. Robert Paul, General Counsel, Commodity

Futures Trading Commission; Daniel P. Cunningham, Partner,

Cravath, Swaine & Moore, on behalf of The International Swaps

and Derivatives Association, Inc.; Mr. Shawn Dorsch, President,

Chief Operating Officer, and Co-Founder, DNI Holdings, Inc.

(Blackbird); Mark D. Young, Partner, Kirkland & Ellis, on behalf

of The Chicago Board of Trade; Terrence A. Duffy, Vice Chairman,

The Chicago Mercantile Exchange; Mark C. Brickell, Managing Director, J.P. Morgan & Co., Inc.; Michael A. Watkins, Deputy General Counsel, First Union Corporation, on behalf of The ABA Securities Association; Garrett Glass, Chief Market Risk Officer, Bank

One Corporation, on behalf of The Financial Services Roundtable;

George Crapple, Chairman, The Managed Funds Association; and

William P. Miller II, Chairman of the Executive Committee, The

End Users of Derivatives Council of the Association for Financial

Professionals.

On July 19, 2000, the Committee held a hearing on H.R. 4541:

the ‘‘Commodity Futures Modernization Act of 2000.’’ Appearing

before the Committee were: Lee Sachs, Assistant Secretary for Financial Markets, Department of the Treasury; Patrick M. Parkinson, Associate Director, Division of Research and Statistics, Board

of Governors of the Federal Reserve System; Annette L. Nazareth,

Director, Division of Market Regulation, U.S. Securities and Exchange Commission; C. Robert Paul, General Counsel, Commodity

Futures Trading Commission; Hal S. Scott, Nomura Professor of

International Financial Systems and Director of the International

58

Financial Systems Program, Harvard Law School; Shawn Dorsch,

President, Chief Operating Officer, and Co-Founder, DNI Holdings,

Inc. (Blackbird); Mark C. Brickell, Managing Director, J.P. Morgan

& Co., Inc.; Richard E. Grove, Jr., Executive Director and CEO,

International Swaps and Derivatives Association, Inc.; Dennis Oakley, Managing Partner, Chase Manhattan Bank; Mark D. Young,

Kirkland & Ellis on behalf of the Chicago Board of Trade and the

Chicago Mercantile Exchange.

COMMITTEE CONSIDERATION AND VOTES

On July 27, 2000, the full Committee met in open session to consider H.R. 4541. A quorum being present, the Committee by voice

vote passed H.R. 4541 wth an amendment, and ordered it to be favorably reported with an amendment to the full House of Representatives for consideration. Also, the Committee adopted, by

voice vote, a motion to authorize the Chairman to offer such motions as may be necessary in the House of Representatives to go

to conference with the Senate on a similar bill.

COMMITTEE OVERSIGHT FINDINGS

In compliance with clause 3(c)(1) of rule XIII of the Rules of the

House of Representatives, the Committee reports that the findings

and recommendations of the Committee, based on oversight activities under clause 2(b)(1) of rule X of the Rules of the House of Representatives, are incorporated in the descriptive portions of this report.

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT FINDINGS

As provided for in clause 3(c)(4) of rule XIII of the Rules of the

House of Representatives, no oversight findings have been submitted to the Committee by the Committee on Government Reform.

CONSTITUTIONAL AUTHORITY

In compliance with clause 3(d)(1) of rule XIII of the Rules of the

House of Representatives, the Constitutional Authority of Congress

to enact this legislation is derived from Article I, section 8, clause

1 (relating to the general welfare of the United States); Article I,

section 8, clause 3 (relating to Congressional power to regulate

commerce); Article 1, section 8, clause 5 (relating to the power ‘‘to

coin money’’ and ‘‘regulate the value thereof ’’); and Article I, section 8, clause 18 (relating to making all laws necessary and proper

for carrying into execution powers vested by the Constitution in the

government of the United States).

NEW BUDGET AUTHORITY AND TAX EXPENDITURES

Clause 3(c)(2) of rule XIII of the Rules of the House of Representatives is inapplicable because this legislation does not provide new

budgetary authority or increased tax expenditures.

ADVISORY COMMITTEE STATEMENT

No advisory committees within the meaning of section 5(b) of the

Federal Advisory Committee Act were created by this legislation.

59

CONGRESSIONAL ACCOUNTABILITY ACT

The reporting requirement under section 102(b)(3) of the Congressional Accountability Act (P.L. 104–1) is inapplicable because

this legislation does not relate to terms and conditions of employment or access to public services or accommodations.

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE AND UNFUNDED

MANDATES ANALYSIS

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE, Washington, DC, September 6, 2000.

Hon. JAMES A. LEACH, Chairman, Committee on Banking and Financial Services, U.S.

House of Representatives, Washington, DC.

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 4541, the Commodity Futures Modernization and Financial Contract Netting Improvement

Act of 2000.

If you wish further details on this estimate, we will be pleased

to provide them. The CBO staff contact is Mark Hadley, who can

be reached at 226–2860.

Sincerely,

BARRY B. ANDERSON

(For Dan L. Crippen, Director).

Enclosure.

H.R. 4541—Commodity Futures Modernization and Financial Contract Netting Improvement Act of 2000

Summary: H.R. 4541 would reauthorize funding for the activities

of Commodity Futures Trading Commission (CFTC) during the

2001–2005 period. The bill also would allow trading of futures contracts based on single stocks (single-stock futures) under certain

conditions, with oversight being shared by the CFTC and the Securities and Exchange Commission (SEC). In addition, H.R. 4541

would clarify that certain over-the-counter derivative transactions

are outside of the jurisdiction of the CFTC. The bill also would establish a new crime related to derivatives fraud and would authorize the Federal Trade Commission (FTC) to combat such fraud. Finally, the bill would amend banking and bankruptcy laws to provide consistent treatment of certain financial contracts and to encourage the settlement by a single payment, on a net basis, of all

the contracted-but-not-yet-due claims and liabilities of an insolvent

institution.

Assuming appropriation of the necessary amounts, CBO estimates that implementing this legislation would cost $368 million

over the 2001–2005 period. Most of this cost would be incurred by

the CFTC; CBO estimates that the SEC would spend $3 million a

year to regulate trading of futures contracts on individual securities and fight derivatives fraud, and that the FTC would spend and

additional $1 million a year to help combat securities fraud.

By imposing new duties on financial institutions regulators, establishing a new crime, and allowing trading of single-stock futures, H.R. 4541 would affect direct spending and receipts; thereVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00059 Fmt 6659 Sfmt 6602 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
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fore, pay-as-you-go procedures would apply. CBO estimates that

any impact on direct spending and receipts would not be significant

in any year.

H.R. 4541 contains intergovernmental mandates as defined in

the Unfunded Mandates Reform Act (UMRA), but CBO estimates

that the costs would not exceed the threshold established in the act

($55 million in 2000, adjusted annually for inflation). CBO’s estimate of the impact of H.R. 4541 on the private sector will be provided later in a separate statement.

Estimated cost for the Federal Government: The estimated budgetary impact of H.R. 4541 is shown in the following table. The costs

of this legislation fall within budget function 370 (commerce and

housing credit).

By fiscal year, in millions of dollars—

2001 2002 2003 2004 2005

CHANGES IN SPENDING SUBJECT TO APPROPRIATION 1

Proposed Changes to CFTC Spending:

Estimated Authorization Level ................................................... 67 69 72 74 77

Estimated Outlays ...................................................................... 60 68 71 73 76

Proposed Changes to SEC Spending:

Estimated Authorization Level ................................................... 3 3 3 3 3

Estimated Outlays ...................................................................... 3 3 3 3 3

Proposed Changes to FTC Spending:

Estimated Authorization Level ................................................... 1 1 1 1 1

Estimated Outlays ...................................................................... 1 1 1 1 1

Total Changes in Spending:

Estimated Authorization Level ................................................... 71 73 76 78 81

Estimated Outlays ...................................................................... 64 72 75 77 80

1 In addition to authorizing additional spending subject to appropriation, enacting H.R. 4541 would have an insignificant effect on direct spending and receipts.

Basis of estimate: For this estimate, CBO assumes that the bill

will be enacted near the start of fiscal year 2001 and that the necessary amounts will be appropriated for each fiscal year. Outlay estimates are based on historical spending rates for the affected

agencies. Enactment of H.R. 4541 also would affect direct spending

and receipts because it would assign new duties to regulators of financial institutions, it would create a new crime, and would result

in additional SEC fee collections. CBO estimates that those additional effects would not be significant.

Spending subject to appropriation

H.R. 4541 would reauthorize funding for activities of the CFTC

over the 2001–2005 period. Based on the agency’s current budget

and adjusting for anticipated inflation, CBO estimates that this reauthorization would cost $59 million in 2001 and a total of $343

million over the five-year period.

The bill also would make several changes to the Commodity Exchange Act that would increase the administrative costs of the

CFTC. The CFTC would share oversight of single-stock futures

transactions with the SEC. CBO estimates that this change to the

CFTC’s regulatory responsibilities would require the agency to hire

new staff. Based on information from the CFTC, CBO estimates

that these changes to the CFTC’s administrative responsibilities

would cost $1 million a year over the 2001–2005 period. The bill

also clarifies that the CFTC does not have jurisdiction over certain

over-the-counter derivatives transactions.

61

H.R. 4541 also would require that the SEC play a significant role

in overseeing single-stock futures transactions and combating fraud

related to such transactions. Based on information from the SEC,

CBO estimates that the SEC would have to hire additional staff to

handle these new responsibilities. We estimate this new effort

would cost about $3 million a year during the 2001+2005 period.

H.R. 4541 would require the FTC to combat certain securities

fraud among parties who are not regulated by the SEC, CFTC, or

banking regulators. Based on information from the FTC, CBO estimates implementing this provision would cost about $1 million a

year.

Although enacting this bill could eliminate certain bankruptcy

proceedings, CBO estimates that any subsequent reduction in the

workload of federal agencies would not have a significant impact on

the budgets of the Executive Office for United States Trustees or

the federal court system.

Direct spending

H.R. 4541 would required the Office of the Comptroller of the

Currency (OCC), and the Federal Deposit Insurance Corporation

(FDIC), to issue regulations to implement the provisions of the legislation concerning bankrupt financial institutions and to combat

fraud in certain securities trading. The OCC charges fees to cover

all its administrative costs; therefore, additional spending by the

OCC would have no net budgetary effect over time. That is not the

case with the FDIC, however, which uses deposit insurance premiums paid by all banks to cover the expenses it incurs to supervise state-chartered banks. Because the balances in the deposit insurance funds exceed the levels required under current law, very

few banks or savings and loans pay premiums for deposit insurance

at this time. Therefore, CBO expects that the FDIC would recover

from premium income very little, if any, of the administrative costs

associated with implementing H.R. 4541. However, we do not expect these costs to be significant.

The bill would give the FDIC, acting as receiver for insolvent financial institutions, additional flexibility to determine the most appropriate method for resolving a failing bank or savings and loan.

As a result, we expect that enacting H.R. 4541 could help reduce

the losses associated with closing insured institutions. Although it

is difficult to assess the amount of savings, if any, associated with

the bill’s clarification of the treatment of certain financial transactions affecting failing banks and savings and loans, CBO estimates that the net effect on FDIC outlays would probably be negligible.

Revenues

H.R. 4541 would establish a new federal crime relating to derivatives fraud. As a result, the federal government would be able to

pursue cases that it otherwise would not be able to prosecute. Because those prosecuted and convicted under H.R. 4541 could be

subject to criminal fines, the federal government might collect additional fines if the bill is enacted. Collections of such fines are recorded in the budget as governmental receipts (revenues), which

are deposited in the Crime Victims Fund and spent in subsequent

62

years. CBO expects that any additional receipts and direct spending would be less than $500,000 each year.

H.R. 4541 would require the Federal Reserve Board to issue new

regulations to implement provisions of the bill to combat fraud in

derivatives trading. Budgetary effects of these additional responsibilities on the Federal Reserve would be recorded as a change in

revenues. Based on information from the Federal Reserve, CBO estimates that enacting H.R. 4541 would reduce such revenues by

less than $500,000 a year over the 2001–2005 period.

Under current law, the SEC collects a fee equal to 1⁄300th of a

percent of the aggregate value of securities traded through national

securities exchanges, brokers, and dealers. Such fees are recorded

as revenues. H.R. 4541 would allow the trading of single-stock futures on national securities exchanges. By creating a new category

of financial transactions that would be subject to SEC fees, this bill

would increase revenues collected by the SEC. However, based on

information provided by the CFTC, the SEC, and by private

groups, CBO estimates that any increase in such revenues would

not be significant.

Pay-as-you-go considerations: The Balanced Budget and Emergency Deficit Control Act (BBEDCA) sets up pay-as-you-go procedures for legislation affecting direct spending or receipts. CBO estimates that enacting H.R. 4541 would affect spending and governmental receipts but that there would be no significant impact in

any year.

Under BBEDCA, provisions providing funding necessary to meet

the government’s deposit insurance commitment are excluded from

pay-as-you-go procedures. CBO believes that the administrative

costs associated with FDIC issuing regulations under H.R. 4541 are

related to safety and soundness of deposit insurance, and thus,

would be excluded. In any case, we estimate that those changes

would be less than $500,000 annually.

Estimated impact on State, local, and tribal governments: H.R.

4541 would require state insurance regulators to enforce antifraud

and consumer protection regulations with regard to certain derivative and swap transactions. The bill also would preempt state laws

affecting bankruptcy proceedings of certain state banks that are

members of the Federal Reserve, certain commodities transactions

that are conducted in markets regulated by the Commodity Futures Trading Commission (CFTC), and certain commodities contracts that are excluded from regulation by the CFTC. Both the

new duties for state insurance regulators and the preemptions of

state law would be mandates as defined by UMRA. CBO estimates

that the costs of these mandates would not be significant and

would not exceed the threshold established in the act ($55 million

in 2000, adjusted annually for inflation).

Estimated impact on the private sector: CBO’s estimate of the

impact of H.R. 4541 on the private sector will be provided later in

a separate statement.

Previous CBO estimates: CBO has transmitted cost estimates for

three other bills that would reauthorize the CFTC. Differences in

the estimates reflect differences in the bills. On September 6, 2000,

CBO transmitted a cost estimate for H.R. 4541 as ordered reported

by the House Committee on Commerce on July 27, 2000. On June

29, 2000, CBO transmitted a cost estimate for H.R. 4541 as ordered

63

4Given that the amendment reported by the Committee on Agriculture was the base text for

Committee consideration of H.R. 4541, the Committee has relied on the section-by-section analysis of that amendment as contained in House Report #106–711, Part I.

reported by the House Committee on Agriculture on June 27, 2000.

On July 11, 2000, CBO transmitted a cost estimate for S. 2697, the

Commodity Futures Modernization Act of 2000, as ordered reported

by the Senate Committee on Agriculture, Nutrition, and Forestry,

on June 29, 2000.

Estimate prepared by: Federal Costs: Mark Hadley; Impact on

State, Local, and Tribal Governments: Susan Sieg Tompkins.

Estimate approved by: Peter H. Fontaine, Deputy Assistant Director for Budget Analysis.

SECTION-BY-SECTION ANALYSIS OF H.R. 4541 4

TITLE I—COMMODITY FUTURES MODERNIZATION ACT OF 2000

Section 101. Short title and table of contents

The title is entitled the ‘‘Commodity Futures Modernization Act

of 2000.’’

Section 102. Purposes

The section lists eight purposes for the title including reauthorizing the CFTC; streamlining the CEA; eliminating unnecessary

regulation for futures exchanges; transforming the regulatory role

of the CFTC; providing a legislative and regulatory framework for

the trading of futures on securities; providing CFTC jurisdiction

over the retail foreign exchange market and bucket shops; promoting innovation and reducing systemic risk for OTC derivatives;

allowing clearing of OTC derivatives and enhancing the competitive position of the U.S. financial institutions and markets.

Section 103. Definitions

Section 103 adds definitions to section 1a of the CEA for the following terms: ‘‘banking product’’; ‘‘derivatives clearing organizations’’; ‘‘designated future on a security’’; ‘‘electronic trading facility’’; ‘‘eligible commercial participant’’, ‘‘eligible contract participant’’; ‘‘exempt commodity’’; ‘‘exclusion-eligible commodity’’; ‘‘financial institution’’; ‘‘hybrid instrument’’; ‘‘nonexempt security’’; ‘‘option’’; ‘‘organized exchange’’; ‘‘registered entity’’; ‘‘security’’; and

‘‘trading facility’’.

Section 103 differs from section 3 of the Agriculture Committee

reported bill in that it adds a definition for ‘‘banking product’’ and

modifies the definitions for ‘‘eligible contract participant’’, ‘‘excluded

commodity’’, ‘‘financial institution’’, ‘‘hybrid instrument’’, ‘‘organized

exchange’’, and ‘‘trading facility’’. Section 103 defines ‘‘banking

product’’ as meaning any agreement, contract, or transaction that

is an identified banking product (as defined in section 206(a) of the

Gramm-Leach-Bliley Act).

The section modifies the definition of ‘‘eligible contract participant’’ to include natural persons (acting for their own account) with

total assets of $5 million and who enter into a transaction in order

to manage the risk associated with an asset or liability owned or

incurred or reasonably likely to be owned or incurred by such persons. It modifies the definition of ‘‘financial institution’’ to include

64

a financial holding company, a new category of financial services

firm authorized under provisions of the Gramm-Leach-Bliley Act. It

renames the term ‘‘excluded commodity’’ to ‘‘exclusion-eligible commodity’’ and modifies the definition of such term in keeping with

the President’s Working Group recommendation to exclude from

the CEA derivatives with a non-finite supply. It excludes from the

definition of ‘‘trading facility’’ electronic systems that facilitate bilateral transactions and prevent any participant from executing a

transaction with another participant unless both participants have

approved the extension of credit to the other.

Section 104. Agreements, contracts, and transactions in foreign currency, government securities and certain other commodities

Section 104 clarifies section 2 of the CEA (the ‘‘Treasury Amendment’’) with respect to CFTC jurisdiction over foreign currency

transactions by adding a new subsection (c).

New paragraph (c)(2) excludes foreign currency transactions from

CFTC regulation, other than those conducted on an organized exchange or as between unregulated entities and persons who are not

eligible contract participants.

The Committee amendment excludes from the definition of ‘‘organized exchange’’, a facility that permits trading (1) by eligible contract participants trading on a principal-to-principal basis; or (2) by

eligible contract participants that are financial institutions, brokerdealers or the affiliates, insurance companies of their affiliates, financial holding companies, or investment bank holding companies

acting as agents on behalf of eligible contract participants.

New subparagraph (c)(2)(B) provides the CFTC with jurisdiction

over retail foreign currency futures and options transactions that

are not regulated by another federal regulator. This would allow

the CFTC to take enforcement action against illegal bucket shops.

Section 105. Legal certainty for excluded derivatives transactions

(over-the-counter transactions)

Section 105 amends section 2 of the CEA to create a new subsection (d), which states that nothing in the CEA applies to transactions in an excluded commodity if the transaction (1) is entered

into between eligible contract participants and is not conducted on

a trading facility; or (2) is between eligible contract participants,

trading on a principal-to-principal basis, and the transaction is conducted on an electronic trading facility. In addition, under section

105 of the Committee amendment the ‘‘principal-to-principal’’ requirement does not apply to transactions entered into between eligible contract participants that are specified regulated entities if

the transaction is executed or traded on an electronic trading facility.

Section 106. Excluded electronic trading facilities

This section amends section 2 of the CEA to create a new subsection (e) that allows for the electronic trading of excluded commodities. Paragraph (e)(2) states that nothing in the CEA shall

prohibit a contract market or derivatives transaction execution facility from establishing and operating an excluded electronic trading facility.

65

Section 107. Conformity with the Gramm-Leach-Bliley Act; hybrid

instruments

This section amends section 2 of the CEA to create a new subsection (f) that provides that nothing in the CEA applies to a hybrid instrument that is predominantly a security or depository instrument, or to banking products or securities offered by certain

regulated entities or their affiliates. Banking products, as defined

in the Gramm-Leach-Bliley Act, encompasses instruments and

transactions that are not properly regulated under the CEA when

entered into by the enumerated regulated entities described in the

section. New paragraph (f)(2) excepts from this exclusion swap

agreements (as defined in section 106(b) of the Gramm-Leach-Bliley Act) with any party who is not an eligible contract participant

until the Federal Reserve and Treasury Department promulgate

new retail swap customer protection rules as provided for in section

133. New paragraph (f)(3) sets forth conditions for determining predominance to cover any hybrid instrument in which (1) the issuer

of the instrument receives payment in full of the purchase price at

the time the instrument is delivered; (2) the purchaser is not required to make additional payments; (3) the issuer of the instrument is not subject to mark-to-market margining requirements;

and (4) the instrument is not marketed as a futures contract. New

paragraph (4) clarifies that mark-to-marketing requirements do not

include the obligation of an issuer of a secured debt instrument to

increase the amount of collateral for the instrument.

Section 108. Futures on securities

This section amends section 2 of the CEA by adding a new subsection (g) that reforms the Shad-Johnson jurisdictional accord.

Paragraph (1) provides that CFTC has no jurisdiction to designate a board of trade as a contract market for any transaction

whereby any party to the transaction acquires a put, call, or other

option on 1 or more securities (as defined in section 2(a)(1) of the

Securities Act of 1933 or section 3(a)(10) of the Securities Exchange

Act of 1934, on the date of enactment of the Futures Trading Act

of 1982), including any group or index of securities and any interest in or based on the value of securities.

Paragraph (2) is a savings clause to ensure that excluded OTC

equity derivatives remain outside the CEA and jurisdiction of the

CFTC.

Paragraph (3) states that it is illegal to provide for the trading

of futures on securities except as provided for in the Act.

Paragraph (4) provides CFTC with exclusive jurisdiction for futures on securities and provides criteria for contract market designation of these products including: cash settlement;

insusceptibility to price manipulation (both of the contract and the

underlying stock or an option on that stock); margin requirements;

and making information available to the regulators. With regard to

the establishment of margin requirements, the Committee amendment provides that a margin requirement for a futures on securities is to be consistent with a margin requirement for a comparable

options contract listed on any national securities exchange. A margin requirement meets this consistency test if the margin provides

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tracts, the frequency with which margin requirements are made,

and the period of time within which margin calls must be met.

Paragraph (5) requires the CFTC and SEC to consult with regard

to the listing of a futures on a security. If the SEC is not satisfied

that all requirements regarding a single stock future are being met

by a contract market, the CFTC shall give the SEC an opportunity

for an oral hearing. If the hearing is held and the SEC’s objections

are not resolved, the SEC may seek judicial review. Paragraph (6)

authorizes the SEC to enforce the securities laws related to insider

trading with respect to futures on securities.

Paragraph (7) authorizes the FED to establish an Intermarket

Margin Board with the concurrence of the CFTC and SEC. This

would allow the CFTC, FED, and SEC to work jointly to set the

margin on single stock futures at appropriate levels to preserve

market financial integrity or to prevent systemic risk.

Paragraph (8) provides that this subsection shall not be construed to prohibit any agreement, contract, or transaction excluded

from this Act by paragraph (2); or any hybrid instrument that is

covered by the terms of any exemption granted by CFTC.

Paragraph (9) directs a registered futures association to adopt

rules requiring a futures commission merchant (FCM), commodity

trading advisor (CTA) or an introducing broker (IB) to determine

if a customer is suitable to purchase single stock futures. FCM’s already follow a ‘know your customer’ rule, however, this paragraph

will ensure customer protection adheres to suitability standards

currently used when selling securities and options on securities.

Paragraph (10) authorizes the offer and sale in the United States

of any futures or option contracts on securities (excluding securities

described in subparagraphs (A)(i) (I) or (II)), traded on a foreign

board of trade without being a designated contract market under

the CEA, if (1) for single stock futures, the United States is not the

primary trading market for the underlying security; or (2) for stock

index futures, less than 25 percent of the index is based on securities that are primarily traded in the United States; and settlement

of the futures contract does not involve the transfer or receipt of

a security in the United States. The CFTC is required to promulgate appropriate regulations implementing this section within 90

days of enactment.

Section 109. Transactions in exempt commodities

This section amends section 2 of the CEA by adding a new subsection (h) to provide legal certainty for exempt commodities. Exempt commodities must be traded between eligible participants and

not traded on a trading facility (except an electronic trading facility). The amendment further provides that transactions in an exempt commodity, other than a metal commodity, can be conducted

between eligible contract participants and traded on an electronic

trading facility. All transactions are also subject to the clearing system provisions of the bill, state fraud statutes, and the fraud and

anti-manipulation provisions of the Act. In addition, CFTC may

prescribe rules to ensure the timely dissemination of electronic

trading facility data if CFTC determines that the electronic facility

performs a significant price discovery function.

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Section 110. Swap transactions

This section amends section 2 of the CEA to exclude from the

CEA a nonagricultural swap if the swap is entered into between

persons that are eligible participants and the terms of the swap are

subject to individual negotiation and not specified by terms of a

trading facility. This exclusion does not apply to swaps executed on

a CFTC-designated or CFTC-registered facility.

Section 111. Application of the Commodity Exchange Act

This section modifies section 2 of the CEA to clarify that nothing

in the CEA is to imply or create any presumption that a transaction is or is not subject to the CEA or CFTC jurisdiction because

it is or is not eligible for an exclusion or exemption provided for

under the CEA or by the CFTC.

Section 112. Protection of the public interest

This section rewrites section 3 of the CEA that lists the responsibilities of the CFTC and purposes of the CEA in protecting the

public interest. These include: protecting investors from fraud and

manipulation; fostering efficiency and fairness with transparent

price dissemination; preventing market manipulation and minimizing the risk of systemic failure; and promoting financial innovation and fair competition.

Section 113. Prohibited transactions

This section rewrites section 4c of the CEA for clarity.

Section 114. Designation of Boards of Trade as contract markets

This section strikes current law sections 5 and 5a and adds a

new section 5 to the CEA providing for the designation of boards

of trade as contract markets. Subsection (b) contains criteria that

boards of trade must meet in order to be designated as a contract

market. These include establishing and enforcing rules preventing

market manipulation; ensuring fair and equitable trading by authorizing various futures exchange transactions; specifying how the

trade execution facility operates, including any electronic matching

systems; ensuring the financial integrity of transactions; disciplining members or market participants who violate the rules; allowing for public access to the board of trade rules and enabling

the board of trade to obtain information in order to enforce its

rules. Existing contract markets are grandfathered in under new

subsection (c). The 18 core principles that must be met to maintain

designation as a contract market are contained in new subsection

(d) and provide that a board of trade must:

Monitor and enforce compliance with the contract market

rules;

List only contracts that are not susceptible to manipulation;

Monitor trading to prevent manipulation, price distortion

and delivery or settlement disruptions;

Adopt position limits for speculators and hedgers;

Adopt rules to provide for the exercise of emergency authority, including the authority to liquidate or transfer open positions, suspend trading and make margin calls;

Make available the terms and conditions of the contracts and

the mechanisms for executing transactions;

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Publish daily information on prices, bids, offers, volume,

open interest, and opening and closing ranges;

Provide a competitive, open and efficient market and mechanism for executing transactions;

Provide for the safe storage of all trade information in a

readily usable manner to assist in fraud prevention;

Provide for the financial integrity of the contracts, the futures commission merchants and customer funds;

Protect market participants from abusive practices;

Provide for alternative dispute resolutions for market participants and intermediaries;

Establish and enforce rules regarding fitness standards for

those involved in market governance;

Establish and enforce rules to minimize conflicts of interest

in a contract market;

Ensure that the governing board reflects the composition of

the market participants (in the case of mutually owned exchanges);

Maintain records and make them available at any time for

inspection by the Attorney General; and

Avoid taking any action that restrains trade or imposes anticompetitive burdens on the markets.

Subsection (e) provides that, with respect to futures contracts involving agricultural or metal commodities enumerated in section

1a(3) of the CEA, such contracts may only trade on designated contract markets. However, upon application by any person, the CFTC

may prescribe rules and regulations to allow such agricultural or

metal commodities to trade on a derivatives transaction execution

facility in instances where it would promote responsible economic

or financial innovation and fair competition.

Section 114. Derivatives transaction execution facilities

This section amends the CEA by adding a new section 5a authorizing a new trading designation called a derivatives transaction

execution facility (DTEF). Under subsection (b), a board of trade

may elect to operate as a DTEF rather than a contract market if

they meet the DTEF designation requirements. registered DTEF

may trade any non-designated futures contract if the commodity

underlying the contract has a nearly inexhaustible supply, is not

susceptible to manipulation, and does not have a cash market in

commercial practice. Eligible DTEF traders include authorized contract market participants and persons trading through registered

futures commission merchants with capital of at least $20,000,000

that are members of a self-regulatory organization (SRO) and a

clearing organization. Boards of trade that have been designated as

contract markets may operate as DTEFs if they provide a separate

location for DTEF trading or, in the case of an electronic system,

identify whether the trading is on a DTEF or contract market.

Subsection (c) provides criteria for boards of trade that wish to

register as DTEFs, including: establishing and enforcing trading

rules, by authorizing various futures exchange transactions, that

will deter abuses and provide market participants impartial access

to the markets and capture information that may be used in rule

enforcement; and defining trading procedures to be used and provide for the financial integrity of DTEF transactions.

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To maintain registration as a DTEF, a board of trade must comply with 9 core principles listed in subsection (d):

Maintain and enforce rules

Ensure orderly trading and provide trading information to

the CFTC;

Publicly disclose information regarding contract terms, trading practices, and financial integrity protections;

Provide information on prices, bids and offers to market participants as well as daily information in volume and open interest for the actively traded contracts;

Establish and enforce rules regarding fitness standards for

those involved in DTEF governance;

Establish and enforce rules to minimum conflicts of interest

in a derivatives transaction execution facility;

Maintian records and make them available at any time for

inspection by the Attorney General; and

Avoid taking any action that restrains trade or imposes anticompetitive burdens on the markets.

Subsection (e) allows a broker-dealer, bank, or Farm Credit Institution in good standing to act as an intermediary on behalf of its

customers and to receive funds serving as margin or security for

the customer’s transactions. If such entity holds the DTEF customer funds or accounts for more than 1 business day, such entity

must be a registered FCM and a member of a registered futures

association. The CFTC and SEC are to coordinate in adopting rules

to implement this subsection.

Under subsection (f), the CFTC may adopt regulations to allow

FCMs to give their customers the right to not segregate customer

funds for purposes of trading on the DTEF.

Subsection (g) clarifies that a DTEF may trade derivatives that

otherwise would be excluded, exempted or not subject to the CEA

and the CFTC has exclusive jurisdiction only when these instruments are traded on a DTEF.

Section 116. Derivatives clearing organizations

This section amends the Federal banking laws, bankruptcy code

and the CEA to provide a clear statutory basis for the regulation

of clearing systems that develop for OTC derivatives.

Subsection (a) amends the Federal Deposit Insurance Corporation Improvement Act to prohibit persons from operating a multilateral clearing organization for derivative transactions unless the

person is a national or state member bank, an affiliate of such a

bank or an Edge Act corporation. This prohibition does not apply

to a clearing organization that (1) is registered as a clearing agency

under the Securities Exchange Act of 1934, (2) performs clearing

functions for a CFTC registered market, or (3) is supervised by a

foreign financial regulator which satisfies appropriate standards

determined by an appropriate Federal financial regulator.

Subsections (b) and (c) amend the Federal Reserve Act (FRA) to

provide the FED with enforcement authority over uninsured state

member banks and resolution authority over such banks which operate as multilateral clearing organizations.

Subsections (d) and (e) make technical and conforming changes

to the Bankruptcy Code.

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Subsection (f) amends the FRA to provide the FED resolution authority over insolvent Edge Act corporations.

Subsection (g) amends the CEA to create a new section 5(b) regarding derivatives clearing organizations.

Section 117. Common provisions applicable to registered entities.

The section amends the CEA to create a new section 5c that contains provisions affecting all registered entities (contract markets,

DTEFs, and derivatives clearing organizations).

Subsection (a) allows the CFTC to issue or approve interpretations to describe what would constitute an acceptable business

practice under the core principals for registered entities.

Subsection (b) allows a registered entity to delegate its self regulatory functions to a registered futures association, while specifying

that responsibility for carrying out these functions remain with

th4e registered entity.

Subsection (c) enables the registered entity to trade new products

or adopt or amend rules by providing the CFTC (or, in the case of

a government security product, the Secretary of the Treasury) a

written certification that the new contract or new rule or amendment complies with the CEA. This subsection would allow a registered entity to request that the CFTC grant prior approval of a

new contract, new rule or rule amendment. For enumerated commodity products, a contract market (futures exchange) shall submit

to the CFTC for prior approval each rule amendment that materially changes the terms and conditions of a contract that has already been listed and has substantial open interest.

Subsection (d) grants the CFTC the authority to informally resolve potential violations of the core principals for registered entities.

Subsection (e) reserves all of CFTC’s emergency powers.

Section 118. Exempt boards of trade

This section amends the CEA to create a new section 5d regarding exempt boards of trade. Under subsections (a) and (b), futures

contracts traded on an exempt board of trade would be exempt

from the CEA (except section 2(g) regarding equity futures) if:

(1) The commodity underlying the futures contract has an inexhaustible deliverable supply, is not subject to manipulation,

or has no cash market;

(2) Participants are eligible contract participants (large institutional investors); and

(3) The contracts do not involve securities (including security

indices).

Subsection (c) subjects futures contracts traded on an exempt

board of trade to the anti-fraud and anti-manipulation provisions

of the CEA.

Under subsection (d), if the CFTC finds that an exempt board of

trade is a significant source of price discovery for the underlying

commodity, the board of trade shall disseminate publicly on a daily

basis trading volume, opening and closing price ranges, open interest, and other trading data as appropriate to the market.

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Section 119. Suspension or revocation of designation as contract

market

This section amends the CEA to authorize the CFTC to suspend

the registration of a registered entity for 180 days for any violation

of the CEA.

Section 120. Authorization of appropriations

This section amends section 12(d) of the CEA by striking 2000

and reauthorizing appropriations through fiscal year 2005.

Section 121. Preemption

This section rewrites paragraph 12(e)(2) of the CEA for clarity

and to conform with changes made in the bill. It restates the current provisions that the CEA supersedes and preempts other laws

in the case of transactions conducted on a registered entity or subject to regulation by the CFTC (even if outside the United States),

and adds that in the case of excluded electronic trading facilities

and any agreements, contracts or transactions that are excluded

commodities or covered by a 4(c) exemption, the CEA supersedes

and preempts State gaming and bucket shop laws (except State

antifraud laws of general applicability).

Section 122. Predispute resolution agreements for institutional customers

This section amends subsection 14(g) of the CEA to clarify that

futures commission merchants, as a condition of doing business,

may require customers, that are eligible contract participants, to

waive their right to file a reparations claim with the CFTC.

Section 123. Consideration of costs and benefits and antitrust laws

This section amends section 15 of the CEA to add a new subsection (a) requiring the CFTC, before promulgating regulations

and issuing orders, to consider the costs and benefits of its action.

This does not apply to orders associated with an adjudicatory or investigative process, or to emergency actions or findings of fact regarding compliance with CFTC rules.

Section 124. Contract enforcement

This section amends subsection 22(a) of the CEA to provide that

a transaction shall not be unenforceable under Federal or State law

based solely on the failure of the transaction to comply with the

terms of an exemption or exclusion provided for under the CEA or

by the CFTC. The provision applies to transactions between eligible

contract participants or involving institutions excluded under the

retail foreign exchange provisions of section 104. This safe harbor

does not apply to any swap agreement (as defined in the GrammLeach-Bliley Act) with any party who is not an eligible contract

participant unless such swap agreement is entered into after regulations have been prescribed under section 133 of the Commodities

Futures Modernization Act of 2000.

Some swaps may not meet the terms of exemptions or exclusions

provided for in the legislation. Any failure to provide a statutory

exclusion or exemption for these categories of swaps transactions

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mination by Congress that these categories of swaps transactions

are subject to the Commodity Exchange Act.

Section 125. Special procedures to encourage and facilitate bona

fide hedging by agricultural producers

This section authorizes the CFTC to consider several factors to

improve domestic agricultural producers’ ability to use contract

markets for hedging price risk. Specifically, this section authorizes

CFTC, in issuing rules or orders, to consider: procedures to facilitate the orderly delivery of agricultural commodities, including

temporary storage costs; the ease with which domestic agricultural

producers may participate in contract markets, including cost and

margin requirements; and flexibility in the minimum quantities of

contract size. This section also requires the CFTC to report to the

House and Senate Agriculture Committees regarding steps taken

to implement this section.

Section 126. Rule of construction

This section provides that nothing in this Act supersedes, affects,

or otherwise limits or expands the scope and applicability of laws

governing the Securities and Exchange Commission unless expressly provided.

Section 127. Authority of agencies to construe the term ‘‘Contract

Market’’

This section authorizes Federal agencies to prescribe regulations

construing the term ‘‘contract market.’’ Many statutes other than

the CEA, including the Federal securities laws and the Internal

Revenue Code, refer to transactions occurring on a contract market. Because the bill amends the CEA to create new categories of

regulated entities, this section gives other agencies rulemaking authority to construe the term to cover these entities as well as contract markets.

Section 128. Technical and conforming amendments

This section makes technical and conforming amendments

throughout the CEA to reflect changes made by the bill.

Section 129. Report to Congress

This section requires the CFTC to study the CEA and its rules,

regulations and orders governing the conduct of CFTC registrants

and report to Congress within one year.

Section 130. Effective date

This section provides that Title I shall take effect on the date of

enactment, except section 109 (dealing with equity futures), which

takes effect one year after enactment.

Section 131. International activities of the Commodity Futures

Trading Commission

This section contains Congressional findings about the changing

and global nature of derivatives markets, the increase in the use

of data processing and communications technologies that enable

users of risk management services to analyze and compare services

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on a worldwide basis, and the need for financial regulatory policy

to be flexible and to avoid compromising U.S. competitiveness.

This section also contains a Sense of Congress regarding the importance of the CFTC, as part of its international activities, to continue to coordinate with foreign regulatory authorities, participate

in international regulatory organizations and forums, and provide

technical assistance to foreign government authorities in order to

encourage and facilitate cross-border transactions, reduce unnecessary obstacles, and enhance international cooperation and information sharing.

Section 132. Antifraud provisions

This section makes it unlawful to commit retail derivatives fraud

by the use of any means or instruments of transportation or communication in interstate commerce or the mails. Under the section,

retail derivatives fraud is defined, in connection with certain derivatives transactions that are neither futures nor securities, as

fraud perpetrated on parties that are not eligible contract participants. This section is enforced by the appropriate Federal financial

regulator, state insurance authority, and the Federal Trade Commission with respect to financial institutions subject to their jurisdiction. The section criminal penalties for retail derivatives fraud.

Section 133. Retail swap customer protections

This section adds a new section to the Federal Deposit Insurance

Act authorizing the FED and the Treasury Department to jointly

prescribe consumer protection regulations that apply to sales practices relating to swap agreements (as defined in section 206(b) of

the Gramm-Leach-Bliley Act) between financial institutions and retail customers. If such regulations are not prescribed after one year

after enactment, the two agencies must submit a report to the Congress within 15 days explaining why such regulations were not prescribed in final form.

TITLE II—FINANCIAL CONTRACT NETTING IMPROVEMENT ACT OF 2000

Section 201. Short title

Title II is entitled the ‘‘Financial Contract Netting Improvement

Act of 2000’’.

Section 202. Treatment of certain agreements by conservators or receivers of insured depository institutions

Subsections (a) through (f) amend the FDIA definitions of ‘‘qualified financial contract,’’ ‘‘securities contract,’’ ‘‘commodity contract,’’

‘‘forward contract,’’ ‘‘repurchase agreement’’ and ‘‘swap agreement’’

to make them consistent with the definitions in the Bankruptcy

Code.

Subsection (b) amends the definition of ‘‘securities contract’’ to

encompass options on securities and margin loans. The inclusion of

‘‘margin loans’’ in the definition is intended to encompass only

those loans commonly known in the securities industry as ‘‘margin

loans’’ and does not include other loans utilizing securities as collateral, however documented.

Subsection (b) also specifies that purchase, sale and repurchase

obligations under a participation in a commercial mortgage loan do

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not constitute ‘‘securities contracts.’’ While a contract for the purchase or sale or a participation may constitute a ‘‘securities contract’’, the purchase, sale or repurchase obligation embedded in a

participation agreement does not make that agreement a ‘‘securities contract.’’

Subsection (e) amends the definition of ‘‘repurchase agreement’’

to codify the substance of the FDIC’s 1995 regulation defining repurchase agreement to include those on qualified foreign government securities. See 12 C.F.R. § 360.5. The term ‘‘qualified foreign

government securities’’ is defined to include those that are direct

obligations of, or fully guaranteed by, central governments of members of the Organization for Economic Cooperation and Development (OECD). Subsection (e) reflects developments in the repurchase agreement markets, which increasingly use foreign government securities as the underlying asset. Any risk presented by this

modification is addressed by limiting it to those issued or guaranteed by OECD member states.

Subsection (e), like subsection (b) for ‘‘securities contracts’’, specifies that repurchase obligations under a participation in a commercial mortgage loan do not make the participation agreement a ‘‘repurchase agreement.’’ Such repurchase obligations embedded in

participations in commercial loans (such as recourse obligations) do

not constitute a ‘‘repurchase agreement.’’ However, a repurchase

agreement involving the transfer of participations in commercial

mortgage loans with a simultaneous agreement to repurchase the

participation on demand or at a date certain one year or less after

such transfer would constitute a ‘‘repurchase agreement.’’

Subsection (f) amends the definition of ‘‘swap agreement’’ to include an ‘‘interest rate swap, option, future, or forward agreement,

including a rate floor, rate cap, rate collar, cross-currency rate

swap, and basis swap; a spot, same day-tomorrow, tomorrow-next,

forward or other foreign exchange or precious metals agreements;

a currency swap, option, future, or forward agreement; an equity

index or equity swap, option, spread, future, or forward agreement;

a debt index or debt swap, option, future, or forward agreement; a

credit swap, option, future, or forward agreement; a commodity

index or commodity swap, option, future, or forward agreement; or

a weather swap, weather derivative, or a weather option.’’ This

amendment would achieve contractual netting across economically

similar over-the-counter products that can be terminated and

closed out on a mark-to-market basis.

These definitions apply only for purposes of the FDIA and the

Bankruptcy Code. These definitions, and the characterization of a

certain transaction as a ‘‘swap agreement’’, are not intended to effect the characterization, definition, or treatment of any instruments under any other statute, regulation, or rule including, but

not limited to, the statutes, regulations or rules enumerated in subsection (f).

Subsection (g) amends the FDIA by adding a definition for

‘‘transfer,’’ which is a key term used in the FDIA, to ensure that

it is broadly construed to encompass dispositions of property or interests in property. The definition tracks that in section 101 of the

Bankruptcy Code.

Subsection (h) makes clarifying technical changes to conform the

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section (h) also clarifies that the FDIA expressly protects rights

under security agreements, arrangements or other credit enhancement related to one or more qualified financial contracts (QFCs).

An example of a security arrangement is a right of set off, and examples of other credit enhancements are letters of credit, guarantees, reimbursement obligations and other similar agreements.

Subsection (i) clarifies that no provision of Federal or state law

relating to the avoidance of preferential or fraudulent transfers (including the anti-preference provision of the National Bank Act) can

be invoked to avoid a transfer made in connection with any QFC

of an insured depository institution in conservatorship or receivership, absent actual fraudulent intent on the part of the transferee.

Section 203. Authority of the corporation with respect to failed and

failing institutions

Section 203 provides that no provision of law, including FDICIA,

shall be construed to limit the power of the FDIC to transfer or to

repudiate any QFC in accordance with its powers under the FDIA.

As discussed below, there has been some uncertainty regarding

whether or not FDICIA limits the authority of the FDIC to transfer

or to repudiate QFCs of an insolvent financial institution. Section

203—as well as other provisions in the Act—clarify that FDICIA

does not limit the transfer powers of the FDIC with respect to

QFCs.

Section 203 denies enforcement to ‘‘walkaway’’ clause in QFCs. A

walkaway clauses is defined as a provision that, after calculation

of a value of a party’s position or an amount due to or from one

of the parties upon termination, liquidation or acceleration of the

QFC, either does not create a payment obligation of a party or extinguishes a payment obligation of a party in whole or in part solely because of such party’s status as a non-defaulting party.

Section 204. Amendments relating to transfers of qualified financial

contracts

Subsection (a) amends the FDIA to expand the transfer authority

of the FDIC to permit transfers of QFCs to ‘‘financial institutions’’

as defined in FDICIA or in regulations. This provision will allow

the FDIC to transfer QFCs to a non-depository financial institution, provided the institution is not subject to bankruptcy or insolvency proceedings.

The new FDIA provision specifies that when the FDIC transfers

QFCs that are subject to the rules of a particular clearing organization, the transfer will not require the clearing organization to accept the transferee as a member of the organization. This provision

gives the FDIC flexibility in resolving QFCs subject to the rules of

a clearing organization, while preserving the ability of such organizations to enforce appropriate risk reducing membership requirements.

The new FDIA provision also permits transfers to an eligible financial institution that is a non-U.S. person, or the branch or agency of a non-U.S. person if, following the transfer, the contractual

rights of the parties would be enforceable substantially to the same

extent as under the FDIA.

Subsection (b) amends the notification requirements following a

transfer of the QFCs of a failed depository institution to require the

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FDIC to notify any party to a transferred QFC of such transfer by

5:00 p.m. (Eastern Time) on the business day following the date of

the appointment of the FDIC acting as receiver or following the

date of such transfer by the FDIC acting as a conservator. This

amendment is consistent with the policy statement on QFCs issued

by the FDIC on December 12, 1989.

Subsection (c) amends the FDIA to clarify the relationship between the FDIA and FDICIA. There has been some uncertainty

whether FDICIA permits counterparties to terminate or liquidate

a QFC before the expiration of the time period provided by the

FDIA during which the FDIC may repudiate or transfer a QFC in

a conservatorship or receivership. Subsection (c) provides that a

party may not terminate a QFC based solely on the appointment

of the FDIC as receiver until 5:00 p.m. (Eastern Time) on the business day following the appointment of the receiver or after the person has received notice of a transfer under FDIA section 11(d)(9),

or based solely on the appointment of the FDIC as conservator, notwithstanding the provisions of FDICIA. This provides the FDIC

with an opportunity to undertake an orderly resolution of the insured depository institution.

The amendment also prohibits the enforcement of rights of termination or liquidation that are based solely on the ‘‘financial condition’’ of the depository institution in receivership or conservatorship. For example, termination based on a cross-default provision

in a QFC that is triggered upon a default under another contract

could be stayed if such other default was caused by an acceleration

of amounts due under that other contract, and such acceleration

was based solely on the appointment of a conservator or receiver

for that depository institution. Similarly, a provision in a QFC permitting termination of the QFC based solely on a downgraded credit rating of a party will not be enforceable in an FDIC receivership

or conservatorship because the provision is based solely on the financial condition of the depository institution in default. However,

any payment, delivery or other performance-based default, or

breach of a representation or covenant putting in question the enforceability of the agreement, will not be deemed to be based solely

on financial condition for purposes of this provision. The amendment is not intended to prevent counterparties from taking all actions permitted and recovering all damages authorized upon repudiation of any QFC by a conservator or receiver.

The amendment allows the FDIC to meet its obligation to provide notice to parties to transferred QFCs by taking steps reasonably calculated to provide notice to such parties by the required

time. This is consistent with the existing policy statement on QFCs

issued by the FDIC on December 12, 1989.

Finally, the amendment permits the FDIC to transfer QFCs of a

failed depository institution to a bridge bank or a depository institution organized by the FDIC for which a conservator is appointed

either (i) immediately upon the organization of such institution or

(ii) at the time of a purchase and assumption transaction between

the FDIC and the institution. This provision clarifies that such institutions are not to be considered financial institutions that are ineligible to receive such transfers under FDIA section 11(e)(9). This

is consistent with the existing policy statement on QFCs issued by

the FDIC on December 12, 1989.

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Section 205. Amendments relating to disaffirmance or repudiation

of qualified financial contracts

Section 205 limits the disaffirmance and repudiation authority of

the FDIC with respect to QFCs so that such authority is consistent

with the FDIC’s transfer authority under FDIA section 11(e)(9).

This ensures that no disaffirmance, repudiation or transfer authority of the FDIC may be exercised to ‘‘cherry-pick’’ or otherwise treat

independently all the QFCs between a depository institution in default and a person or any affiliate of such person. The FDIC has

announced that its policy is not to repudiate or disaffirm QFCs selectively. This unified treatment is fundamental to the reduction of

systemic risk.

Section 206. Clarifying amendment relating to master agreements

Section 206 states that a master agreement for one or more securities contracts, commodity contracts, forward contracts, repurchase

agreements or swap agreements will be treated as a single QFC

under the FDIA. This provision ensures that cross-product netting

pursuant to a master agreement will be enforceable under the

FDIA. Cross-product netting permits a wide variety of financial

transactions between two parties to be netted, thereby maximizing

the present and potential future risk-reducing benefits of the netting arrangement between the parties. Express recognition of the

enforceability of such cross-product master agreements furthers the

policy of increasing legal certainty and reducing systemic risks in

the case of an insolvency of a large financial participant. Similar

Bankruptcy Code clarifications to recognize cross-product netting

both under a master agreement and in the absence of a master

agreement are described below.

Section 207. Federal Deposit Insurance Corporation Improvement

Act of 1991

Subsection (a)(1) amends the definition of ‘‘clearing organization’’

to include clearinghouses that are subject to exemptions pursuant

to orders of the SEC or the CFTC.

Subsection (a)(2). FDICIA provides that a netting arrangement

will be enforced pursuant to its terms, notwithstanding the failure

of a party to the agreement. However, the current netting provisions of FDICIA limit this protection to ‘‘financial institutions,’’

which include depository institutions. Subsection (a)(2) amends the

FDICIA definition of covered institutions to include (i) uninsured

national and State member banks, irrespective of their eligibility

for deposit insurance and (ii) foreign banks (including the foreign

bank and its branches or agencies as a combined group, or only the

foreign bank parent of a branch or agency). The Federal Reserve

Board already has by regulation included certain foreign banks in

the definition of a ‘‘financial institution’’ for purposes of FDICIA

and the latter change will statutorily extend the protections of

FDICIA to ensure that U.S. financial organizations participating in

netting agreements with foreign banks are covered by the Act,

thereby enhancing the safety and soundness of these arrangements.

Subsection (a)(3) amends FDICIA to provide that, for purposes of

FDICIA, two or more clearing organizations that enter into a netting contract are considered ‘‘members’’ of each other. This assures

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the enforceability of netting arrangements involving two or more

clearing organizations and a member common to all such organizations, thus reducing systemic risk in the event of the failure of such

a member. Under the current FDICIA provisions, the enforceability

of such arrangements depends on a case-by-case determination that

clearing organizations could be regarded as members of each other

for purposes of FDICIA.

Subsection (a)(4) amends the FDICIA definition of netting contract and the general rules applicable to netting contracts. The current FDICIA provisions require that the netting agreement must

be governed by the law of the United States or a State to receive

the protections of FDICIA. However, many of these agreements,

particularly netting arrangements covering positions taken in foreign exchange dealings, are governed by the laws of a foreign country. This subsection broadens the definition of ‘‘netting contract’’ to

include those agreements governed by foreign law, and preserves

the FDICIA requirement that a netting contract is not invalid

under, or precluded by, Federal law.

Subsection (a)(5) adds a new definition of ‘‘payment’’ to FDICIA.

Subsections (b) and (c) establish two exceptions to FDICIA’s protection of the enforceability of the provisions of netting contracts

between financial institutions and among clearing organization

members.

First, the termination provisions of netting contracts will not be

enforceable based solely on (i) the appointment of a conservator for

an insolvent depository institution under the FDIA or (ii) the appointment of a receiver for such institution under the FDIA, if such

receiver transfers or repudiates QFCs in accordance with the FDIA

and gives notice of a transfer by 5:00 p.m. on the business day following the appointment of a receiver. This change is made to confirm the FDIC’s flexibility to transfer or repudiate the QFCs of an

insolvent depository institution in accordance with the terms of the

FDIA. This modification also provides important legal certainty regarding the treatment of QFCs under the FDIA, because the current relationship between the FDIA and FDICIA is unclear.

The second exception provides that FDICIA does not override a

stay order under SIPA with respect to foreclosure on securities (but

not cash) collateral of a debtor (section 212 makes a conforming

change to SIPA). There is also an exception relating to insolvent

commodity brokers.

Subsections (b) and (c) also clarify that a security agreement or

other credit enhancement related to a netting contract is enforceable to the same extent as the underlying netting contract.

Subsection (d) adds a new section 407 to FDICIA. This new section provides that, notwithstanding any other law, QFCs with uninsured national banks or uninsured Federal branches or agencies

that are placed in receivership or conservatorship will be treated

in the same manner as if the contract were with an insured national bank or insured Federal branch for which a receiver or conservator was appointed. This provision will ensure that parties to

QFCs with uninsured national banks or uninsured Federal

branches or agencies will have the same rights and obligations as

parties entering into the same agreements with insured depository

institutions. The new section also specifically limits the powers of

a receiver or conservator for an uninsured national bank or uninVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00078 Fmt 6659 Sfmt 6602 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
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sured Federal branch or agency to those contained in 12 U.S.C.

§ 1821(e)(8), (9), (10), and (11), which address QFCs.

While the amendment would apply the same rules to uninsured

national banks and Federal branches and agencies that apply to insured institutions, the provision would not change the rules that

apply to insured institutions. Nothing in this section would amend

the International Banking Act, the Federal Deposit Insurance Act,

the National Bank Act, or other statutory provisions with respect

to receiverships of insured national banks or Federal branches.

Section 208. Bankruptcy code amendments

Subsection (a)(1) amends the Bankruptcy Code definitions of ‘‘repurchase agreement’’ and ‘‘swap agreement’’ to conform with the

amendments to the FDIA contained in sections 202(e) and 20–2(f)

of the Act.

In connection with the definition of ‘‘repurchase agreement,’’ the

term ‘‘qualified foreign government securities’’ is defined to include

securities that are direct obligations of, or fully guaranteed by, central governments of members of the Organization for Economic Cooperation and Development (OECD). This language reflects developments in the repurchase agreement markets, which increasingly

use foreign government securities as the underlying asset. Any risk

presented by this modification is addressed by limiting it to those

obligating or guaranteed by OECD member states.

Subsection (a)(1) specifies that repurchase obligations under a

participation in an commercial mortgage loan do not make the participation agreement a ‘‘repurchase agreement.’’ Such repurchase

obligations embedded in participations in commercial loans (such

as recourse obligations) do not constitute a ‘‘repurchase agreement.’’ However, a repurchase agreement involving the transfer to

participations in commercial mortgage loans with a simultaneous

agreement to repurchase the participation on demand or at a date

certain one year or less after such transfer would constitute a ‘‘repurchase agreement.’’

The amendments to the definition of ‘‘repurchase agreement’’ are

not intended to affect the interpretation of the definition of ‘‘securities contract.’’

The definition of ‘‘swap agreement,’’ in conjunction with the addition of ‘‘spot foreign exchange transactions’’ that was added to the

definition in 1994, will achieve contractual netting across economically similar over-the-counter products that can be terminated and

closed out on a mark-to-market basis.

The definition of ‘‘swap agreement’’ originally was intended to

provide sufficient flexibility to avoid the need to amend the definition as the nature and uses of swap transactions matured. For that

reason, the phrase ‘‘or any other similar agreement’’ was included

in the definition. To clarify this, subsection (a)(1) expands the definition of ‘‘swap agreement’’ to include ‘‘any agreement or transaction similar to any other agreement or transaction referred to in

[subsection (a)(1)] that is presently, or in the future becomes, regularly entered into in the swap market [. . .] and is a forward,

swap, future, or option on one or more rates currencies, commodities, equity securities or other equity instruments, debt securities

or other debt instruments, or economic indices or measures of economic risk or value.’’ Subsection (a)(1) specifies that this definition

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of swap agreement applies only for purposes of the Bankruptcy

Code and is inapplicable to the other statutes, rules and regulations enumerated in that section.

The definition also includes any security agreement or arrangement, or other credit enhancement, related to a swap agreement.

This ensures that any such agreement, arrangement or enhancement is itself deemed to be a swap agreement, and therefore eligible for treatment as such for purposes of termination, liquidation,

acceleration, offset and netting under the Bankruptcy Code and the

FDIA. Similar changes are made in the definitions of ‘‘forward contract,’’ ‘‘commodity contract’’ and ‘‘repurchase agreement.’’ An example of a security arrangement is a right of setoff; examples of

other credit enhancements are letters of credit, guarantees, reimbursement obligations and other similar agreements.

Subsections (a)(2) and (a)(3) amend the Bankruptcy Code definitions of ‘‘securities contract’’ and ‘‘commodity contract,’’ respectively, to conform them to the definitions in the FDIA, and also to

include any security agreements or arrangements or other credit

enhancements related to one or more such contracts. Subsection

(a)(2), like the amendments to the FDIA, amends the definition of

‘‘securities contract’’ to encompass options on securities and margin

loans. The inclusion of ‘‘margin loans’’ in the definition is intended

to encompass only those loans commonly known in the securities

industry as ‘‘margin loans’’ and does not include other loans utilizing securities as collateral, however, documented.

Subsection (a)(2) also specifies that purchase, sale and repurchase obligations under a participation in a commercial mortgage

loan do not constitute ‘‘securities contracts.’’ While a contract for

the purchase or sale or a participation may constitute a ‘‘securities

contract,’’ the purchase, sale or repurchase obligation embedded in

a participation agreement does not make that agreement a ‘‘securities contract.’’

Subsection (b) amends the Bankruptcy Code definitions of ‘‘forward contract merchant’’ and also adds a new definition of ‘‘financial participant’’ to limit the potential impact of insolvencies upon

other major market participants. This definition will allow such

market participants to close-out and net agreements with insolvent

entities under sections 362(b)(6), 546, 548, 555, and 556 even if the

creditor could not qualify as, for example, a commodity broker. Section 116(d) of the Act amends the definition of financial institution

to conform to the changes made in this subsection. The new subsection preserves the limitations of the right to close-out and net

such contracts, in most cases, to entities who qualify under the

Bankruptcy Code’s counter party limitations. However, where the

counter party has transactions with a total gross dollar value of at

least $1 billion in notional principal amount outstanding on any

day during the previous 15-month period, or has gross mark-tomarket positions of at least $100 million (aggregated across counter

parties) in one or more agreements or transactions on any day during the previous 15-month period, the new subsection and corresponding amendments would permit it to exercise netting rights

irrespective of its inability otherwise to satisfy those counter party

limitations. This change will help prevent systemic impacts upon

the markets from a single failure.

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Subsection (c) adds to the Bankruptcy Code new definitions for

the terms ‘‘master netting agreement’’ and ‘‘master netting agreement participant.’’ The definition of ‘‘master netting agreement’’ is

designed to protect the termination and close-out netting provisions

of cross-product master agreements between parties. Such an

agreement may be used (i) to document a wide variety of securities

contracts, commodity contracts, forward contracts, repurchase

agreements and swap agreements or (ii) as an umbrella agreement

for separate master agreements between the same parties, each of

which is used to document a discrete type of transaction. The definition includes security agreements or arrangements or other credit

enhancements related to one or more such agreements and clarifies

that a master netting agreement will be treated as such even if it

documents transactions that are not within the enumerated categories of qualifying transactions (but the provisions of the Bankruptcy Code relating to master netting agreements and the other

categories of transactions will not apply to such other transactions).

A ‘‘master netting agreement participant’’ is any entity that is a

party to an outstanding master netting agreement with a debtor

before the filing of a bankruptcy petition.

Subsection (d) amends section 362(b) of the Bankruptcy Code to

protect enforcement, free from the automatic stay, of setoff or netting provisions in swap agreements and in master netting agreements and security agreements or arrangements related to one or

more swap agreements or master netting agreements. This provision parallels the over provisions of the Bankruptcy Code that protect netting provisions of securities contracts, commodity contracts,

forward contracts, and repurchase agreements. Because the relevant definitions include related security agreements, the reference

to ‘‘setoff’’ in this provision, as well as in section 362(b)(6) and (7)

of the Bankruptcy Code, are intended to refer also to rights to foreclose on, and to set off against, obligations to return collateral securing swap agreements, master netting arrangements, repurchase

agreements, securities contracts, commodity contracts, or forward

contracts. Collateral may be pledged to cover the cost of replacing

the defaulted transactions in the relevant market, as well as other

costs and expenses incurred or estimated to be incurred for the

purpose of hedging or reducing the risks arising out of such termination. Enforcement of these agreements and arrangements is consistent with the policy goal of minimizing systemic risk.

Subsection (d) also clarifies that the provisions protecting setoff

and foreclosure in relation to securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements, and master netting agreements free from the automatic

stay apply to collateral pledged by the debtor that is under the control of the creditor but that cannot technically be ‘‘held by’’ the

creditor, such as receivables and book-entry securities, and to collateral that has been repledged by the creditor.

Subsection (e) amends section 546 of the Bankruptcy Code to

provide that transfers made under or in connection with a master

netting agreement may not be avoided by a trustee except where

such transfer is made with actual intent to hinder, delay or defraud. This section of the Act also clarifies the limitation on a

trustee’s power to avoid transfers made under swap agreements.

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Subsection (f) amends section 548(d) of the Bankruptcy Code to

provide that transfers made under or in connection with a master

netting agreement may not be avoided by a trustee except where

such transfer is made with actual intent to hinder, delay or defraud. This amendment provides the same protections for transfers

made under, or in connection with, master netting agreements as

currently is provided for margin payments and settlement payments received by commodity brokers, forward contract merchants,

stockbrokers, financial institutions securities clearing agencies,

repo participants, and swap participants under section 546 and

548(d).

Subsections (g), (h), (i) and (j) clarify that the provisions of the

Bankruptcy Code that protect (i) rights of liquidation under securities contracts, commodity contracts, forward contracts and repurchase agreements also protect rights of termination or acceleration

under such contracts, and (ii) rights to terminate under swap

agreements also protect rights of liquidation and acceleration.

Subsection (k) adds a new section 561 to the Bankruptcy Code

to protect the contractual right of a master netting agreement participant to enforce any rights of termination, liquidation, acceleration, offset or netting under a master netting agreement. Such

rights include rights arising (i) from the rules of a securities exchange or clearing organization, (ii) under common law, law merchant or (iii) by reason of normal business practice. This is consistent with the current treatment of rights under swap agreements under section 560 of the Bankruptcy Code.

For the purposes of Bankruptcy Code sections 555, 556, 559, 560

and 561, it is intended that the normal business practice in the

event of a default of a party based on bankruptcy or insolvency is

to terminate, liquidate or accelerate securities contracts, commodity

contracts, forward contracts, repurchase agreements, swap agreements and master netting agreements with the bankrupt or insolvent party.

The protection of netting and offset rights in sections 560 and

561 is in addition to the protections afforded in sections 362(b)(6),

(b)(7), (b)(17) and (b)(32). For example, cross-product netting will be

protected from the automatic stay under section 561 even in the

absence of a master netting agreement.

Sections 561(b)(2) and (3) limit the exercise of contractual rights

to net or to offset obligations where one leg of the obligations

sought to be netted relates to commodity contracts. Under subsection (b)(2), netting or offset is not permitted if the obligations

are not mutual. This means, for example, that proprietary obligations cannot be netted or offset against obligations held for, or on

behalf of, some other party. Even if the obligations are mutual,

under subsection (b)(3) netting or offset is not permitted in a commodity broker bankruptcy if the party seeking to net or to offset

has no positive net equity in the commodity account at the debtor.

Subsections (b)(2) and (b)(3) limit the depletion of assets available

for distribution to customers of commodity brokers. This is consistent with the principle of Subchapter IV of Chapter 7 of the

Bankruptcy Code, which gives priority to customer claims in the

bankruptcy of a commodity broker.

Under the Act, the termination, liquidation or acceleration rights

of a master netting agreement participant are subject to limitations

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contained in other provisions of the Bankruptcy Code relating to

securities contracts and repurchase agreements. In particular, if a

securities contract or repurchase agreement is documented under

a master netting agreement, a party’s termination, liquidation and

acceleration rights would be subject to the provisions of the Bankruptcy Code relating to orders authorized under the provisions of

SIPA or any statute administered by the SEC. In addition, the netting rights of a party to a master netting agreement would be subject to any contractual terms between the parties limiting or

waiving netting or set off rights. Similarly, a waiver by a bank or

a counter party of netting or set off rights in connection with QFCs

would be enforceable under the FDIA.

Subsection (1) clarifies that, with respect to municipal bankruptcies, all the provisions of the Bankruptcy Code relating to securities contracts, commodity contracts, forward contracts, repurchase

agreements, swap agreements and master netting agreements

(which by their terms are intended to apply in all proceedings

under title 11) will apply in a Chapter 9 proceeding for a municipality. Although sections 555, 556, 559 and 560 provide that they

apply in any proceeding under the Bankruptcy Code, this subsection makes a technical amendment in Chapter 9 to clarify the

applicability of these provisions.

Subsection (m) clarifies that the provisions of the Bankruptcy

Code related to securities contracts, commodity contracts, forward

contracts, repurchase agreements, swap agreements and master

netting agreements apply in a section 304 proceeding ancillary to

a foreign insolvency proceeding.

Subsections (n) and (o) amend those provisions in the Bankruptcy Code concerning the liquidation of commodity brokers and

stockbrokers. Subchapter III of Chapter 7 of the Bankruptcy Code

details specific rules for the liquidation of stockbrokers. Subchapter

IV of Chapter 7 of the Bankruptcy Code and regulations of the

CFTC detail specific rules for the liquidation of commodity brokers.

These authorities are designed to protect customers and customer

property of an insolvent stockbroker or commodity broker.

Subsections (n) and (o) clarify the rights of parties to commodity

contracts, securities contracts, forward contracts, swap agreements,

repurchase agreements and master netting agreements with an insolvent commodity broker or stockbroker. They ensure that noncustomers will not defeat the priority scheme of Subchapter III or

IV priority by gaining access to assets held in segregated customer

accounts. The subsections also clarify that the exercise of termination and netting rights will not otherwise affect customer property or distributions by the trustee of the insolvent commodity

broker or stockbroker after the exercise of such rights.

Subsection (p) amends section 553 of the Bankruptcy Code to

clarify that the acquisition by a creditor of setoff rights in connection with swap agreements, repurchase agreements, securities contracts, forward contracts, commodity contracts and master netting

agreements cannot be avoided as a preference.

This subsection also adds setoff of the kinds described in sections

555, 556, 559, 560, and 561 of the Bankruptcy Code to the types

of set off excepted from section 553(b).

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Section 209. Recordkeeping requirements

Section 209 amends section 11(e)(8) of the Federal deposit Insurance Act to explicitly authorize the FDIC, in consultation with appropriate Federal banking agencies, to prescribe regulations on recordkeeping with respect to QFCs. Adequate recordkeeping for such

transactions is essential to effective risk management and to the

reduction of systemic risk permitted by the orderly resolution of depository institutions utilizing QFCs.

Section 210. Exemptions from contemporaneous execution requirement

Section 210 amends FDIA section 13(e)(2) to provide that an

agreement for the collateralization of governmental deposits, bankruptcy estate funds, Federal Reserve Bank or Federal Home Loan

Bank extensions of credit or one or more QFCs shall not be deemed

invalid solely because such agreement was not entered into contemporaneously with the acquisition of the collateral or because of

pledges, delivery or substitution of the collateral made in accordance with such agreement.

The amendment codifies portions of policy statements issued by

the FDIC regarding the application of section 13(e), which codifies

the ‘‘D’Oench Duhme’’ doctrine. With respect to QFCs, this codification recognizes that QFCs often are subject to collateral and other

security arrangements that may require posting and return of collateral on an ongoing basis based on the mark-to-market values of

the collateralized transactions. The codification of only portions of

the existing FDIC policy statements on these and related issues

should not give rise to any negative implication regarding the continued validity of these policy statements.

Section 211. Damage measure

Section 211 adds a new section 562 to the Bankruptcy Code providing that damages under any swap agreement, securities contract, forward contract, commodity contract, repurchase agreement

or master netting agreement will be calculated as of the earlier of

(i) the date of rejection of such agreement by a trustee or (ii) the

date of liquidation, termination or acceleration of such contract or

agreement.

New section 562 provides important legal certainty and makes

the Bankruptcy Code consistent with the current provisions related

to the timing of the calculation of damages under QFCs in the

FDIA.

Section 212. SIPC stay

Section 212 amends SIPA to provide that an order or decree

issued pursuant to SIPA shall not operate as a stay of any right

of liquidation, termination, acceleration, offset or netting under one

or more securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements or master netting

agreements (as defined in the Bankruptcy Code and including

rights of foreclosure on collateral), except that such order or decree

may stay any right to foreclose on securities (but not cash) collateral pledged by the debtor or sold by the debtor under a repurchase

agreement (a corresponding amendment to FDICIA is made by section 7). A creditor that was stayed in exercising rights against seVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00084 Fmt 6659 Sfmt 6602 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
85

curities collateral would be entitled to post-insolvency interest to

the extent of the collateral.

Section 213. Asset-backed securitizations

Section 213 amends section 541 of the Bankruptcy Code to provide that certain assets transferred to an eligible entity in connection with an asset-backed securitization generally will not be included within the bankruptcy estate of the debtor. This provision

recognizes that a valid transfer of such assets to an ‘‘eligible entity’’, generally eliminates the debtor’s legal or equitable interests in

those assets. Accordingly, subject to the avoidance powers in section 548(a), the transfer will be treated as a sale of those assets

not subject to avoidance.

Section 214. Application of amendments

Section 214 provides that the amendments made by the Act shall

not apply with respect to cases commenced, or to conservator/receiver appointments made, before the date of enactment.

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the

House of Representatives, changes in existing law made by the bill,

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic,

existing law in which no change is proposed is shown in roman):

COMMODITY EXCHANGE ACT

SEC. 1a. DEFINITIONS.

As used in this Act:

(1) BANKING PRODUCT.— (A) IN GENERAL.—The term ‘‘banking product’’ means any

agreement, contract, or transaction that is an identified

banking product (as defined in section 206(a) of the

Gramm-Leach-Bliley Act).

(B) EXCLUSION.—The term ‘‘banking product’’ does not

include a contract for the sale of a commodity for future delivery traded on a contract market designated under section

5 of this Act or an agreement, contract, or transaction traded on a derivatives transaction execution facility registered

under section 5a.

ø(1)¿ (2) BOARD OF TRADE.—The term ‘‘board of trade’’ means

any exchange or association, whether incorporated or unincorporated, of persons who are engaged in the business of buying

or selling any commodity or receiving the same for sale on consignment.

ø(2)¿ (3) COMMISSION.—The term ‘‘Commission’’ means the

Commodity Futures Trading Commission established under

section 2(a)(2).

ø(3)¿ (4) COMMODITY.—The term ‘‘commodity’’ means wheat,

cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums,

mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes),

wool, wool tops, fats and oils (including lard, tallow, cottonseed

oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, liveVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00085 Fmt 6659 Sfmt 6601 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
86

stock, livestock products, and frozen concentrated orange juice,

aluminum, copper, gold, palladium, platinum, silver, and all

other goods and articles, except onions as provided in Public

Law 85–839 (7 U.S.C. 13–1), and all services, rights, and interests in which contracts for future delivery are presently or in

the future dealt in.

ø(4)¿ (5) COMMODITY POOL OPERATOR.—The term ‘‘commodity

pool operator’’ means any person engaged in a business that is

of the nature of an investment trust, syndicate, or similar form

of enterprise, and who, in connection therewith, solicits, accepts, or receives from others, funds, securities, or property, either directly or through capital contributions, the sale of stock

or other forms of securities, or otherwise, for the purpose of

trading in any commodity for future delivery on or subject to

the rules of any contract market or derivatives transaction execution facility, except that the term does not include such persons not within the intent of the definition of the term as the

Commission may specify by rule, regulation, or order.

ø(5)¿ (6) COMMODITY TRADING ADVISOR.— (A) IN GENERAL.—Except as otherwise provided in this

paragraph, the term ‘‘commodity trading advisor’’ means

any person who—

(i) for compensation or profit, engages in the business of advising others, either directly or through publications, writings, or electronic media, as to the value

of or the advisability of trading in—

(I) any contract of sale of a commodity for future

delivery made or to be made on or subject to the

rules of a contract market or derivatives transaction execution facility;

(II) any commodity option authorized under section 4c; or

(III) any leverage transaction authorized under

section 19; or

(ii) for compensation or profit, and as part of a regular business, issues or promulgates analyses or reports concerning any of the activities referred to in

clause (i).

(B) EXCLUSIONS.—Subject to subparagraph (C), the term

‘‘commodity trading advisor’’ does not include—

(i) any bank or trust company or any person acting

as an employee thereof;

(ii) any news reporter, news columnist, or news editor of the print or electronic media, or any lawyer, accountant, or teacher;

(iii) any floor broker or futures commission merchant;

(iv) the publisher or producer of any print or electronic data of general and regular dissemination, including its employees;

(v) the fiduciary of any defined benefit plan that is

subject to the Employee Retirement Income Security

Act of 1974 (29 U.S.C. 1001 et seq.);

(vi) any contract market or derivatives transaction

execution facility; and

87

(vii) such other persons not within the intent of this

paragraph as the Commission may specify by rule,

regulation, or order.

(C) INCIDENTAL SERVICES.—Subparagraph (B) shall

apply only if the furnishing of such services by persons referred to in subparagraph (B) is solely incidental to the

conduct of their business or profession.

(D) ADVISORS.—The Commission, by rule or regulation,

may include within the term ‘‘commodity trading advisor’’,

any person advising as to the value of commodities or

issuing reports or analyses concerning commodities if the

Commission determines that the rule or regulation will effectuate the purposes of this paragraph.

ø(6)¿ (7) CONTRACT OF SALE.—The term ‘‘contract of sale’’ includes sales, agreements of sale, and agreements to sell.

ø(7)¿ (8) COOPERATIVE ASSOCIATION OF PRODUCERS.—The

term ‘‘cooperative association of producers’’ means any cooperative association, corporate, or otherwise, not less than 75 percent in good faith owned or controlled, directly or indirectly, by

producers of agricultural products and otherwise complying

with the Act of February 18, 1922 (42 Stat. 388, chapter 57;

7 U.S.C. 291 and 292), including any organization acting for a

group of such associations and owned or controlled by such associations, except that business done for or with the United

States, or any agency thereof, shall not be considered either

member or nonmember business in determining the compliance

of any such association with this Act.

(9) DERIVATIVES CLEARING ORGANIZATION.— (A) IN GENERAL.—The term ‘‘derivatives clearing organization’’ means a clearinghouse, clearing association, clearing corporation, or similar entity, facility, system, or organization that, with respect to a derivative agreement, contract, or transaction—

(i) enables each party to the derivative agreement,

contract, or transaction to substitute, through novation

or otherwise, the credit of the derivatives clearing organization for the credit of the parties;

(ii) arranges or provides, on a multilateral basis, for

the settlement or netting of obligations resulting from

such agreements, contracts, or transactions executed by

parties in the derivatives clearing organization; or

(iii) otherwise provides clearing services or arrangements that mutualize or transfer among parties in the

derivatives clearing organization the credit risk arising

from such agreements, contracts, or transactions executed by the parties.

(B) EXCLUSIONS.—The term ‘‘derivatives clearing organization’’ does not include an entity, facility, system, or organization solely because it arranges or provides for—

(i) settlement, netting, or novation of obligations resulting from agreements, contracts, or transactions, on

a bilateral basis and without a centralized

counterparty;

(ii) settlement or netting of cash payments through

an interbank payment system; or

88

(iii) settlement, netting, or novation of obligations resulting from a sale of a commodity in a transaction in

the spot market for the commodity.

(10) ELECTRONIC TRADING FACILITY.—The term ‘‘electronic

trading facility’’ means a trading facility that—

(A) operates by means of an electronic network; and

(B) maintains a real-time audit trail of bids, offers, and

the matching of orders or the execution of transactions.

(11) ELIGIBLE COMMERCIAL PARTICIPANT.—The term ‘‘eligible

commercial participant’’ means a party or entity described in

paragraph (11)(A)(i), (ii), (v), or (vii) or paragraph (11)(C), who,

in connection with its business—

(A) has a demonstrable capacity or ability, directly or

through separate contractual arrangements, to make or

take delivery of the underlying physical commodity;

(B) incurs risks, in addition to price risk, related to the

commodity; or

(C) is a dealer that regularly provides hedging, risk management, or market-making services to the foregoing entities.

(12) ELIGIBLE CONTRACT PARTICIPANT.—The term ‘‘eligible

contract participant’’ means—

(A) acting for its own account—

(i) a financial institution;

(ii) an insurance company regulated by a State (including a subsidiary or affiliate of such an insurance

company);

(iii) an investment company subject to regulation

under the Investment Company Act of 1940 (15 U.S.C.

80a–1 et seq.) or a foreign person performing a similar

role or function subject as such to foreign regulation

(regardless of whether each investor in the investment

company or the foreign person is itself an eligible contract participant);

(iv) a commodity pool that—

(I) has total assets exceeding $5,000,000; and

(II) is formed and operated by a person subject

to regulation under this Act or a foreign person

performing a similar role or function subject as

such to foreign regulation (regardless of whether

each investor in the commodity pool or the foreign

person is itself an eligible contract participant);

(v) a corporation, partnership, proprietorship, organization, trust, or other entity—

(I) that has total assets exceeding $10,000,000;

(II) the obligations of which under an agreement,

contract, or transaction are guaranteed or otherwise supported by a letter of credit or keepwell,

support, or other agreement by an entity described

in subclause (I), in clause (i), (ii), (iii), (iv), or (vii),

or in subparagraph (C); or

(III) that—

(aa) has a net worth exceeding $1,000,000;

and

89

(bb) enters into an agreement, contract, or

transaction in connection with the conduct of

the entity’s business or to manage the risk associated with an asset or liability owned or incurred or reasonably likely to be owned or incurred by the entity in the conduct of the entity’s business;

(vi) an employee benefit plan subject to the Employee

Retirement Income Security Act of 1974 (29 U.S.C.

1001 et seq.) or a foreign person performing a similar

role or function subject as such to foreign regulation— (I) that has total assets exceeding $5,000,000; or

(II) the investment decisions of which are made

by—

(aa) an investment advisor or commodity

trading advisor subject to regulation under the

Investment Advisers Act of 1940 (15 U.S.C.

80b–1 et seq.) or this Act;

(bb) a foreign person performing a similar

role or function subject as such to foreign regulation;

(cc) a financial institution; or

(dd) an insurance company regulated by a

State (including a subsidiary or affiliate of

such an insurance company);

(vii)(I) a governmental entity (including the United

States, a State, or a foreign government) or political

subdivision of a governmental entity;

(II) a multinational or supranational government entity; or

(III) an instrumentality, agency, or department of an

entity described in subclause (I) or (II);

(viii) a broker or dealer subject to regulation under

the Securities Exchange Act of 1934 (15 U.S.C. 78a et

seq.) or a foreign person performing a similar role or

function subject as such to foreign regulation, except

that, if the broker or dealer or foreign person is a natural person or proprietorship, the broker or dealer or

foreign person shall not be considered to be an eligible

contract participant unless the broker or dealer or foreign person also meets the requirements of clause (v) or

(xi);

(ix) a futures commission merchant subject to regulation under this Act or a foreign person performing a

similar role or function subject as such to foreign regulation, except that, if the futures commission merchant

or foreign person is a natural person or proprietorship,

the futures commission merchant or foreign person

shall not be considered to be an eligible contract participant unless the futures commission merchant or foreign person also meets the requirements of clause (v) or

(xi);

(x) a floor broker or floor trader subject to regulation

under this Act in connection with any transaction that

takes place on or through the facilities of a registered

90

entity or an exempt board of trade, or any affiliate

thereof, on which such person regularly trades; or

(xi) an individual who has total assets in an amount

in excess of— (I) $10,000,000; or

(II) $5,000,000 and who enters into the agreement, contract, or transaction in order to manage

the risk associated with an asset owned or liability

incurred, or reasonably likely to be owned or incurred, by such individual with total assets exceeding $10,000,000;

(B)(i) a person described in any of clauses (i) through (x)

of subparagraph (A) or in subparagraph (C), acting as

broker or performing an equivalent agency function on behalf of another person described in subparagraph (A) or

(C);

(ii) an investment adviser subject to regulation under the

Investment Advisors Act of 1940, a commodity trading advisor subject to regulation under this Act, a foreign person

performing a similar role or function subject as such to foreign regulation, or a person described in any of clauses (i)

through (x) of subparagraph (A) or in subparagraph (C), in

any such case acting as investment manager or fiduciary

(but excluding a person acting as broker or performing an

equivalent agency function) for another person described in

subparagraph (A) or (C) and who is authorized by such

person to commit such person to the transaction; or

(iii) a commodity trading advisor subject to regulation

under this Act, having assets under management of not less

than $25,000,000 and acting as investment manager or fiduciary for another person and authorized by such person

to commit such person to the transaction; or

(C) any other person that the Commission determines to

be eligible in light of the financial or other qualifications

of the person.

(13) EXCLUSION-ELIGIBLE COMMODITY.—

(A) IN GENERAL.—The term ‘‘exclusion-eligible commodity’’ means—

(i) an interest rate, exchange rate, currency, security,

security index, credit risk or measure, debt or equity instrument, index or measure of inflation, or other macroeconomic index or measure;

(ii) any other rate, differential, index, or measure of

economic or commercial risk, return, or value that is—

(I) not based in substantial part on the value of

a narrow group of commodities not described in

clause (i); or

(II) based solely on 1 or more commodities that

have no cash market;

(iii) any economic or commercial index based on

prices, rates, values, or levels that are not within the

control of any party to the relevant contract, agreement,

or transaction; or

(iv) an occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or

91

level of a commodity not described in clause (i)) that

is—

(I) beyond the control of the parties to the relevant contract, agreement, or transaction; and

(II) associated with a financial, commercial, or

economic consequence.

(B) REFERENCE TO EXCLUDED COMMODITY.—Any reference in this Act to the term ‘‘excluded commodity’’ shall

be deemed to be a reference to ‘‘exclusion-eligible commodity’’.

(14) EXEMPT COMMODITY.—The term ‘‘exempt commodity’’

means a commodity that is not an excluded commodity or an

agricultural commodity.

(15) FINANCIAL INSTITUTION.—The term ‘‘financial institution’’ means—

(A) a corporation operating under the fifth undesignated

paragraph of section 25 of the Federal Reserve Act (12

U.S.C. 603), commonly known as ‘‘an agreement corporation’’;

(B) a corporation organized under section 25A of the Federal Reserve Act (12 U.S.C. 611 et seq.), commonly known

as an ‘‘Edge Act corporation’’;

(C) an institution that is regulated by the Farm Credit

Administration;

(D) a Federal credit union or State credit union (as defined in section 101 of the Federal Credit Union Act (12

U.S.C. 1752));

(E) a depository institution (as defined in section 3 of the

Federal Deposit Insurance Act (12 U.S.C. 1813));

(F) a foreign bank or a branch or agency of a foreign

bank (each as defined in section 1(b) of the International

Banking Act of 1978 (12 U.S.C. 3101(b)));

(G) any financial holding company (as defined in section

2 of the Bank Holding Company Act of 1956);

(H) a trust company; or

(I) a similarly regulated subsidiary or affiliate of an entity described in any of subparagraphs (A) through (H).

ø(8)¿ (16) FLOOR BROKER.—The term ‘‘floor broker’’ means

any person who, in or surrounding any pit, ring, post, or other

place provided by a contract market or derivatives transaction

execution facility for the meeting of persons similarly engaged,

shall purchase or sell for any other person any commodity for

future delivery on or subject to the rules of any contract market or derivatives transaction execution facility.

ø(9)¿ (17) FLOOR TRADER.—The term ‘‘floor trader’’ means

any person who, in or surrounding any pit, ring, post, or other

place provided by a contract market or derivatives transaction

execution facility for the meeting of persons similarly engaged,

purchases, or sells solely for such person’s own account, any

commodity for future delivery on or subject to the rules of any

contract market or derivatives transaction execution facility.

ø(10)¿ (18) FOREIGN FUTURES AUTHORITY.—The term ‘‘foreign

futures authority’’ means any foreign government, or any department, agency, governmental body, or regulatory organization empowered by a foreign government to administer or enVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00091 Fmt 6659 Sfmt 6601 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
92

force a law, rule, or regulation as it relates to a futures or options matter, or any department or agency of a political subdivision of a foreign government empowered to administer or

enforce a law, rule, or regulation as it relates to a futures or

options matter.

ø(11)¿ (19) FUTURE DELIVERY.—The term ‘‘future delivery’’

does not include any sale of any cash commodity for deferred

shipment or delivery.

ø(12)¿ (20) FUTURES COMMISSION MERCHANT.—The term ‘‘futures commission merchant’’ means an individual, association,

partnership, corporation, or trust that—

(A) is engaged in soliciting or in accepting orders for the

purchase or sale of any commodity for future delivery on

or subject to the rules of any contract market or derivatives transaction execution facility; and

(B) in or in connection with such solicitation or acceptance of orders, accepts any money, securities, or property

(or extends credit in lieu thereof) to margin, guarantee, or

secure any trades or contracts that result or may result

therefrom.

(21) HYBRID INSTRUMENT.—

(A) IN GENERAL.—The term ‘‘hybrid instrument’’ means a

deposit instrument offered by a financial institution, or a

security, having 1 or more payments indexed to the value,

level, or rate of 1 or more commodities.

(B) DEPOSIT INSTRUMENT DEFINED.—The term ‘‘deposit

instrument’’ means an instrument representing an interest

described in paragraph (1), (2), (3), (4), or (5) of section 3(l)

of the Federal Deposit Insurance Act, other than in subparagraph (A), (B), or (C) at the end of paragraph (5).

ø(13)¿ (22) INTERSTATE COMMERCE.—The term ‘‘interstate

commerce’’ means commerce—

(A) between any State, territory, or possession, or the

District of Columbia, and any place outside thereof; or

(B) between points within the same state, territory, or

possession, or the District of Columbia, but through any

place outside thereof, or within any territory or possession,

or the District of Columbia.

ø(14)¿ (23) INTRODUCING BROKER.—The term ‘‘introducing

broker’’ means any person (except an individual who elects to

be and is registered as an associated person of a futures commission merchant) engaged in soliciting or in accepting orders

for the purchase or sale of any commodity for future delivery

on or subject to the rules of any contract market or derivatives

transaction execution facility who does not accept any money,

securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or

may result therefrom.

ø(15)¿ (24) MEMBER OF A øCONTRACT MARKET¿ REGISTERED

ENTITY.—The term ‘‘member of a øcontract market¿ registered

entity’’ means an individual, association, partnership, corporation, or trust owning or holding membership in, or admitted to

membership representation on, a øcontract market¿ registered

entity or given members’ trading privileges thereon.

93

(25) NONEXEMPT SECURITY.—The term ‘‘nonexempt security’’

means a security that is not an exempted security under section

3 of the Securities Act of 1933 or section 3(a)(12) of the Securities Exchange Act of 1934 (other than any municipal security,

as defined in section 3(a)(29) of the Securities Exchange Act of

1934).

(26) OPTION.—The term ‘‘option’’ means an agreement, contract, or transaction that is of the character of, or is commonly

known to the trade as, an ‘‘option’’, ‘‘privilege’’, ‘‘indemnity’’,

‘‘bid’’, ‘‘offer’’, ‘‘put’’, ‘‘call’’, ‘‘advance guaranty’’, or ‘‘decline

guaranty’’.

(27) ORGANIZED EXCHANGE.—The term ‘‘organized exchange’’

means a trading facility that—

(A) permits trading by persons other than—

(i) eligible contract participants trading on a principal-to-principal basis; or

(ii) eligible contract participants described in subclause (I), (II), (III), (IV), (V) or (VI) of section

2(c)(2)(B), acting as a broker or performing an equivalent agency function on behalf of eligible contract participants; or

(B) has adopted (directly or through another nongovernmental entity) rules that—

(i) govern the conduct of participants, other than

rules that govern the submission of orders or execution

of transactions on the trading facility; or

(ii) include disciplinary sanctions other than the exclusion of participants from trading.

ø(16)¿ (28) PERSON.—The term ‘‘person’’ imports the plural

or singular, and includes individuals, associations, partnerships, corporations, and trusts.

(29) REGISTERED ENTITY.—The term ‘‘registered entity’’

means—

(A) a board of trade designated as a contract market

under section 5;

(B) a derivatives transaction execution facility registered

under section 5a; or

(C) a derivatives clearing organization registered under

section 5b.

(30) SECURITY.—The term ‘‘security’’ has the meaning given

the term in section 3(a) of the Securities Exchange Act of 1934

(15 U.S.C. 78c(a)) as in effect on date of the enactment of this

paragraph.

(31) TRADING FACILITY.—

(A) IN GENERAL.—The term ‘‘trading facility’’ means a

person or group of persons that constitutes, maintains, or

provides a physical or electronic facility or system in which

multiple participants have the ability to execute or trade

agreements, contracts, or transactions by accepting bids

and offers made by other participants that are open to multiple participants in the facility or system.

(B) EXCLUSIONS.—The term ‘‘trading facility’’ does not

include—

(i) a person or group of persons solely because the

person or group of persons constitutes, maintains, or

94

provides an electronic facility or system that enables

participants to negotiate the terms of and enter into bilateral transactions as a result of communications exchanged by the parties and not from interaction of

multiple orders within a predetermined, nondiscretionary automated trade matching algorithm;

(ii) a government securities dealer or government securities broker, to the extent that the dealer or broker

executes or trades agreements, contracts, or transactions in government securities, or assists persons in

communicating about, negotiating, entering into, executing, or trading an agreement, contract, or transaction in government securities (as the terms ‘‘government securities dealer’’, ‘‘government securities broker’’,

and ‘‘government securities’’ are defined in section 3(a)

of the Securities Exchange Act of 1934 (15 U.S.C.

78c(a)));

(iii) facilities on which bids and offers, and acceptances of bids and offers effected on the facility, are not

binding; or

(iv) a person or group of persons solely because the

person or group of persons constitutes, maintains, or

provides an electronic facility or system that—

(I) enables participants to enter into bilateral

transactions with other participants; and

(II) incorporates credit screens or filters that prevent any participant from executing a transaction

with another participant unless both participants

have approved the extension of credit to the other.

øSEC. 2. (a)(1)(A)(i) The¿

SEC. 2. JURISDICTION OF COMMISSION; LIABILITY OF PRINCIPAL FOR

ACT OF AGENT; COMMODITY FUTURES TRADING COMMISSION; TRANSACTION IN INTERSTATE COMMERCE.

(a) JURISDICTION OF COMMISSION; COMMODITY FUTURES TRADING

COMMISSION.—

(1) JURISDICTION OF COMMISSION.—

(A) IN GENERAL.—The Commission shall have exclusive

jurisdiction, except to the extent otherwise provided in

øsubparagraph (B) of this paragraph¿ subsection (c), (d),

(e), (f), (g), or (i), with respect to accounts, agreements (including any transaction which is of the character of, or is

commonly known to the trade as, an ‘‘option’’, ‘‘privilege’’,

‘‘indemnity’’, ‘‘bid’’, ‘‘offer’’, ‘‘put’’, ‘‘call’’, ‘‘advance guaranty’’, or ‘‘decline guaranty’’), and transactions involving

contracts of sale of a commodity for future delivery, traded

or executed on a øcontract market designated pursuant to

section 5 of this Act¿ contract market designated or derivatives transaction execution facility registered pursuant to

section 5 or 5a or any other board of trade, exchange, or

market, and transactions subject to regulation by the Commission pursuant to section 19 of this Act. Except as hereinabove provided, nothing contained in this section shall

ø(I)¿ (i) supersede or limit the jurisdiction at any time conferred on the Securities and Exchange Commission or

other regulatory authorities under the laws of the United

95

States or of any State, or ø(II)¿ (ii) restrict the Securities

and Exchange Commission and such other authorities

from carrying out their duties and responsibilities in accordance with such laws. Nothing in this section shall supersede or limit the jurisdiction conferred on courts of the

United States or any State.

ø(ii) Nothing in this Act shall be deemed to govern or in any way

be applicable to transactions in foreign currency, security warrants,

security rights, resales of installment loan contracts, repurchase

options, government securities, or mortgages and mortgage purchase commitments, unless such transactions involve the sale

thereof for future delivery conducted on a board of trade.

ø(iii) The¿

(B) LIABILITY OF PRINCIPAL FOR ACT OF AGENT.—The act,

omission, or failure of any official, agent, or other person

acting for any individual, association, partnership, corporation, or trust within the scope of his employment or office

shall be deemed the act, omission, or failure of such individual, association, partnership, corporation, or trust, as

well as of such official, agent, or other person.

ø(B) Notwithstanding any other provision of law—

ø(i) This Act shall not apply to and the Commission shall

have no jurisdiction to designate a board of trade as a contract

market for any transaction whereby any party to such transaction acquires any put, call, or other option on one or more

securities (as defined in section 2(1) of the Securities Act of

1933 or section 3(a)(10) of the Securities Exchange Act of 1934

on the date of enactment of the Futures Trading Act of 1982),

including any group or index of such securities, or any interest

therein or based on the value thereof.

ø(ii) This Act shall apply to and the Commission shall have

exclusive jurisdiction with respect to accounts, agreements (including any transaction which is of the character of, or is commonly known to the trade as, an ‘‘option’’, ‘‘privilege’’, ‘‘indemnity’’, ‘‘bid’’, ‘‘offer’’, ‘‘put’’, ‘‘call’’, ‘‘advance guaranty’’, or ‘‘decline guaranty’’) and transactions involving, and may designate

a board of trade as a contract market in, contracts of sale (or

options on such contracts) for future delivery of a group or

index of securities (or any interest therein or based upon the

value thereof): Provided, however, That no board of trade shall

be designated as a contract market with respect to any such

contracts of sale (or options on such contracts) for future delivery unless the board of trade making such application demonstrates and the Commission expressly finds that the specific

contract (or option on such contract) with respect to which the

application has been made meets the following minimum requirements:

ø(I) Settlement of or delivery on such contract (or option

on such contract) shall be effected in cash or by means

other than the transfer or receipt of any security, except

an exempted security under section 3 of the Securities Act

of 1933 or section 3(a)(12) of the Securities Exchange Act

of 1934 as in effect on the date of enactment of the Futures Trading Act of 1982 (other than any municipal security, as defined in section 3(a)(29) of the Securities ExVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00095 Fmt 6659 Sfmt 6602 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
96

change Act of 1934 on the date of enactment of the Futures Trading Act of 1982);

ø(II) Trading in such contract (or option on such contract) shall not be readily susceptible to manipulation of

the price of such contract (or option on such contract), nor

to causing or being used in the manipulation of the price

of any underlying security, option on such security or option on a group or index including such securities; and

ø(III) Such group or index of securities shall be predominately composed of the securities of unaffiliated issuers

and shall be a widely published measure of, and shall reflect, the market for all publicly traded equity or debt securities or a substantial segment thereof, or shall be comparable to such measure.

ø(iii) Upon application by a board of trade for designation as

a contract market with respect to any contract of sale (or option on such contract) for future delivery involving a group or

index of securities, the Commission shall provide an opportunity for public comment on whether such contracts (or options on such contracts) meet the minimum requirements set

forth in clause (ii) of this subparagraph.

ø(iv)(I) The Commission shall consult with the Securities and

Exchange Commission with respect to any application which is

submitted by a board of trade before December 9, 1982, for

designation as a contract market with respect to any contract

of sale (or option on such contract) for future delivery of a

group or index of securities. If, no later than fifteen days following the close of the public comment period, the Securities

and Exchange Commission shall object to the designation of a

board of trade as a contract market in such contract (or option

on such contract) on the ground that any minimum requirement of clause (ii) of this subparagraph is not met, the Commission shall afford the Securities and Exchange Commission

an opportunity for an oral hearing, to be transcribed, before

the Commission, and shall give appropriate weight to the

views of the Securities and Exchange Commission. Such oral

hearing shall be held after the public comment period, prior to

Commission action upon such designation, and not less than

thirty nor more than forty-five days after the close of the public comment period, unless both the Commission and the Securities and Exchange Commission otherwise agree. If such an

oral hearing is held, the Securities and Exchange Commission

fails to withdraw its objections, and the Commission issues an

order designating a board of trade as a contract market with

respect to any such contract (or option on such contract), the

Securities and Exchange Commission shall have the right of

judicial review of such order in accordance with the standards

of section 6(c) of this Act. If, pursuant to section 6 of this Act,

there is a hearing on the record with respect to such application for designation, the Securities and Exchange Commission

shall have the right to participate in that hearing as an interested party.

ø(II) Effective for any application submitted by a board of

trade on or after December 9, 1982, for designation as a contract market with respect to any contract of sale (or option on

97

such contract) for future delivery of a group or index of securities, the Commission shall transmit a copy of such application

to the Securities and Exchange Commission for review. The

Commission shall not approve any such application if the Securities and Exchange Commission determines that such contract

(or option on such contract) fails to meet the minimum requirements set forth in clause (ii) of this subparagraph. Such determination shall be made by order no later than forty-five days

after the close of the public comment period under clause (iii)

of this subparagraph. In the event of such determination, the

board of trade shall be afforded an opportunity for a hearing

on the record before the Securities and Exchange Commission.

If a board of trade requests a hearing on the record, the hearing shall commence no later than thirty days following the receipt of the request, and a final determination shall be made

no later than thirty days after the close of the hearing. A person aggrieved by any such order of the Securities and Exchange Commission may obtain judicial review thereof in the

same manner and under such terms and conditions as are provided in section 6(b) of this Act.

ø(v) No person shall offer to enter into, enter into, or confirm

the execution of any contract of sale (or option on such contract) for future delivery of any security, or interest therein or

based on the value thereof, except an exempted security under

section 3 of the Securities Act of 1933 or section 3(a)(12) of the

Securities Exchange Act of 1934 as in effect on the date of enactment of the Futures Trading Act of 1982 (other than any

municipal security as defined in section 3(a)(29) of the Securities Exchange Act of 1934 on the date of enactment of the Futures Trading Act of 1982), or except as provided in clause (ii)

of this subparagraph, any group or index of such securities or

any interest therein or based on the value thereof.

ø(vi)(I) Notwithstanding any other provision of this Act, any

contract market in a stock index futures contract (or option

thereon) shall file with the Board of Governors of the Federal

Reserve System any rule establishing or changing the levels of

margin (initial and maintenance) for the stock index futures

contract (or option thereon).

ø(II) The Board may at any time request any contract market to set the margin for any stock index futures contract (or

option thereon) at such levels as the Board in its judgment determines are appropriate to preserve the financial integrity of

the contract market or its clearing system or to prevent systemic risk. If the contract market fails to do so within the time

specified by the Board in its request, the Board may direct the

contract market to alter or supplement the rules of the contract market as specified in the request.

ø(III) Subject to such conditions as the Board may determine, the Board may delegate any or all of its authority under

this clause only to the Commission.

ø(IV) Nothing in this clause shall supersede or limit the authority granted to the Commission in section 8a(9) to direct a

contract market, on finding an emergency to exist, to raise

temporary emergency margin levels on any futures contract or

option on the contract covered by this clause.

98

ø(V) Any action taken by the Board, or by the Commission

acting under the delegation of authority under subclause III,

under this clause directing a contract market to alter or supplement a contract market rule shall be subject to review only

in the Court of Appeals where the party seeking review resides

or has its principal place of business, or in the United States

Court of Appeals for the District of Columbia Circuit. The review shall be based on the examination of all information before the Board or the Commission, as the case may be, at the

time the determination was made. The court reviewing the action of the Board or the Commission shall not enter a stay or

order of mandamus unless the court has determined, after notice and a hearing before a panel of the court, that the agency

action complained of was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.¿

(2)(A) There is hereby established, as an independent agency

of the United States Government, a Commodity Futures Trading Commission. The Commission shall be composed of five

Commissioners who shall be appointed by the President, by

and with the advice and consent of the Senate. In nominating

persons for appointment, the President shall—

(i) select persons who shall each have demonstrated

knowledge in futures trading or its regulation, or the production, merchandising, processing or distribution of one

or more of the commodities or other goods and articles,

services, rights, and interests covered by this Act; and

(ii) seek to ensure that the demonstrated knowledge of

the Commissioners is balanced with respect to such areas.

Not more than three of the members of the Commission shall

be members of the same political party. Each Commissioner

shall hold office for a term of five years and until his successor

is appointed and has qualified, except that he shall not so continue to serve beyond the expiration of the next session of Congress subsequent to the expiration of said fixed term of office,

and except (i) any Commissioner appointed to fill a vacancy occurring prior to the expiration of the term for which his predecessor was appointed shall be appointed for the remainder of

such term, and (ii) the terms of office of the Commissioners

first taking office after the enactment of this paragraph shall

expire as designated by the President at the time of nomination, one at the end of one year, one at the end of two years,

one at the end of three years, one at the end of four years, and

one at the end of five years.

(B) The President shall appoint, by and with the advice and

consent of the Senate, a member of the Commission as Chairman, who shall serve as Chairman at the pleasure of the President. An individual may be appointed as Chairman at the

same time that person is appointed as a Commissioner. The

Chairman shall be the chief administrative officer of the Commission and shall preside at hearings before the Commission.

At any time, the President may appoint, by and with the advice and consent of the Senate, a different Chairman, and the

Commissioner previously appointed as Chairman may complete

that Commissioner’s term as a Commissioner.

99

(3) A vacancy in the Commission shall not impair the right

of the remaining Commissioners to exercise all the powers of

the Commission.

(4) The Commission shall have a General Counsel, who shall

be appointed by the Commission and serve at the pleasure of

the Commission. The General Counsel shall report directly to

the Commission and serve as its legal advisor. The Commission shall appoint such other attorneys as may be necessary,

in the opinion of the Commission, to assist the General Counsel, represent the Commission in all disciplinary proceedings

pending before it, represent the Commission in courts of law

whenever appropriate, assist the Department of Justice in handling litigation concerning the Commission in courts of law,

and perform such other legal duties and functions as the Commission may direct.

(5) The Commission shall have an Executive Director, who

shall be appointed by the Commission and serve at the pleasure of the Commission. The Executive Director shall report directly to the Commission and perform such functions and duties as the Commission may prescribe.

(6)(A) Except as otherwise provided in this paragraph and in

paragraphs (4) and (5) of this subsection, the executive and administrative functions of the Commission, including functions

of the Commission with respect to the appointment and supervision of personnel employed under the Commission, the distribution of business among such personnel and among administrative units of the Commission, and the use and expenditure

of funds, according to budget categories, plans, programs, and

priorities established and approved by the Commission, shall

be exercised solely by the Chairman.

(B) In carrying out any of his functions under the provisions

of this paragraph, the Chairman shall be governed by general

policies, plans, priorities, and budgets approved by the Commission and by such regulatory decisions, findings, and determinations as the Commission may by law be authorized to

make.

(C) The appointment by the Chairman of the heads of major

administrative units under the Commission shall be subject to

the approval of the Commission.

(D) Personnel employed regularly and full time in the immediate offices of Commissioners other than the Chairman shall

not be affected by the provisions of this paragraph.

(E) There are hereby reserved to the Commission its functions with respect to revising budget estimates and with respect to determining the distribution of appropriated funds according to major programs and purposes.

(F) The Chairman may from time to time make such provisions as he shall deem appropriate authorizing the performance by any officer, employee, or administrative unit under his

jurisdiction of any functions of the Chairman under this paragraph.

(7) No Commissioner or employee of the Commission shall

accept employment or compensation from any person, exchange, or clearinghouse subject to regulation by the Commission under this Act during his term of office, nor shall he parVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00099 Fmt 6659 Sfmt 6602 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
100

ticipate, directly or indirectly, in any øcontract market¿ registered entity operations or transactions of a character subject

to regulation by the Commission.

(8)(A) The Commission shall, in cooperation with the Secretary of Agriculture, maintain a liaison between the Commission and the Department of Agriculture. The Secretary shall

take such steps as may be necessary to enable the Commission

to obtain information and utilize such services and facilities of

the Department of Agriculture as may be necessary in order to

maintain effectively such liaison. In addition, the Secretary

shall appoint a liaison officer, who shall be an employee of the

Office of the Secretary, for the purpose of maintaining a liaison

between the Department of Agriculture and the Commission.

The Commission shall furnish such liaison officer appropriate

office space within the offices of the Commission and shall

allow such liaison officer to attend and observe all deliberations and proceedings of the Commission.

(B)(i) The Commission shall maintain communications with

the Department of the Treasury, the Board of Governors of the

Federal Reserve System, and the Securities and Exchange

Commission for the purpose of keeping such agencies fully informed of Commission activities that relate to the responsibilities of those agencies, for the purpose of seeking the views of

those agencies on such activities, and for considering the relationships between the volume and nature of investment and

trading in contracts of sale of a commodity for future delivery

and in securities and financial instruments under the jurisdiction of such agencies.

(ii) When a board of trade applies for ødesignation as a contract market¿ designation or registration as a contract market

or derivatives transaction execution facility involving transactions for future delivery of any security issued or guaranteed

by the United States or any agency thereof, the Commission

shall promptly deliver a copy of such application to the Department of the Treasury and the Board of Governors of the Federal Reserve System. The Commission may not ødesignate a

board of trade as a contract market¿ designate or register a

board of trade as a contract market or derivatives transaction

execution facility based on such application until forty-five days

after the date the Commission delivers the application to such

agencies or until the Commission receives comments from each

of such agencies on the application, whichever period is shorter. Any comments received by the Commission from such agencies shall be included as part of the public record of the Commission’s designation proceeding. In ødesignating, or refusing,

suspending, or revoking the designation of, a board of trade as

a contract market involving transactions for future delivery referred to in this clause or in considering possible emergency action under section 8a(9) of this Act¿ designating, registering, or

refusing, suspending, or revoking the designation or registration

of, a board of trade as a contract market or derivatives transaction execution facility involving transactions for future delivery referred to in this clause or in considering any possible action under this Act (including without limitation emergency action under section 8a(9)) with respect to such transactions, the

101

Commission shall take into consideration all comments it receives from the Department of the Treasury and the Board of

Governors of the Federal Reserve System and shall consider

the effect that any such ødesignation, suspension, revocation,

or emergency action¿ designation, registration, suspension, revocation, or action may have on the debt financing requirements

of the United States Government and the continued efficiency

and integrity of the underlying market for government securities.

(iii) The provisions of this subparagraph shall not create any

rights, liabilities, or obligations upon which actions may be

brought against the Commission.

(9)(A) Whenever the Commission submits any budget estimate or request to the President or the Office of Management

and Budget, it shall concurrently transmit copies of that estimate or request to the House and Senate Appropriations Committees and the House Committee on Agriculture and the Senate Committee on Agriculture, Nutrition, and Forestry.

(B) Whenever the Commission transmits any legislative recommendations, or testimony, or comments on legislation to the

President or the Office of Management and Budget, it shall

concurrently transmit copies thereof to the House Committee

on Agriculture and the Senate Committee on Agriculture, Nutrition, and Forestry. No officer or agency of the United States

shall have any authority to require the Commission to submit

its legislative recommendations, or testimony, or comments on

legislation to any officer or agency of the United States for approval, comments, or review, prior to the submission of such

recommendations, testimony, or comments to the Congress. In

instances in which the Commission voluntarily seeks to obtain

the comments or review of any officer or agency of the United

States, the Commission shall include a description of such actions in its legislative recommendations, testimony, or comments on legislation which it transmits to the Congress.

(C) Whenever the Commission issues for official publication

any opinion, release, rule, order, interpretation, or other determination on a matter, the Commission shall provide that any

dissenting, concurring, or separate opinion by any Commissioner on the matter be published in full along with the Commission opinion, release, rule, order, interpretation, or determination.

(10) The Commission shall have an official seal, which shall

be judicially noticed.

(11) The Commission is authorized to promulgate such rules

and regulations as it deems necessary to govern the operating

procedures and conduct of the business of the Commission.

* * * * * * *

(c) AGREEMENTS, CONTRACTS, AND TRANSACTIONS IN FOREIGN

CURRENCY, GOVERNMENT SECURITIES, AND CERTAIN OTHER COM- MODITIES.— (1) IN GENERAL.—Except as provided in paragraph (2), nothing in this Act (other than section 5b or 12(e)(2)(B)) governs or

applies to an agreement, contract, or transaction in—

(A) foreign currency;

(B) government securities;

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(C) security warrants;

(D) security rights;

(E) resales of installment loan contracts;

(F) repurchase transactions in an excluded commodity; or

(G) mortgages or mortgage purchase commitments.

(2) COMMISSION JURISDICTION.—

(A) AGREEMENTS, CONTRACTS, AND TRANSACTIONS THAT

ARE FUTURES TRADED ON AN ORGANIZED EXCHANGE.—This

Act applies to, and the Commission shall have jurisdiction

over, an agreement, contract, or transaction described in

paragraph (1) that is—

(i) a contract of sale of a commodity for future delivery (or an option thereon), or an option on a commodity

(other than foreign currency or a security), that is executed or traded on an organized exchange; or

(ii) an option on foreign currency and is executed or

traded on an organized exchange that is not a national

securities exchange.

(B) AGREEMENTS, CONTRACTS, AND TRANSACTIONS IN RETAIL FOREIGN CURRENCY.—This Act applies to, and the

Commission shall have jurisdiction over, an agreement,

contract, or transaction in foreign currency that—

(i) is a contract of sale for future delivery (or an option on such a contract) or an option; and

(ii) is offered to, or entered into with, a person that

is not an eligible contract participant, unless the

counterparty, or the person offering to be the

counterparty, of the person is—

(I) a financial institution;

(II) a broker or dealer registered under section

15(b) or 15C of the Securities Exchange Act of

1934 (15 U.S.C. 78o(b), 78o–5) or a futures commission merchant registered under this Act;

(III) an associated person of a broker or dealer

registered under section 15(b) or 15C of the Securities Exchange Act of 1934 (15 U.S.C. 78o(b), 78o–

5), or an affiliated person of a futures commission

merchant registered under this Act, concerning the

financial or securities activities of which the registered person makes and keeps records under section 15C(b) or 17(h) of the Securities Exchange Act

of 1934 (15 U.S.C. 78o–5(b), 78q(h)) or section

4f(c)(2)(B) of this Act;

(IV) an insurance company that is subject to

State regulation (including a subsidiary or affiliate of such an insurance company);

(V) a financial holding company (as defined in

section 2 of the Bank Holding Company Act of

1956); or

(VI) an investment bank holding company (as

defined in section 17(i) of the Securities Exchange

Act of 1934).

(d) EXCLUDED DERIVATIVE TRANSACTIONS.—

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(1) IN GENERAL.—Nothing in this Act (other than section 5b

or 12(e)(2)(B)) governs or applies to an agreement, contract, or

transaction in an excluded commodity if—

(A) the agreement, contract, or transaction is entered into

only between persons that are eligible contract participants

at the time at which the persons enter into the agreement,

contract, or transaction; and

(B) the agreement, contract, or transaction is not executed

or traded on a trading facility.

(2) ELECTRONIC TRADING FACILITY EXCLUSION.—Nothing in

this Act (other than section 5a, 5b, or 12(e)(2)(B)) governs or applies to an agreement, contract, or transaction in an excluded

commodity if—

(A) the agreement, contract, or transaction is—

(i) entered into—

(I) on a principal-to-principal basis between parties trading for their own accounts or as described

in section 1a(12)(B)(ii) of this Act; and

(II) only between eligible contract participants

(as defined in subparagraphs (A), (B)(ii), and (C)

section 1a(12)) at the time at which the persons

enter into the agreement, contract, or transaction;

or

(ii) entered into only between eligible contract participants described in subclause (I), (II), (III), (IV), (V), or

(VI) of section 2(c)(2)(B)(ii) acting as a broker or performing a similar agency function on behalf of persons

that are eligible contract participants at the time at

which the persons enter into the agreement, contract, or

transaction; and

(B) the agreement, contract, or transaction is executed or

traded on an electronic trading facility.

(e) EXCLUDED ELECTRONIC TRADING FACILITIES.— (1) IN GENERAL.—Nothing in this Act (other than section

12(e)(2)(B)) governs or is applicable to an electronic trading facility that limits transactions authorized to be conducted on its

facilities to those satisfying the requirements of sections 2(d)(2)

and 2(h)(3)(B) of this Act.

(2) EFFECT ON AUTHORITY TO ESTABLISH AND OPERATE.—

Nothing in this Act shall prohibit a board of trade designated

by the Commission as a contract market or derivatives transaction execution facility, or an exempt board of trade, from establishing and operating an electronic trading facility excluded

under this Act pursuant to paragraph (1).

(f) EXCLUSION FOR QUALIFYING HYBRID INSTRUMENTS.—

(1) IN GENERAL.—Nothing in this Act (other than section

12(e)(2)(B)) governs or is applicable to—

(A) a banking product or security sold or provided by an

entity that is listed in any of subclauses (I) through (VI) of

section 2(c)(2)(B)(ii); or

(B) a hybrid instrument that is predominantly a security

or a deposit instrument.

(2) EXCEPTION.—Paragraph (1)(A) shall not apply to any

swap agreement (as defined in section 206(b) of the GrammLeach-Bliley Act) with any party who is not an eligible contract

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participant unless such swap agreement is entered into after

final regulations have been prescribed under section 49 of the

Federal Deposit Insurance Act

(3) PREDOMINANCE.—A hybrid instrument shall be considered

to be predominantly a security or deposit instrument if—

(A) the issuer of the hybrid instrument receives payment

in full of the purchase price of the hybrid instrument, substantially contemporaneously with delivery of the hybrid instrument;

(B) the purchaser or holder of the hybrid instrument is

not required to make any payment to the issuer in addition

to the purchase price paid under subparagraph (A), whether as margin, settlement payment, or otherwise, during the

life of the hybrid instrument or at maturity;

(C) the issuer of the hybrid instrument is not subject by

the terms of the instrument to mark-to-market margining

requirements; and

(D) the hybrid instrument is not marketed as a contract

of sale for future delivery of a commodity (or option on such

a contract) subject to this Act.

(4) MARK-TO-MARKET MARGINING REQUIREMENTS.—For the

purposes of paragraph (3)(C), mark-to-market margining requirements do not include the obligation of an issuer of a secured debt instrument to increase the amount of collateral held

in pledge for the benefit of the purchaser of the secured debt instrument to secure the repayment obligations of the issuer under

the secured debt instrument.

(g) Notwithstanding any other provision of law:

(1) This Act shall not apply to and the Commission shall

have no jurisdiction to designate a board of trade as a contract

market for any transaction whereby any party to the transaction acquires a put, call, or other option on 1 or more securities (as defined in section 2(a)(1) of the Securities Act of 1933

or section 3(a)(10) of the Securities Exchange Act of 1934, on

the date of enactment of the Futures Trading Act of 1982), including any group or index of securities and any interest in or

based on the value of securities.

(2) Nothing in this subsection governs or applies to—

(A) an agreement, contract, or transaction in a commodity that is excluded under subsection (c) or (d);

(B) an electronic trading facility that is excluded under

subsection (e); or

(C) a hybrid instrument that is covered by an exclusion

under subsection (f) or an exemption granted by the Commission under section 4(c) (whether or not the hybrid instrument is otherwise subject to this Act).

(3) Except as provided in paragraph (4) of this subsection, or

unless excluded by paragraph (2) of this subsection, a person

shall not offer to enter into, enter into, or confirm the execution

of any contract of sale (or option on the contract) for future delivery of any security or interest in or based on the value of a

nonexempt security.

(4)(A) Except as excluded by paragraph (2) of this subsection,

this Act shall apply to and the Commission shall have exclusive

jurisdiction with respect to accounts, agreements (including any

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transaction which is of the character of, or is commonly known

to the trade as an option, privilege, indemnity, bid, offer, put,

call, advance guaranty, or decline guaranty), and transactions

involving, and may designate a board of trade as a contract

market under section 5 or register the board of trade as a derivatives transaction execution facility under section 5a in, contracts of sale (or options on the contracts) for future delivery of

1 or more securities (as defined in section 2(a)(1) of the Securities Act of 1933 or section 3(a)(10) of the Securities Exchange

Act of 1934), including any group or index of securities and any

interest in or based on the value of securities.

(B) The Commission shall not designate a board of trade as

a contract market under section 5 or register a board of trade

as a derivatives transaction execution facility under section 5a

with respect to any such contracts of sale (or options on the contracts) for future delivery unless the board of trade demonstrates and the Commission expressly finds that the specific

contract (or option on the contract) with respect to which the application for the designation or recognition has been made

meets the following requirements:

(i) Settlement of or delivery on the contract (or option on

the contract) shall be effected in cash or by means other

than the transfer or receipt of a nonexempt security.

(ii) SUSCEPTIBILITY TO PRICE MANIPULATION.—Trading in

a contract (or option on such a contract) described in subparagraph (A) shall not be readily susceptible to—

(I) manipulation of the price of the contract (or option on such a contract); or

(II) causing or being used in the manipulation of the

price of any underlying security, option on a security,

or option on a group or index that includes a security.

(iii) If the contract is based on a single nonexempt security, an option on the security underlying the contract

would meet all Securities and Exchange Commission requirements for listing on a national securities exchange.

(iv) If the contract is based on any group or index of nonexempt securities comprised of fewer than 5 securities, or on

an index in which a single nonexempt security predominates, an option on each security comprising the group or

index would meet all requirements for listing on a national

securities exchange.

(v)(I) IN GENERAL.—The contract will be traded on a

board of trade that establishes the level of margin for futures contracts (or options on the contracts) based on a single nonexempt security, an index of fewer than 5 nonexempt

securities, or an index in which a single nonexempt security

predominates, at a level consistent with the level of margin

on comparable option contracts listed on any national securities exchange.

(II) CONSISTENCY.—For the purposes of subclause (I), a

margin for designated futures on securities and options on

securities shall be considered to be consistent if the margin

provides a similar level of protection against defaults by

counterparties, taking into account any differences in—

(aa) the price volatility of the contracts;

106

(bb) the frequency with which margin requirements

are made; and

(cc) the period of time within which margin calls

must be met.

(vi) The contract will be traded on a board of trade that

prohibits a person who acts as a floor broker for any contract of sale (or options on the contract) for future delivery

of a nonexempt security, an index based on fewer than 5

nonexempt securities, or an index in which a single nonexempt security predominates, from trading that contract

for the broker’s own account during the same trading session.

(vii) The contract will be traded on a board of trade that

collects, maintains, and promptly provides to the Securities

and Exchange Commission such information as the Commission and the Securities and Exchange Commission

jointly consider necessary to perform the enforcement responsibilities described in paragraph (6).

(5) The Commission shall consult with the Securities and Exchange Commission with respect to any application submitted

by a board of trade for designation as a contract market or derivatives transaction execution facility with respect to any contract of sale (or option on the contract) for future delivery of a

nonexempt security or a group or index of such securities. If, not

later than 15 days after the consultation, the Securities and Exchange Commission objects to the designation of a board of

trade as a contract market or derivatives transaction execution

facility in the contract (or option on the contract) on the ground

that any requirement of paragraph (4)(B) is not met, the Commission shall afford the Securities and Exchange Commission

an opportunity for an oral hearing to be transcribed before the

Commission, and shall give appropriate weight to the views of

the Securities and Exchange Commission. The oral hearing

shall be held before Commission action upon the application for

the designation, and not less than 30 nor more than 45 days

after the Securities and Exchange Commission has objected. If

such an oral hearing is held, the Securities and Exchange Commission fails to withdraw its objections, and the Commission

issues an order designating a board of trade as a contract market or recognizes the board of trade as a derivatives transaction

execution facility with respect to any such contract (or option on

the contract), the Securities and Exchange Commission may

seek judicial review of the order in accordance with the procedural requirements set forth in section 6(c). If, pursuant to section 6, there is a hearing on the record with respect to an application for such designation, the Securities and Exchange Commission may participate in that hearing as an interested party.

(6) Notwithstanding any other provision of this Act, the Securities and Exchange Commission may enforce against a person

that purchases or sells any contract of sale (or option on the

contract) for future delivery of any nonexempt security, any

index comprised of fewer than 5 nonexempt securities, or any

index in which a single nonexempt security predominates to the

same extent as if the person had purchased or sold an option

on the security or index under the following provisions of the seVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00106 Fmt 6659 Sfmt 6603 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
107

curities laws and regulations with respect to the following categories of conduct:

(A) Section 10(b) and 21A of the Securities Exchange Act

of 1934 (15 U.S.C. 78j(b), 78u–1) with respect to insider

trading.

(B) Section 16(b) of such Act (15 U.S.C. 78p(b)) with respect to unfair use of information in short swing trading by

a corporate insider.

(C) Section 9 of such Act (15 U.S.C. 78i) with respect to

manipulation of securities prices.

(D) Section 10(b) of such Act (15 U.S.C. 78J(b)) and section 204A of the Investment Adviser’s Act of 1940 (15

U.S.C. 80b–4a) with respect to frontrunning.

(E) Section 14 of the Securities Exchange Act of 1934 (15

U.S.C. 78n) with respect to the pricing and integrity of tender offers.

(F) Rule 144 of the rules of the Securities and Exchange

Commission (17 C.F.R. 230.144) with respect to trading in

restricted securities.

(7)(A) Notwithstanding any other provision of this Act, any

contract market or derivatives transaction execution facility in

a nonexempt security or stock index futures contract (or option

thereon) shall file with the Board of Governors of the Federal

Reserve System any rule establishing or changing the levels of

margin (initial and maintenance) for the nonexempt security or

stock index futures contract (or option on the contract).

(B) The Board may at any time request any contract market

or derivatives transaction execution facility to set the level of

margin for any nonexempt security or stock index futures contract (or option on the contract) at such levels as the Board in

its judgment determines are appropriate to preserve the financial integrity of the contract market or derivatives transaction

execution facility or its clearing system or to prevent systemic

risk. If the contract market or derivatives transaction execution

facility fails to do so within the time specified by the Board in

its request, the Board may direct the contract market or derivatives transaction execution facility to alter or supplement the

rules of the contract market or derivatives transaction execution

facility as specified in the request.

(C) Subject to such conditions as the Board may determine,

the Board may delegate any or all of its authority under this

paragraph to the Commission or an intermarket margin board

as provided in subparagraph (D).

(D) INTERMARKET MARGIN BOARD.—

(i) ESTABLISHMENT.—With the concurrence of the Securities and Exchange Commission and the Commission, the

Board may establish an intermarket margin board, consisting of representatives of any or all of the three agencies.

(ii) DUTIES.—The intermarket margin board may set and

maintain margin levels and rules pertaining to margin for

futures on a single nonexempt security, an index of fewer

than 5 nonexempt securities, or an index in which a single

nonexempt security predominates, listed on a contract market or derivatives transaction execution facility. In discharging these duties, the intermarket margin board shall

108

endeavor to make the levels of margin for futures and options on a single nonexempt security consistent taking into

account any material differences in such contracts,

including—

(I) the price volatility of the contracts;

(II) the frequency with which margin calls are made;

and

(III) the period of time within which margin calls

must be met.

(E) This paragraph shall not be construed to supersede or

limit the authority granted to the Commission in section 8a(9)

to direct a contract market or derivatives transaction execution

facility, on finding an emergency to exist, to raise temporary

emergency margin levels on any futures contract or option on

the contract covered by this paragraph.

(F) Any action taken by the Board under this paragraph, or

by the Commission acting under the delegation of authority

under subparagraph (C), directing a contract market or derivatives transaction execution facility to alter or supplement a contract market or derivatives transaction execution facility rule

shall be subject to review only in the United States Court of Appeals for the judicial circuit in which the party seeking review

resides or has its principal place of business, or in the United

States Court of Appeals for the District of Columbia Circuit.

The review shall be based on the examination of all information

before the Board or the Commission, as the case may be, at the

time the determination was made. The court reviewing the action of the Board or the Commission shall not enter a stay or

order of mandamus unless the court determines, after notice

and a hearing before a panel of the court, that the agency action

complained of was arbitrary, capricious, an abuse of discretion,

or otherwise not in accordance with law.

(8) This subsection shall not be construed to prohibit—

(A) an agreement, contract, or transaction excluded from

this Act by paragraph (2); or

(B) any hybrid instrument that is covered by the terms of

any exemption granted by the Commission under section

4(c) (whether or not any such hybrid instrument is otherwise subject to this Act).

(9)(A) No futures commission merchant, commodity trading

advisor, or introducing broker shall recommend to any customer the purchase or sale of any contract of sale for future delivery of a single nonexempt security, an index of fewer than 5

nonexempt securities, or an index in which a single nonexempt

security predominates, unless the futures commission merchant,

commodity trading advisor, or introducing broker complies with

the rules described in subparagraph (B) of a registered futures

association of which such merchant, advisor, or broker is a

member.

(B) Within 9 months of the date of enactment of the Commodity Futures Modernization Act of 2000, a registered futures

association shall adopt rules requiring a futures commission

merchant, a commodity trading advisor, or an introducing

broker which recommends to any customer the purchase or sale

of any contract of sale for future delivery of a single nonexempt

109

security, an index of fewer than 5 nonexempt securities, or an

index in which a single nonexempt security predominates to ascertain through reasonable due diligence that the recommendation is suitable for that customer in light of the customer’s financial position and trading goals. The registered futures association shall consult with the Commission and the Securities

and Exchange Commission prior to the adoption of any such

rule, and shall submit any such rule to the Commission for approval in the manner and according to the procedures described

in section 17(j) of this Act, provided, that in such case the rule

shall become effective if the Commission fails to disapprove

such rule within 90 days of submission.

(10)(A) Nothing in this Act shall be construed to require or

authorize the Commission to review or approve, directly or indirectly, any contract, rule, regulation, or action adopted by a foreign board of trade, exchange, or market, or a clearinghouse for

such a board of trade, exchange, or market, relating to any

transaction involving a contract of sale for future delivery (or

option on such a contract) in or involving any security, including any foreign government debt security, or group or index of

such securities, if—

(i)(I) in the case of a contract of sale for future delivery

(or option on such a contract) in or involving a single equity security, the United States is not the primary trading

market for the underlying security; or

(II) in the case of a contract of sale for future delivery (or

option on such a contract) in or involving a group or index

of equity securities, less than 25 percent of the weighting of

the group or index is derived from securities for which the

United States is the primary trading market for the securities underlying the contract for future delivery (or option on

the contract); and

(ii) settlement of or delivery on the contract for future delivery (or option on such a contract) is to be effected in cash

or by means other than the transfer or receipt of a security

in the United States other than an exempted security.

(B) Within 90 days after the date of the enactment of this

paragraph, the Commission shall adopt such procedures as it

deems appropriate pursuant to which, consistent with this Act,

the Commission shall authorize the offer and sale in the United

States of any contract of sale for future delivery (or option on

such a contract) of a security, other than a security of the type

described in subparagraph (A)(i)(I) or a group or index of securities of the type described in subparagraph (A)(i)(II), traded on

or subject to the rules of a foreign board of trade, exchange, or

market, or a clearinghouse for such a board of trade, exchange,

or market, except that such procedures shall not require a foreign board of trade, exchange, or market, or a clearinghouse for

such a board of trade, exchange, or market to apply for designation as a contract market under this Act with respect to such

a contract for future delivery (or option on such a contract).

(h) LEGAL CERTAINTY FOR CERTAIN TRANSACTIONS IN EXEMPT

COMMODITIES.—

110

(1) Except as provided in paragraph (2) of this subsection,

nothing in this Act shall apply to a contract, agreement or

transaction in an exempt commodity which—

(A) is entered into solely between persons that are eligible

contract participants at the time they enter into the agreement, contract, or transaction; and

(B) is not entered into on a trading facility.

(2) An agreement, contract, or transaction described in paragraph (1) of this subsection shall be subject to—

(A) sections 5b and 12(e)(2)(B) of this Act;

(B) sections 4b and 4n of this Act and the regulations of

the Commission pursuant to section 4c(b) of this Act proscribing fraud in connection with commodity option transactions, to the extent such agreement, contract, or transaction is not between eligible commercial participants and

would otherwise be subject to those provisions; and

(C) sections 6(c) and 9(a)(2) of this Act to the extent they

prohibit manipulation of the market price of any commodity in interstate commerce, to the extent such agreement, contract, or transaction would otherwise be subject to

those provisions.

(3) Except as provided in paragraph (4) of this subsection,

nothing in this Act shall apply to an agreement, contract, or

transaction in an exempt commodity (other than a metal commodity enumerated in section 1a(3) of this Act) which—

(A) is entered into solely between persons that are eligible

contract participants at the time at which the persons enter

into the agreement, contract, or transaction; and

(B) is executed or traded on an electronic trading facility.

(4) An agreement, contract, or transaction described in paragraph (3) shall be subject to—

(A) sections 5b and 12(e)(2)(B) of this Act;

(B) sections 4b and 4n of this Act and the regulations of

the Commission pursuant to section 4c(b) of this Act proscribing fraud in connection with commodity option transactions and section 6(c) and 9(a)(2) of this Act, to the extent

these provisions prohibit manipulation of the market price

of any commodity in interstate commerce, to the extent such

agreement, contract, or transaction would otherwise be subject to those provisions; and

(C) such rules and regulations as the Commission may

prescribe if necessary to ensure timely dissemination by the

electronic trading facility of price, trading volume, and

other trading data to the extent appropriate, if the Commission determines that the electronic trading facility performs

a significant price discovery function for transactions related to the commodity executed or traded on the electronic

trading facility.

(i) EXCLUDED SWAP TRANSACTIONS.—

(1) IN GENERAL.—No provision of this Act (other than section

5b or 12(e)(2)(B)) shall apply to or govern any agreement, contract, or transaction in a commodity other than an agricultural

commodity enumerated in section 1a(3) if—

(A) the agreement, contract, or transaction is entered into

only between persons that are eligible contract participants

111

at the time they enter into the agreement, contract, or transaction; and

(B) the material economic terms of the agreement, contract, or transaction are subject to individual negotiation

and are not specified by the rules terms or conditions of a

trading facility.

(2) EXCLUSION.—Paragraph (1) shall not apply to—

(A) a contract for the sale of a commodity for future delivery traded on a contract market designated under section

5; or

(B) any agreement, contract, or transaction traded on a

derivatives transaction execution facility registered under

section 5a.

(j) APPLICATION OF THE ACT.—No provision of this Act shall be

construed as—

(1) implying or creating any presumption that—

(A) any agreement, contract, or transaction that is eligible for an exclusion or exemption from regulation under

this Act; or

(B) any agreement, contract, or transaction that is not eligible for an exclusion or exemption from regulation under

this Act,

is or would otherwise be subject to this Act; or

(2) conferring jurisdiction on the Commission with respect to

any such agreement, contract, or transaction, except as expressly provided in section 5b.

øSEC. 3. Transactions in commodities involving the sale thereof

for future delivery as commonly conducted on boards of trade and

known as ‘‘futures’’ are affected with a national public interest.

Such futures transactions are carried on in large volume by the

public generally and by persons engaged in the business of buying

and selling commodities and the products and byproducts thereof

in interstate commerce. The prices involved in such transactions

are generally quoted and disseminated throughout the United

States and in foreign countries as a basis for determining the

prices to the producer and the consumer of commodities and the

products and byproducts thereof and to facilitate the movements

thereof in interstate commerce. Such transactions are utilized by

shippers, dealers, millers, and others engaged in handling commodities and the products and byproducts thereof in interstate commerce as a means of hedging themselves against possible loss

through fluctuations in price. The transactions and prices of commodities on such boards of trade are susceptible to excessive speculation and can be manipulated, controlled, cornered or squeezed, to

the detriment of the producer or the consumer and the persons

handling commodities and the products and byproducts thereof in

interstate commerce, rendering regulation imperative for the protection of such commerce and the national public interest therein.

Furthermore, transactions which are of the character of, or are

commonly known to the trade as, ‘‘options’’ are or may be utilized

by commercial and other entities for risk shifting and other purposes. Options transactions are in interstate commerce or affect

such commerce and the national economy, rendering regulation of

such transactions imperative for the protection of such commerce

and the national public interest.¿

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SEC. 3. FINDINGS AND PURPOSE.

(a) FINDINGS.—The futures contracts and options contracts that

are subject to this Act are entered into regularly in interstate and

international commerce and are affected with a national public interest by providing a means for managing and assuming price risks,

discovering prices, and disseminating pricing information through

trading in liquid, fair and financially secure trading facilities.

(b) PURPOSE.—It is the purpose of this Act to serve the public interests described in subsection (a) through a system of effective selfregulation of trading facilities, clearing systems, market participants and market professionals under the oversight of the Commission. To foster these public interests, it is further the purpose of this

Act to deter and prevent price manipulation or any other disruptions to market integrity; to ensure the financial integrity of all

transactions subject to this Act and the avoidance of systemic risk;

to protect all market participants from fraudulent or other abusive

sales practices and misuses of customer assets; and to promote responsible innovation and fair competition among boards of trade,

other markets and market participants.

SEC. 4. (a) Unless exempted by the Commission pursuant to subsection (c), it shall be unlawful for any person to offer to enter into,

to enter into, to execute, to confirm the execution of, or to conduct

any office or business anywhere in the United States, its territories

or possessions, for the purpose of soliciting, or accepting any order

for, or otherwise dealing in, any transaction in, or in connection

with, a contract for the purchase or sale of a commodity for future

delivery (other than a contract which is made on or subject to the

rules of a board of trade, exchange, or market located outside the

United States, its territories or possessions) unless—

(1) such transaction is conducted on or subject to the rules

of a board of trade which has been ødesignated by the Commission as a ‘‘contract market’’ for¿ designated or registered by the

Commission as a contract market or derivatives transaction execution facility for such commodity;

(2) such contract is executed or consummated by or through

a ømember of such¿ contract market; and

(3) such contract is evidenced by a record in writing which

shows the date, the parties to such contract and their addresses, the property covered and its price, and the terms of delivery: Provided, That each contract market or derivatives transaction execution facility member shall keep such record for a

period of three years from the date thereof, or for a longer period if the Commission shall so direct, which record shall at all

times be open to the inspection of any representative of the

Commission or the Department of Justice.

* * * * * * *

(c)(1) In order to promote responsible economic or financial innovation and fair competition, the Commission by rule, regulation, or

order, after notice and opportunity for hearing, may (on its own initiative or on application of any person, including any board of trade

ødesignated as a contract market¿ designated or registered as a

contract market or derivatives transaction execution facility for

transactions for future delivery in any commodity under section 5

of this Act) exempt any agreement, contract, or transaction (or

class thereof) that is otherwise subject to subsection (a) (including

113

any person or class of persons offering, entering into, rendering advice or rendering other services with respect to, the agreement,

contract, or transaction), either unconditionally or on stated terms

or conditions or for stated periods and either retroactively or prospectively, or both, from any of the requirements of subsection (a),

or from any other provision of this Act (except section ø2(a)(1)(B)¿

2(g)), if the Commission determines that the exemption would be

consistent with the public interest.

(2) The Commission shall not grant any exemption under paragraph (1) from any of the requirements of subsection (a) unless the

Commission determines that—

(A) the requirement should not be applied to the agreement,

contract, or transaction for which the exemption is sought and

that the exemption would be consistent with the public interest

and the purposes of this Act; and

(B) the agreement, contract, or transaction—

(i) will be entered into solely between appropriate persons; and

(ii) will not have a material adverse effect on the ability

of the Commission or any contract market or derivatives

transaction execution facility to discharge its regulatory or

self-regulatory duties under this Act.

* * * * * * *

SEC. 4a. (a) Excessive speculation in any commodity under contracts of sale of such commodity for future delivery made on or subject to the rules of contract markets or derivatives transaction execution facilities causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and

unnecessary burden on interstate commerce in such commodity.

For the purpose of diminishing, eliminating, or preventing such

burden, the Commission shall, from time to time, after due notice

and opportunity for hearing, by rule, regulation, or order, proclaim

and fix such limits on the amounts of trading which may be done

or positions which may be held by any person under contracts of

sale of such commodity for future delivery on or subject to the rules

of any contract market or derivatives transaction execution facility

as the Commission finds are necessary to diminish, eliminate, or

prevent such burden. In determining whether any person has exceeded such limits, the positions held and trading done by any persons directly or indirectly controlled by such person shall be included with the positions held and trading done by such person;

and further, such limits upon positions and trading shall apply to

positions held by, and trading done by, two or more persons acting

pursuant to an expressed or implied agreement or understanding,

the same as if the positions were held by, or the trading were done

by, a single person. Nothing in this section shall be construed to

prohibit the Commission from fixing different trading or position

limits for different commodities, markets, futures, or delivery

months, or for different number of days remaining until the last

day of trading in a contract, or different trading limits for buying

and selling operations, or different limits for the purposes of paragraphs (1) and (2) of subsection (b) of this section, or from exempting transactions normally known to the trade as ‘‘spreads’’ or

‘‘straddles’’ or ‘‘arbitrage’’ or from fixing limits applying to such

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actions or positions. The word ‘‘arbitrage’’ in domestic markets

shall be defined to mean the same as a ‘‘spread’’ or ‘‘straddle’’. The

Commission is authorized to define the term ‘‘international arbitrage’’.

(b) The Commission shall, in such rule, regulation, or order, fix

a reasonable time (not to exceed ten days) after the promulgation

of the rule, regulation, or order; after which, and until such rule,

regulation, or order is suspended, modified, or revoked, it shall be

unlawful for any person—

(1) directly or indirectly to buy or sell, or agree to buy or sell,

under contracts of sale of such commodity for future delivery

on or subject to the rules of the contract market or markets,

or derivatives transaction execution facility or facilities, to

which the rule, regulation, or order applies, any amount of

such commodity during any one business day in excess of any

trading limit fixed for one business day by the Commission in

such rule, regulation, or order for or with respect to such commodity; or

(2) directly or indirectly to hold or control a net long or a net

short position in any commodity for future delivery on or subject to the rules of any contract market or derivatives transaction execution facility in excess of any position limit fixed by

the Commission for or with respect to such commodity: Provided, That such position limit shall not apply to a position acquired in good faith prior to the effective date of such rule, regulation, or order.

* * * * * * *

(e) Nothing in this section shall prohibit or impair the adoption

by any øcontract market or¿ contract market, derivatives transaction execution facility, or by any other board of trade ølicensed

or designated¿ licensed, designated, or registered by the Commission of any bylaw, rule, regulation, or resolution fixing limits on

the amount of trading which may be done or positions which may

be held by any person under contracts of sale of any commodity for

future delivery traded on or subject to the rules of such øcontract

market, or¿ contract market or derivatives transaction execution facility, or under options on such contracts or commodities traded on

or subject to the rules of such øcontract market or¿ contract market, derivatives transaction execution facility, or such board of

trade: Provided, That if the Commission shall have fixed limits

under this section for any contract or under section 4c of this Act

for any commodity option, then the limits fixed by the bylaws,

rules, regulations, and resolutions adopted by such øcontract market or¿ contract market, derivatives transaction execution facility, or

such board of trade shall not be higher than the limits fixed by the

Commission. It shall be a violation of this Act for any person to violate any bylaw, rule, regulation, or resolution of any øcontract market or¿ contract market, derivatives transaction execution facility, or

other board of trade ølicensed or designated¿ licensed, designated,

or registered by the Commission fixing limits on the amount of

trading which may be done or positions which may be held by any

person under contracts of sale of any commodity for future delivery

or under options on such contracts or commodities, if such bylaw,

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sion: Provided, That the provisions of section 9(c) of this Act shall

apply only to those who knowingly violate such limits.

SEC. 4b. (a) It shall be unlawful (1) for any member of a øcontract market¿ registered entity, or for any correspondent, agent, or

employee of any member, in or in connection with any order to

make, or the making of, any contract of sale of any commodity in

interstate commerce, made, or to be made, on or subject to the

rules of any øcontract market¿ registered entity, for or on behalf of

any other person, or (2) for any person, in or in connection with

any order to make, or the making of, any contract of sale of any

commodity for future delivery, made, or to be made, for or on behalf of any other person if such contract for future delivery is or

may be used for (A) hedging any transaction in interstate commerce in such commodity or the products or by products thereof,

or (B) determining the price basis of any transaction in interstate

commerce in such commodity, or (C) delivering any such commodity

sold, shipped, or received in interstate commerce for the fulfillment

thereof—

(i) * * *

* * * * * * *

øSEC. 4c. (a) It shall be unlawful for any person to offer to enter

into, enter into, or confirm the execution of, any transaction involving any commodity, which is or may be used for (1) hedging any

transaction in interstate commerce in such commodity or the products or byproducts thereof, or (2) determining the price basis of any

such transaction in interstate commerce in such commodity, or (3)

delivering any such commodity sold, shipped, or received in interstate commerce for the fulfillment thereof—

ø(A) if such transaction is, is of the character of, or is commonly known to the trade as, a ‘‘wash sale’’, ‘‘cross trade’’, or

‘‘accommodation trade’’, or is a fictitious sale; or

ø(B) if such transaction is used to cause any price to be reported, registered, or recorded which is not a true and bona

fide price.

Nothing in this section shall be construed to prevent the exchange of futures in connection with cash commodity transactions

or of futures for cash commodities, or of transfer trades or office

trades if made in accordance with board of trade rules applying to

such transactions and such rules shall have been approved by the

Commission.¿

SEC. 4c. PROHIBITED TRANSACTIONS.

(a) IN GENERAL.—

(1) PROHIBITION.—It shall be unlawful for any person to offer

to enter into, enter into, or confirm the execution of a transaction described in paragraph (2) involving any commodity if

the transaction is used or may be used to—

(A) hedge any transaction in interstate commerce in the

commodity or the product or byproduct of the commodity;

(B) determine the price basis of any such transaction in

interstate commerce in the commodity; or

(C) deliver any such commodity sold, shipped, or received

in interstate commerce for the execution of the transaction.

(2) TRANSACTION.—A transaction referred to in paragraph (1)

is a transaction that—

116

(A)(i) is, is of the character of, or is commonly known to

the trade as, a ‘‘wash sale’’ or ‘‘accommodation trade’’; or

(ii) is a fictitious sale; or

(B) is used to cause any price to be reported, registered,

or recorded that is not a true and bona fide price.

* * * * * * *

(g) The Commission shall adopt rules requiring that a contemporaneous written record be made, as practicable, of all orders for

execution on the floor or subject to the rules of each contract market or derivatives transaction execution facility placed by a member

of the contract market who is present on the floor at the time such

order is placed.

SEC. 4d. It shall be unlawful for any person to engage as futures

commission merchant or introducing broker in soliciting orders or

accepting orders for the purchase or sale of any commodity for future delivery, or involving any contracts of sale of any commodity

for future delivery, on or subject to the rules of any contract market or derivatives transaction execution facility unless—

(1) such person shall have registered, under this Act, with

the Commission as such futures commission merchant or introducing broker and such registration shall not have expired nor

been suspended nor revoked; and

(2) such person shall, if a futures commission merchant,

whether a member or nonmember of a contract market or derivatives transaction execution facility, treat and deal with all

money, securities, and property received by such person to

margin, guarantee, or secure the trades or contracts of any

customer of such person, or accruing to such customer as the

result of such trades or contracts, as belonging to such customer. Such money, securities, and property shall be separately accounted for and shall not be commingled with the

funds of such commission merchant or be used to margin or

guarantee the trades or contracts, or to secure or extend the

credit, of any customer or person other than the one for whom

the same are held: Provided, however, That such money, securities, and property of the customers of such futures commission merchant may, for convenience, be commingled and deposited in the same account or accounts with any bank or trust

company or with the clearing house organization of such contract market or derivatives transaction execution facility, and

that such share thereof as in the normal course of business

shall be necessary to margin, guarantee, secure, transfer, adjust, or settle the contracts or trades of such customers, or resulting market positions, with the clearing-house organization

of such contract market or derivatives transaction execution facility or with any member of such contract market or derivatives transaction execution facility, may be withdrawn and applied to such purposes, including the payment of commissions,

brokerage, interest, taxes, storage, and other charges, lawfully

accruing in connection with such contracts and trades: Provided further, That in accordance with such terms and conditions as the Commission may prescribe by rule, regulation, or

order, such money, securities, and property of the customers of

such futures commission merchant may be commingled and deposited as provided in this section with any other money, secuVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00116 Fmt 6659 Sfmt 6601 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
117

rities, and property received by such futures commission merchant and required by the Commission to be separately accounted for and treated and dealt with as belonging to the customers of such futures commission merchant: Provided further,

That such money may be invested in obligations of the United

States, in general obligations of any State or of any political

subdivision thereof, and in obligations fully guaranteed as to

principal and interest by the United States, such investments

to be made in accordance with such rules and regulations and

subject to such conditions as the Commission may prescribe.

It shall be unlawful for any person, including but not limited to

any clearing agency of a contract market or derivatives transaction

execution facility and any depository, that has received any money,

securities, or property for deposit in a separate account as provided

in paragraph (2) of this section, to hold, dispose of, or use any such

money, securities, or property as belonging to the depositing futures commission merchant or any person other than the customers

of such futures commission merchant.

SEC. 4e. It shall be unlawful for any person to act as floor trader

in executing purchases and sales, or as floor broker in executing

any orders for the purchase or sale, of any commodity for future

delivery, or involving any contracts of sale of any commodity for future delivery, on or subject to the rules of any contract market or

derivatives transaction execution facility unless such person shall

have registered, under this Act, with the Commission as such floor

trader or floor broker and such registration shall not have expired

nor been suspended nor revoked.

SEC. 4f. (a) * * *

(b) Notwithstanding any other provisions of this Act, no person

desiring to register as futures commission merchant or as introducing broker shall be so registered unless he meets such minimum financial requirements as the Commission may by regulation

prescribe as necessary to insure his meeting his obligations as a

registrant, and each person so registered shall at all times continue

to meet such prescribed minimum financial requirements: Provided, That such minimum financial requirements will be considered met if the applicant for registration or registrant is a member

of a contract market or derivatives transaction execution facility

and conforms to minimum financial standards and related reporting requirements set by such contract market in its bylaws, rules,

regulations, or resolutions and approved by the Commission as adequate to effectuate the purposes of this subsection.

(c)(1) As used in this subsection:

(i) * * *

* * * * * * *

(3)(A)***

(B) The Commission, in requiring reports pursuant to this paragraph, shall specify the information required, the period for which

it is required, the time and date on which the information must be

furnished, and whether the information is to be furnished directly

to the Commission or to a contract market or derivatives transaction execution facility or other self-regulatory organization with

118

primary responsibility for examining the registered futures commission merchant’s financial and operational condition.

* * * * * * *

SEC. 4g. (a)***

(b) Every øclearinghouse and contract market¿ registered entity

shall maintain daily trading records. The daily trading records

shall include such information as the Commission shall prescribe

by rule.

* * * * * * *

(f) Nothing contained in this section shall be construed to prohibit the Commission from making separate determinations for different øclearinghouses, contract markets, and exchanges¿ registered entities when such determinations are warranted in the

judgment of the Commission.

SEC. 4h. It shall be unlawful for any person falsely to represent

such person to be a member of a øcontract market¿ registered entity or the representative or agent of such member, or to be a registrant under this Act or the representative or agent of any registrant, in soliciting or handling any order or contract for the purchase or sale of any commodity in interstate commerce or for future

delivery, or falsely to represent in connection with the handling of

any such order or contract that the same is to be or has been executed on, or by or through a member of, any øcontract market¿ registered entity.

SEC. 4i. It shall be unlawful for any person to make any contract

for the purchase or sale of any commodity for future delivery on or

subject to the rules of any contract market or derivatives transaction execution facility— (1) * * *

* * * * * * *

øSEC. 4j. (a)(1) The Commission shall issue regulations to prohibit the privilege of dual trading on each contract market which

has not been exempted from such regulations under paragraph (3).

The regulations issued by the Commission under this paragraph—

ø(A) shall provide that the prohibition of dual trading thereunder shall take effect not less than thirty days after the

issuance of the regulations;

ø(B) shall provide for exceptions, as the Commission determines necessary and appropriate, to ensure fairness and orderly trading in affected contract markets, including—

ø(i) transition measures and a reasonable phase-in period,

ø(ii) exceptions for spread transactions and the correction of trading errors,

ø(iii) allowance for a customer to designate in writing

not less than once annually a named floor broker to execute orders for such customer, notwithstanding the regulations to prohibit the privilege of dual trading required

under this paragraph, and

ø(iv) other measures reasonably designed to accommodate unique or special characteristics of individual boards

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usual market conditions, or otherwise to further the public

interest;

ø(C) shall establish procedures for the application for and

issuance of exemptions under paragraph (3) which, among

other things, shall specify the relevant data required to be submitted by the board of trade with each application;

ø(D) shall specify the methodology by which it shall determine the average daily trading volume on a contract market

for purposes of paragraph (4) based on a moving daily average

of either six or twelve months; and

ø(E) shall establish an expeditious procedure to revoke an

exemption granted under paragraph (3) providing sufficient notice, opportunity for hearing, and findings to assure fundamental fairness.

ø(2) As used in this section, the term ‘‘dual trading’’ means the

execution of customer orders by a floor broker during any trading

session in which the floor broker executes any trade in the same

contract market for—

ø(A) the account of such floor broker;

ø(B) an account for which such floor broker has trading discretion; or

ø(C) an account controlled by a person with whom such floor

broker is subject to trading restrictions under section 4j(d).

ø(3) The Commission shall exempt a contract market from the

regulations issued under paragraph (1), either unconditionally or

on stated conditions (including stated periods of time) relevant to

the attainment or maintenance of compliance with the standards in

subparagraphs (A) and (B), upon finding that—

ø(A) the trade monitoring system in place at the contract

market satisfies the requirements of section 5a(b) with regard

to violations attributable to dual trading at such contract market; or

ø(B)(i) there is a substantial likelihood that a dual trading

suspension would harm the public interest in hedging or price

basing at such contract market, and

ø(ii) other corrective actions, such as those described in section 8e, are sufficient and appropriate to bring the contract

market into compliance with the standard in subparagraph

(A).

ø(4)(A) The regulations issued by the Commission under paragraph (1) shall not apply to any contract market in which the Commission determines that the average daily trading volume is less

than the threshold trading level established for the contract market

under this paragraph.

ø(B) The threshold trading level shall be set initially at eight

thousand contracts.

ø(C) The Commission may, by rule or order—

ø(i) increase, or

ø(ii) at any time following the date three years after the date

of enactment of this paragraph, decrease,

the threshold trading level for specific contract markets after taking into consideration the actual or potential effects of a dual trading ban on the public interest in hedging or price basing at the affected contract market.

120

ø(D) The Commission shall provide the affected contract market

with adequate notice of any such increase or decrease.

ø(5) Before the Commission denies an application for an exemption under paragraph (3) or exempts a contract market subject to

conditions, it shall—

ø(A) provide the affected board of trade with notice of the

reason or reasons that the application was not approved as

submitted, including—

ø(i) any reason the Commission has to believe that the

trade monitoring system in place at the contract market

does not satisfy the requirements of paragraph (3)(A) and

the basis for such reason;

ø(ii) any corrective action or actions, such as those described in section 8e, that the Commission believes the affected contract market must take to satisfy the requirements of paragraph (3)(A), and an acceptable timetable for

such corrective action; and

ø(iii) any conditions or limitations that the Commission

proposes to attach to the exemption under paragraph (3);

ø(B) provide the affected board of trade with an opportunity

for a hearing through submission of written data, views, or arguments and, under terms set by the Commission at the request of the board of trade, through an oral presentation of

views and comments to the Commission, in order to make the

demonstration required under paragraph (3) or otherwise to

petition the Commission with respect to its application; and

ø(C) make findings, based on the information, views, and arguments placed before it in connection with the application, as

to whether—

ø(i) the standard in either paragraph (3)(A) or (3)(B) applies, and

ø(ii) any conditions or limitations which the Commission

proposes to attach under paragraph (3) are appropriate in

light of the purposes of this subsection.

The Commission shall publish in the Federal Register notice of any

exemptive petitions filed under paragraph (3) and any proposed or

final actions the Commission may take on such petitions. Unless

the Commission determines that more immediate action is appropriate in the public interest, any Commission order denying an application or exempting a contract market conditionally shall not

take effect for at least twenty days following the issuance of the

order.

ø(6) Violation of an order issued under this subsection shall be

considered a violation of an order of the Commission for purposes

of—

ø(i) establishing liability and assessing penalties against a

contract market or any director, officer, agent, or employee

thereof under section 6b or 6c; or

ø(ii) initiating proceedings under section 5b or 6(a).

ø(7) Any board of trade which has applied to the Commission to

exempt a contract market from the regulations issued under paragraph (1) may obtain judicial review of any final action of the Commission to deny such application, to issue an exemption subject to

conditions, or to revoke an exemption, only in the United States

Court of Appeals for the circuit in which the party seeking review

121

resides or has its principal place of business, or in the United

States Court of Appeals for the District of Columbia Circuit, under

the standards applicable to rulemaking proceedings under section

553 of title 5, United States Code.

ø(8)(A) The Commission shall issue the regulations required

under paragraph (1) not later than two hundred and seventy days

after the enactment of this section. If, prior to the effective date of

the prohibition on dual trading under such regulations, a board of

trade submits to the Commission an application for an exemption

for a contract market under paragraph (3), the Commission shall

not apply the prohibition against dual trading under paragraph (1)

to the contract market until the Commission has approved or denied the application.

ø(B) The Commission shall approve or deny any application for

an exemption under paragraph (3) within seventy-five days after

receipt of the application, or as soon as practicable.

ø(b) If, in addition to the regulations issued pursuant to subsection (a), the Commission has reason to believe that dual tradingrelated or facilitated abuses are not being or cannot be effectively

addressed by subsection (a), the Commission shall make a determination, after notice and opportunity for hearing, whether or not

a floor broker may trade for his own account or any account in

which such broker has trading discretion, and also execute a customer’s order for future delivery and, if the Commission determines

that such trades and such executions shall be permitted, the Commission shall further determine the terms, conditions, and circumstances under which such trades and such executions shall be

conducted: Provided, That any such determination shall, at a minimum, take into account the effect upon the liquidity of trading of

each market: And provided further, That nothing herein shall be

construed to prohibit the Commission from making separate determinations for different contract markets when such are warranted

in the judgment of the Commission, or to prohibit contract markets

from setting terms and conditions more restrictive than those set

by the Commission.

ø(c) The Commission shall within nine months after the effective

date of the Commodity Futures Trading Commission Act of 1974,

and subsequently when it determines that changes are required,

make a determination, after notice and opportunity for hearing,

whether or not a futures commission merchant may trade for its

own account or any proprietary account, as defined by the Commission, and if the Commission determines that such trades shall be

permitted, the Commission shall further determine the terms, conditions, and circumstances under which such trades shall be conducted: Provided, That any such determination, at a minimum,

shall take into account the effect upon the liquidity of trading of

each market: And provided further, That nothing herein shall be

construed to prohibit the Commission from making separate determinations for different contract markets when such are warranted

in the judgment of the Commission, or to prohibit contract markets

from setting terms and conditions more restrictive than those set

by the Commission.

ø(d)(1) Except as provided in paragraph (2), a floor broker may

not execute an order of a customer if such floor broker knows the

opposite party to the transaction to be a floor broker or floor trader

122

with whom such trader or broker has a relationship involving trading on such contract market as—

ø(A) a partner in a partnership;

ø(B) an employer or employee; or

ø(C) Such other affiliation as the Commission may specify by

rule.

ø(2) Paragraph (1) shall not apply—

ø(A) if the Commission has adopted rules that the Commission certifies to Congress require procedures and standards designed to prevent violations of this Act attributable to the trading described in paragraph (1); or

ø(B) to any contract market that has implemented rules designed to prevent violations of this Act attributable to the trading described in paragraph (1), except that, if the Commission

determines, by rule or order, that such rules are not adequate

to prevent such violations, paragraph (1) shall become effective

with respect to such contract market after a reasonable period

determined by the Commission.¿

SEC. ø4k.¿ 4j. (1) It shall be unlawful for any person to be associated with a futures commission merchant as a partner, officer, or

employee, or to be associated with an introducing broker as a partner, officer, employee, or agent (or any person occupying a similar

status or performing similar functions), in any capacity that involves (i) the solicitation or acceptance of customers’ orders (other

than in a clerical capacity) or (ii) the supervision of any person or

persons so engaged, unless such person is registered with the Commission under this Act as an associated person of such futures commission merchant or of such introducing broker and such registration shall not have expired, been suspended (and the period of suspension has not expired), or been revoked. It shall be unlawful for

a futures commission merchant or introducing broker to permit

such a person to become or remain associated with the futures

commission merchant or introducing broker in any such capacity if

such futures commission merchant or introducing broker knew or

should have known that such person was not so registered or that

such registration had expired, been suspended (and the period of

suspension has not expired), or been revoked. Any individual who

is registered as a floor broker, futures commission merchant, or introducing broker (and such registration is not suspended or revoked) need not also register under this subsection.

(2) It shall be unlawful for any person to be associated with a

commodity pool operator as a partner, officer, employee, consultant,

or agent (or any person occupying a similar status or performing

similar functions), in any capacity that involves (i) the solicitation

of funds, securities, or property for a participation in a commodity

pool or (ii) the supervision of any person or persons so engaged, unless such person is registered with the Commission under this Act

as an associated person of such commodity pool operator and such

registration shall not have expired, been suspended (and the period

of suspension has not expired), or been revoked. It shall be unlawful for a commodity pool operator to permit such a person to become or remain associated with the commodity pool operator in any

such capacity if the commodity pool operator knew or should have

known that such person was not so registered or that such registration had expired, been suspended (and the period of suspenVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00122 Fmt 6659 Sfmt 6602 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
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sion has not expired), or been revoked. Any individual who is registered as a floor broker, futures commission merchant, introducing

broker, commodity pool operator, or as an associated person of another category of registrant under this section (and such registration is not suspended or revoked) need not also register under this

subsection. The Commission may exempt any person or class of

persons from having to register under this subsection by rule, regulation, or order.

(3) It shall be unlawful for any person to be associated with a

commodity trading advisor as a partner, officer, employee, consultant, or agent (or any person occupying a similar status or performing similar functions), in any capacity which involves (i) the

solicitation of a client’s or prospective client’s discretionary account

or (ii) the supervision of any person or persons so engaged, unless

such person is registered with the Commission under this Act as

an associated person of such commodity trading advisor and such

registration shall not have expired, been suspended (and the period

of suspension has not expired), or been revoked. It shall be unlawful for a commodity trading advisor to permit such a person to become or remain associated with the commodity trading advisor in

any such capacity if the commodity trading advisor knew or should

have known that such person was not so registered or that such

registration had expired, been suspended (and the period of suspension has not expired), or been revoked. Any individual who is registered as a floor broker, futures commission merchant, introducing

broker, commodity trading advisor, or as an associated person of

another category of registrant under this section (and such registration is not suspended or revoked) need not also register under

this subsection. The Commission may exempt any person or class

of persons from having to register under this subsection by rule,

regulation, or order.

(4) Any person desiring to be registered as an associated person

of a futures commission merchant, of an introducing broker, of a

commodity pool operator, or of a commodity trading advisor shall

make application to the Commission in the form and manner prescribed by the Commission, giving such information and facts as

the Commission may deem necessary concerning the applicant.

Such person, when registered hereunder, shall likewise continue to

report and furnish to the Commission such information as the

Commission may require. Such registration shall expire at such

time as the Commission may by rule, regulation, or order prescribe.

(5) It shall be unlawful for any registrant to permit a person to

become or remain an associated person of such registrant, if the

registrant knew or should have known of facts regarding such associated person that are set forth as statutory disqualifications in

section 8a(2) of this Act, unless such registrant has notified the

Commission of such facts and the Commission has determined that

such person should be registered or temporarily licensed.

SEC. ø4l.¿ 4k. It is hereby found that the activities of commodity

trading advisors and commodity pool operators are affected with a

national public interest in that, among other things—

(1) their advice, counsel, publications, writings, analyses, and

reports are furnished and distributed, and their contracts, solicitations, subscriptions, agreements, and other arrangements

with clients take place and are negotiated and performed by

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the use of the mails and other means and instrumentalities of

interstate commerce;

(2) their advice, counsel, publications, writings, analyses, and

reports customarily relate to and their operations are directed

toward and cause the purchase and sale of commodities for future delivery on or subject to the rules of contract markets or

derivatives transaction execution facilities; and

(3) the foregoing transactions occur in such volume as to affect substantially transactions on contract markets or derivatives transaction execution facilities. SEC. ø4m.¿ 4l. (1) It shall be unlawful for any commodity trading

advisor or commodity pool operator, unless registered under this

Act, to make use of the mails or any means or instrumentality of

interstate commerce in connection with his business as such commodity trading advisor or commodity pool operator: Provided, That

the provisions of this section shall not apply to any commodity

trading advisor who, during the course of the preceding twelve

months, has not furnished commodity trading advice to more than

fifteen persons and who does not hold himself out generally to the

public as a commodity trading advisor. The provisions of this section shall not apply to any commodity trading advisor who is a (1)

dealer, processor, broker, or seller in cash market transactions of

any commodity specifically set forth in section 2(a) of this Act prior

to the enactment of the Commodity Futures Trading Commission

Act of 1974 (or products thereof) or (2) nonprofit, voluntary membership, general farm organization, who provides advice on the sale

or purchase of any commodity specifically set forth in section 2(a)

of this Act prior to the enactment of the Commodity Futures Trading Commission Act of 1974; if the advice by the person described

in clause (1) or (2) of this sentence as a commodity trading advisor

is solely incidental to the conduct of that person’s business: Provided, That such person shall be subject to proceedings under section 14 of this Act.

(2) Nothing in this Act shall relieve any person of any obligation

or duty, or affect the availability of any right or remedy available

to the Securities and Exchange Commission or any private party

arising under the Securities Act of 1933 or the Securities Exchange

Act of 1934 governing the issuance, offer, purchase, or sale of securities of a commodity pool, or of persons engaged in transactions

with respect to such securities, or reporting by a commodity pool.

SEC. ø4n.¿ 4m. (1) Any commodity trading advisor or commodity

pool operator, or any person who contemplates becoming a commodity trading advisor or commodity pool operator, may register

under this Act by filing an application with the Commission. Such

application shall contain such information, in such form and detail,

as the Commission may, by rules and regulations, prescribe as necessary or appropriate in the public interest, including the following:

(A) the name and form of organization, including capital

structure, under which the applicant engages or intends to engage in business; the name of the State under the laws of

which he is organized; the location of his principal business office and branch offices, if any; the names and addresses of all

partners, officers, directors, and persons performing similar

functions or, if the applicant be an individual, of such individual; and the number of employees;

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(B) the education, the business affiliations for the past ten

years, and the present business affiliations of the applicant

and of his partners, officers, directors, and persons performing

similar functions and of any controlling person thereof;

(C) the nature of the business of the applicant, including the

manner of giving advice and rendering of analyses or reports;

(D) the nature and scope of the authority of the applicant

with respect to clients’ funds and accounts;

(E) the basis upon which the applicant is or will be compensated; and

(F) such other information as the Commission may require

to determine whether the applicant is qualified for registration.

(2) Each registration under this section shall expire on the 30th

day of June of each year, or at such other time, not less than one

year from the effective date thereof, as the Commission may by

rule, regulation or order prescribe, and shall be renewed upon application therefor subject to the same requirements as in the case

of an original application.

(3)(A) Every commodity trading advisor and commodity pool operator registered under this Act shall maintain books and records

and file such reports in such form and manner as may be prescribed by the Commission. All such books and records shall be

kept for a period of at least three years, or longer if the Commission so directs, and shall be open to inspection by any representative of the Commission or the Department of Justice. Upon the request of the Commission, a registered commodity trading advisor

or commodity pool operator shall furnish the name and address of

each client, subscriber, or participant, and submit samples or copies of all reports, letters, circulars, memorandums, publications,

writings, or other literature or advice distributed to clients, subscribers, or participants, or prospective clients, subscribers, or participants.

(B) Unless otherwise authorized by the Commission by rule or

regulation, all commodity trading advisors and commodity pool operators shall make a full and complete disclosure to their subscribers, clients, or participants of all futures market positions

taken or held by the individual principals of their organization.

(4) Every commodity pool operator shall regularly furnish statements of account to each participant in his operations. Such statements shall be in such form and manner as may be prescribed by

the Commission and shall include complete information as to the

current status of all trading accounts in which such participant has

an interest.

SEC. ø4o.¿ 4n. (1) It shall be unlawful for a commodity trading

advisor, associated person of a commodity trading advisor, commodity pool operator, or associated person of a commodity pool operator by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly—

(A) to employ any device, scheme, or artifice to defraud any

client or participant or prospective client or participant; or

(B) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or

participant or prospective client or participant.

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ator, or associated person of a commodity pool operator registered

under this Act to represent or imply in any manner whatsoever

that such person has been sponsored, recommended, or approved,

or that such person’s abilities or qualifications have in any respect

been passed upon, by the United States or any agency or officer

thereof. This section shall not be construed to prohibit a statement

that a person is registered under this Act as a commodity trading

advisor, associated person of a commodity trading advisor, commodity pool operator, or associated person of a commodity pool operator, if such statement is true in fact and if the effect of such registration is not misrepresented.

SEC. ø4p.¿ 4o. (a) The Commission may specify by rules and regulations appropriate standards with respect to training, experience,

and such other qualifications as the Commission finds necessary or

desirable to insure the fitness of persons required to be registered

with the Commission. In connection therewith, the Commission

may prescribe by rules and regulations the adoption of written proficiency examinations to be given to applicants for registration and

the establishment of reasonable fees to be charged to such applicants to cover the administration of such examinations. The Commission may further prescribe by rules and regulations that, in lieu

of examinations administered by the Commission, futures associations registered under section 17 of this øAct or contract markets¿

Act, contract markets, or derivatives transaction execution facilities

may adopt written proficiency examinations to be given to applicants for registration and charge reasonable fees to such applicants

to cover the administration of such examinations. Notwithstanding

any other provision of this section, the Commission may specify by

rules and regulations such terms and conditions as it deems appropriate to protect the public interest wherein exception to any written proficiency examination shall be made with respect to individuals who have demonstrated, through training and experience, the

degree of proficiency and skill necessary to protect the interests of

customers, clients, pool participants, or other members of the public with whom such individuals deal.

(b) The Commission shall issue regulations to require new registrants, within six months after receiving such registration, to attend a training session, and all other registrants to attend periodic

training sessions, to ensure that registrants understand their responsibilities to the public under this Act, including responsibilities

to observe just and equitable principles of trade, any rule or regulation of the Commission, any rule of any appropriate contract market, derivatives transaction execution facility, registered futures association, or other self-regulatory organization, or any other applicable Federal or state law, rule or regulation.

SEC. 4p. SPECIAL PROCEDURES TO ENCOURAGE AND FACILITATE

BONA FIDE HEDGING BY AGRICULTURAL PRODUCERS.

(a) AUTHORITY.—The Commission shall consider issuing rules or

orders which—

(1) prescribe procedures under which each contract market is

to provide for orderly delivery, including temporary storage

costs, of any agricultural commodity enumerated in section

1a(3) which is the subject of a contract for purchase or sale for

future delivery;

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(2) increase the ease with which domestic agricultural producers may participate in contract markets, including by addressing cost and margin requirements, so as to better enable

such producers to hedge price risk associated with their production;

(3) provide flexibility in the minimum quantities of such agricultural commodities that may be the subject of a contract for

purchase or sale for future delivery that is traded on a contract

market, to better allow domestic agricultural producers to hedge

such price risk; and

(4) encourage exchanges to provide information and otherwise

facilitate the participation of domestic agricultural producers in

contract markets.

(b) REPORT.—Within 1 year after the date of enactment of this section, the Commission shall submit to the Committee on Agriculture

of the House of Representatives and the Committee on Agriculture,

Nutrition, and Forestry of the Senate a report on the steps it has

taken to implement this section and on the activities of contract

markets pursuant to this section.

øSEC. 5. The Commission is hereby authorized and directed to

designate any board of trade as a ‘‘contract market’’ when, and only

when, such board of trade complies with and carries out the following conditions and requirements:

ø(1) When located at a terminal market where any cash commodity of the kind specified in the contracts of sale of commodities for future delivery to be executed on such board is sold in

sufficient volumes and under such conditions as fairly to reflect

the general value of the commodity and the differences in

value between the various grades of such commodity, and

where there is available to such board of trade official inspection service approved by the Secretary of Agriculture or the

Commission for the purpose: Provided, That any board of trade

not so located shall be designated as a ‘‘contract market’’ if

such board of trade provides for the delivery of commodities on

such contracts at a delivery point or points and upon terms

and conditions approved by the Commission.

ø(2) When the governing board thereof provides for the making and filing by the board or any member thereof, as the Commission may direct, of reports in accordance with the rules and

regulations, and in such manner and form and at such times

as may be prescribed by the Commission, showing the details

and terms of all transactions entered into by the board, or the

members thereof, either in cash transactions or transactions

for future delivery consummated on or subject to the rules of

a board of trade, and when such governing board provides, in

accordance with such rules and regulations, for the keeping of

a record by the board or the members of the board of trade,

as the Commission may direct, showing the details and terms

of all cash and future transactions entered into by them, consummated on or subject to the rules of a board of trade, such

record to be in permanent form, showing the parties to all such

transactions, including the persons for whom made, any assignments or transfers thereof, with the parties thereto, and

the manner in which said transactions are fulfilled, discharged,

or terminated. Such record shall be required to be kept for a

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period of three years from the date thereof, or for a longer period if the Commission shall so direct, and shall at all times

be open to the inspection of any representative of the Commission or United States Department of Justice.

ø(3) When the governing board thereof provides for the prevention of dissemination by the board or any member thereof,

of false or misleading or knowingly inaccurate reports concerning crop or market information or conditions that affect or

tend to affect the price of any commodity in interstate commerce.

ø(4) When the governing board thereof provides for the prevention of manipulation of prices and the cornering of any commodity by the dealers or operators upon such board.

ø(5) When the governing board thereof does not exclude from

membership in, and all privileges on, such board of trade, any

duly authorized representative of any lawfully formed and conducted cooperative association of producers having adequate financial responsibility which is engaged in any cash commodity

business, if such association has complied, and agrees to comply, with such terms and conditions as are or may be imposed

lawfully on other members of such board: Provided, That no

rule of a contract market shall forbid or be construed to forbid

the return on a patronage basis by such cooperative association

to its bona fide members of moneys collected in excess of the

expense of conducting the business of such association.

ø(6) When the governing board provides for making effective

the final orders or decisions entered pursuant to the provisions

of section 6(c), and the orders issued pursuant to the provisions

of section 5a of this Act, and for compliance in all other respects with the requirements applicable to such board of trade

under this Act.

ø(7) When such board of trade demonstrates that transactions for future delivery in the commodity for which designation as a contract market is sought will not be contrary to the

public interest.

ø(8) When such board of trade demonstrates that every contract market for which such board of trade is designated complies with the requirements of section 5a(b).

øSEC. 5a. (a) Each contract market shall—

ø(1) promptly furnish the Commission copies of all bylaws,

rules, regulations, and resolutions made or issued by it or by

the governing board thereof or any committee, and of all

changes and proposed changes therein;

ø(2) keep all books, records, minutes, and journals of proceedings of such contract market, and its governing board,

committees, subsidiaries, and affiliates in a manner that will

clearly describe all matters discussed by such contract market,

governing board, committees, subsidiaries and affiliates and reveal any action taken in such matters, and allow inspection at

all times by any authorized representative of the Commission

or United States Department of Justice of all such books,

records, minutes, and journals of proceedings. Such books,

records, minutes, and journals of proceedings shall be kept for

a period of three years from the date thereof, or for a longer

period if the Commission shall so direct;

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ø(3) require the operators of warehouses in which or out of

which any commodity is deliverable on any contract for future

delivery made on or subject to the rules of such contract market, to make such reports, keep such records, and permit such

warehouse visitation as the Commission may prescribe. Such

books and records shall be required to be kept for a period of

three years from the date thereof, or for a longer period if the

Commission shall so direct, and such books, records, and warehouses shall be open at all times to inspection by any representative of the Commission or United States Department of

Justice;

ø(4) when so directed by order of the Commission, provide

for a period, after trading in contracts of sale of any commodity

for future delivery in a delivery month has ceased, during

which contracts of sale of such commodity for future delivery

in such month may be satisfied by the delivery of the actual

cash commodity. Whenever, after due notice and opportunity

for hearing, the Commission finds that provision for such a period of delivery for any one or more commodities or markets

would prevent or tend to prevent ‘‘squeezes’’ and market congestion endangering price stability, it shall, by order, require

such period of delivery (which shall be not less than three nor

more than ten business days) applicable to such commodities

and markets as it finds will prevent or tend to prevent such

‘‘squeezes’’ and market congestion: Provided, however, That

such order shall not apply to then existing contracts;

ø(5) require the party making delivery of any commodity on

any contract of sale of such commodity for future delivery to

furnish the party obligated under the contract to accept delivery, written notice of the date of delivery at least one business

day prior to such date of delivery. Whenever, after due notice

and opportunity for hearing, the Commission finds that the

giving of longer notice of delivery is necessary to prevent or diminish unfair practices in trading in any one or more commodities or markets, it shall by order require such longer notice of

delivery (which shall be not more than ten business days) applicable to such commodities and markets as it finds will prevent or diminish such unfair practices: Provided, however, That

such order shall not apply to then existing contracts;

ø(6) require that all contracts of sale of any commodity for

future delivery on such contract market shall provide for the

delivery thereunder of commodities of grades conforming to

United States standards, if such standards shall have been officially promulgated and adopted by the Commission;

ø(7) require that receipts issued under the United States

Warehouse Act (U.S.C., 1934 ed., title 7, secs. 241–273) shall

be accepted in satisfaction of any futures contract, made on or

subject to the rules of such contract market, without discrimination and notwithstanding that the warehouseman issuing

such receipts is not also licensed as a warehouseman under the

laws of any State or enjoys other or different privileges than

under State law: Provided, however, That such receipts shall

be for the kind, quality, and quantity of commodity specified in

such contract and that the warehouse in which the commodity

is stored meets such reasonable requirements as may be imVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00129 Fmt 6659 Sfmt 6602 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
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posed by such contract market on other warehouses as to location, accessibility, and suitability for warehousing and delivery

purposes: And provided further, That this subsection shall

apply only to futures contracts for those commodities which

may be delivered from a warehouse subject to the United

States Warehouse Act;

ø(8) enforce all bylaws, rules, regulations, and resolutions,

made or issued by it or by the governing board thereof or any

committee, that (i) have been approved by the Commission

pursuant to paragraph (12) of this section, (ii) have become effective under such paragraph, or (iii) must be enforced pursuant to any Commission rule, regulation, or order; and revoke

and not enforce any bylaw, rule, regulation, or resolution,

made, issued, or proposed by it or by the governing board

thereof or any committee, that has been disapproved by the

Commission;

ø(9) enforce all bylaws, rules, regulations, and resolutions

made or issued by it or by the governing board thereof or by

any committee, which provide minimum financial standards

and related reporting requirements for futures commission

merchants who are members of such contract market, and

which have been approved by the Commission;

ø(10) permit the delivery of any commodity, on contracts of

sale thereof for future delivery, of such grade or grades, at

such point or points and at such quality and locational price

differentials as will tend to prevent or diminish price manipulation, market congestion, or the abnormal movement of such

commodity in interstate commerce. If the Commission after investigation finds that the rules and regulations adopted by a

contract market permitting delivery of any commodity on contracts of sale thereof for future delivery, do not accomplish the

objectives of this subsection, then the Commission shall notify

the contract market of its finding and afford the contract market an opportunity to make appropriate changes in such rules

and regulations. If the contract market within seventy-five

days of such notification fails to make the changes which in

the opinion of the Commission are necessary to accomplish the

objectives of this subsection, then the Commission after granting the contract market an opportunity to be heard, may

change or supplement such rules and regulations of the contract market to achieve the above objectives: Provided, That

any order issued under this paragraph shall not apply to contracts of sale for future delivery in any months in which contracts are currently outstanding and open: And provided further, That no requirement for an additional delivery point or

points shall be promulgated following hearings until the contract market affected has had notice and opportunity to file exceptions to the proposed order determining the location and

number of such delivery point or points;

ø(11) provide a fair and equitable procedure through arbitration or otherwise (such as by delegation to a registered futures

association having rules providing for such procedures) for the

settlement of customers’ claims and grievances against any

member or employee thereof: Provided, That (A) the use of

such procedure by a customer shall be voluntary, (B) the term

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‘‘customer’’ as used in this paragraph shall not include another

member of the contract market, and (C) in the case of a claim

arising from a violation in the execution of an order on the

floor of a contract market, such procedure shall provide, to the

extent appropriate—

ø(i) for payment of actual damages proximately caused

by such violation. If an award of actual damages is made

against a floor broker in connection with the execution of

a customer order, and the futures commission merchant

which selected the floor broker for the execution of the customer order is held to be responsible under section 2(a)(1)

for the floor broker’s violation, such futures commission

merchant may be required to satisfy such award; and

ø(ii) where the violation is willful and intentional, for

payment to the customer of punitive or exemplary damages, in addition to losses proximately caused by the violation, in an amount equal to no more than two times the

amount of such losses. If punitive or exemplary damages

are awarded against a floor broker in connection with the

execution of a customer order, and the futures commission

merchant which selected the floor broker for the execution

of such order is held to be responsible under section 2(a)(1)

for the floor broker’s violation, such futures commission

merchant may be required to satisfy the award of punitive

or exemplary damages if the floor broker fails to do so, except that such requirement shall apply to the futures commission merchant only if it willfully and intentionally selected the floor broker with the intent to assist or facilitate

the floor broker’s violation;

ø(12)(A) except as otherwise provided in this paragraph, submit to the Commission for its prior approval all bylaws, rules,

regulations, and resolutions (‘‘rules’’) made or issued by such

contract market, or by the governing board thereof or any committee thereof, that relate to terms and conditions in contracts

of sale to be executed on or subject to the rules of such contract

market, as such terms and conditions are defined by the Commission by rule or regulation, except those rules relating to the

setting of levels of margin. Each contract market shall submit

to the Commission all other rules (except those relating to the

setting of levels of margin and except those that the Commission may specify by regulation) and may make such rules effective ten days after receipt of such submission by the Commission unless, within the ten-day period, the contract market requests review and approval thereof by the Commission or the

Commission notifies such contract market in writing of its determination to review such rules for approval. The determination to review such rules for approval shall not be delegable to

any employee of the Commission. At least thirty days before

approving any rules of major economic significance, as determined by the Commission, the Commission shall publish a notice of such rules in the Federal Register. The Commission

shall give interested persons an opportunity to participate in

the approval process through the submission of written data,

views, or arguments. The determination by the Commission

whether any such rules are of major economic significance

132

shall be final and not subject to judicial review. The Commission shall approve such rules if such rules are determined by

the Commission not to be in violation of this Act or the regulations of the Commission and the Commission shall disapprove,

after appropriate notice and opportunity for hearing, any such

rule which the Commission determines at any time to be in

violation of the provisions of this Act or the regulations of the

Commission. If the Commission institutes proceedings to determine whether a rule should be disapproved pursuant to this

paragraph, it shall provide the contract market with written

notice of the proposed grounds for disapproval, including the

specific sections of this Act or the Commission’s regulations

which would be violated. At the conclusion of such proceedings,

the Commission shall approve or disapprove such rule. Any

disapproval shall specify the sections of this Act or the Commission’s regulations which the Commission determines such

rule has violated or, if effective, would violate. If the Commission does not approve or institute disapproval proceedings with

respect to any rule within one hundred and eighty days after

receipt or within such longer period as the contract market

may agree to, or if the Commission does not conclude a disapproval proceeding with respect to any rule within one year

after receipt or within such longer period as the contract market may agree to, such rule may be made effective by the contract market until such time as the Commission disapproves

such rule in accordance with this paragraph.

ø(B)(i) The Commission shall issue regulations to specify the

terms and conditions under which, in an emergency as defined

by the Commission, a contract market may, by a two-thirds

vote of its governing board, make a rule (hereinafter referred

to as an ‘‘emergency rule’’) effective on a temporary basis without prior Commission approval, or without compliance with the

ten-day notice requirement under subparagraph (A), or during

any period of review by the Commission, if the contract market

makes every effort practicable to notify the Commission of such

emergency rule, along with a complete explanation of the

emergency involved, prior to making the emergency rule effective. If the contract market does not provide the Commission

with such notification and explanation before making the

emergency rule effective, the contract market shall provide the

Commission with such notification and explanation at the earliest possible date. The Commission may delegate the power to

receive such notification and explanation to such individuals as

the Commission determines necessary and appropriate.

ø(ii) Within ten days of the receipt from a contract market

of notification of such an emergency rule and an explanation

of the emergency involved, or as soon as practicable, the Commission shall determine whether it is appropriate either—

ø(I) to permit such rule to remain in effect during the

pendency of the emergency, or

ø(II) to suspend the effect of such rule pending review either under the procedures of subparagraph (A) or otherwise.

The Commission shall submit a report on its determination

and the basis thereof with respect to such emergency rule to

133

the affected contract market, to the Committee on Agriculture

of the House of Representatives and the Committee on Agriculture, Nutrition, and Forestry of the Senate. If the report is

submitted more than ten days after the Commission’s receipt

of notification of such an emergency rule from a contract market, the report shall explain why submission within such tenday period was not practicable. A determination by the Commission to suspend the effect of a rule under this subparagraph

shall be subject to judicial review on the same basis as an

emergency determination under section 8a(9). Nothing in this

paragraph shall be construed to limit the authority of the Commission under section 8a(9);

ø(13) provide for disclosure to the contract market and the

Commission of any trade, business, or financial partnership,

cost-, profit-, or capital-sharing agreements or other formal arrangement among or between floor brokers and traders on

such contract market where such partnership agreement or arrangement is material and known to the floor broker or floor

trader;

ø(14)(A) provide for meaningful representation on the governing board of the contract market’s board of trade of a diversity of interests, including—

ø(i) futures commission merchants;

ø(ii) producers of, and consumers, processors, distributors, or merchandisers of, principal commodities traded on

the board of trade;

ø(iii) floor brokers and traders; and

ø(iv) participants in a variety of pits or principal groups

of commodities traded on the exchange.

ø(B) provide that no less than 20 percent of the regular voting members of such board be comprised of nonmembers of

such contract market’s board of trade with—

ø(i) expertise in futures trading, or the regulation thereof, or in commodities traded through contracts on the

board of trade; or

ø(ii) other eminent qualifications making such person capable of participating in and contributing to board deliberations.

ø(C) provide that no less than 10 percent of the regular voting members of such board be comprised where applicable of

farmers, producers, merchants, or exporters of principal commodities traded on the exchange;

ø(15)(A) provide on all major disciplinary committees for a

diversity of membership sufficient to ensure fairness and to

prevent special treatment or preference for any person in the

conduct of disciplinary proceedings and the assessment of penalties.

ø(B) Consistent with Commission rules, a major disciplinary

committee hearing a disciplinary matter shall include—

ø(i) a majority of qualified persons representing a trading status other than that of the subject of the proceeding;

and

ø(ii) where appropriate to carry out the purposes of this

Act, qualified persons who are not members of the exchange.

134

ø(C) For purposes of this paragraph, a trading status on a

contract market may include, consistent with Commission

rules, such categories as—

ø(i) floor brokers and traders;

ø(ii) producers, consumers, processors, distributors, or

merchandisers of commodities;

ø(iii) futures commission merchants; and

ø(iv) members of the aforementioned categories who participate in particular contract markets or principal groups

of commodities on the board of trade.

ø(D) If a contract market takes final disciplinary action

against a member for a violation that involves the execution of

a customer transaction and results in financial harm to such

customer, the contract market shall promptly inform the futures commission merchant identified on the records of such

contract market as having cleared such transaction, and such

futures commission merchant shall promptly inform the person

identified on its records as the owner of the account for which

such transaction was executed, of the disciplinary action and

the principal facts thereof;

ø(16) provide that no member found by the Commission, a

contract market, a registered futures association, or a court of

competent jurisdiction to have committed any violation of this

Act or any other provision of law that would reflect on the fitness of the member may serve on any contract market oversight or disciplinary panel for an appropriate period (as defined

by Commission rule); and

ø(17)(A) provide for the avoidance of conflict of interest in deliberations by the governing board and any disciplinary and

oversight committees. In order to comply with this subparagraph, each contract market shall adopt rules and procedures

to require, at a minimum, that

ø(i) any member of a governing board or a disciplinary

or other oversight committee must abstain from confidential deliberations and voting on any matter where the

named party in interest is the member, the member’s employer, the member’s employee, or any other person that

has a business, employment, or family relationship with

the member that warrants abstention by the member;

ø(ii) any member of a governing board or a disciplinary

or other oversight committee must abstain from voting on

any significant action that would not be submitted to the

Commission for its prior approval, if, as determined in accordance with regulations promulgated by the Commission, the member knowingly has a direct and substantial

financial interest in the result of the vote, based either on

positions held personally or at an affiliated firm;

ø(iii) prior to the deliberations of the governing board,

disciplinary board, or other oversight committee, acting directly or indirectly through an authorized member or contract market official, the positions of the members of such

board or committee, and positions of the firm or firms with

which such members are affiliated, are reviewed: Provided,

however, That no contract market or official, employee,

member, other than the member whose position or posiVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00134 Fmt 6659 Sfmt 6602 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
135

tions are being reviewed, or agent thereof shall be subject

to liability, except for liability in an action initiated by the

Commission, for having conducted this review and for having taken or not taken further action; and

ø(iv) the board or committee shall clearly reflect, in the

minutes of such meeting, that the review required in

clause (iii) occurred and any decisions by a member to abstain or by the board or committee whether to direct a

member or members to abstain from deliberations or voting on the matter before the board or committee.

Any member prohibited from voting on a rule pursuant to this

paragraph shall not be included in determining whether there

has been a two-thirds vote of members of the governing board

or committee as required by subparagraph (12).

ø(B) For the purposes of this paragraph, the term ‘‘significant action that would not be submitted to the Commission for

its prior approval’’ includes—

ø(i) any nonphysical emergency rule; or

ø(ii) any changes in margin levels designed to respond to

extraordinary market conditions that are likely to have a

substantial affect on prices in any contract traded on such

contract market, but does not include any rule not submitted for prior Commission approval because such rule is

unrelated to terms and conditions of any contract traded

on such contract market.

ø(C) Notwithstanding the provisions of subparagraph (A)(ii),

the Commission shall issue rules establishing the conditions

under which a member of a board or committee who is required to abstain from voting on a significant action, as provided in subparagraph (A)(ii), may participate in deliberations

on that action prior to such vote, where the member’s participation is consistent with the public interest.

ø(b)(1) Each contract market shall maintain and utilize a system

to monitor trading to detect and deter violations of the contract

market’s rules and regulations committed in the making of trades

and the execution of customer orders on the floor or subject to the

rules of such contract market. The system shall include—

ø(A) physical observation of trading areas;

ø(B) audit trail and recordkeeping systems able to capture

essential data on the terms, participants, and sequence of

transactions (including relevant data on unmatched trades and

out-trades);

ø(C) systems capable of reviewing, and used to review, data

on trades effectively on a regular basis to detect violations

committed in making trades and executing customer orders on

the floor or subject to the rules of such contract market,

including—

ø(i) all types of violations attributable to dual trading;

and

ø(ii) to the full extent feasible, as determined by the

Commission, all other types of violations involving the

making of trades and the execution of customer orders;

ø(D) the use of information gathered through such system on

a consistent basis to bring appropriate disciplinary actions

against violators;

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ø(E) the commitment of resources to such system necessary

for such system to be effective in detecting and deterring such

violations, including adequate staff to develop and prosecute

disciplinary actions; and

ø(F) the assessment of meaningful penalties against violators

and the referral of appropriate cases to the Commission.

ø(2) The audit trail system of the contract market shall, consistent with Commission regulations, accurately record—

ø(A) the times of trades in increments of no more than one

minute in length; and

ø(B) the sequence of trades for each floor trader and broker.

ø(3) Beginning three years after the date of enactment of this

subsection, the audit trail system of each contract market, except

as provided in paragraph (5) and except to the extent the Commission determines that circumstances beyond the control of the contract market prevent compliance despite the contract market’s affirmative good faith efforts to comply, shall—

ø(A) for all trades, record accurately and promptly the essential data on terms, participants, and times as required by the

Commission by rule, including the time of execution of such

trade, through a means that—

ø(i) records such data in a form which cannot be altered

except in a manner that will leave a complete and independent record of such alteration;

ø(iii) identifies such time, to the extent practicable as determined by the Commission—

ø(ii) continually provides such data to the contract market;

ø(I) independently of the person making the trade;

ø(II) through a mechanism that records the time

automatically when entered by the person making the

trade; or

ø(III) through such other means that will capture a

similarly reliable time; and

ø(iv) is adequately precise to determine, to the extent

practicable as determined by the Commission by rule or

order—

ø(I) the sequence of all trades by each floor trader;

and

ø(II) the sequence of all trades by each floor broker;

and

ø(B) to the extent practicable as determined by the Commission by rule or order, for customer trades, record the time that

each order is received on the floor of the board of trade, is received by the floor broker for execution (or when such order is

transmitted in an extremely rapid manner to the broker), and

is reported from the floor of the board of trade as executed,

through a means that—

ø(i) records such times in a form which cannot be altered

except in a manner that will leave a complete and independent record of such alteration;

ø(ii) continually provides such data to the contract market;

ø(iii) identifies such time—

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ø(I) independently of the person making the trade or

processing the order;

ø(II) through a mechanism that records the time

automatically when entered by the person making the

trade or processing such order, as appropriate; or

ø(III) through such other means as will capture a

similarly reliable time; and

ø(iv) is adequately precise to determine—

ø(I) the sequence in which, for each futures commission merchant, floor broker, or member firm, as applicable, all orders are received on and reported from the

floor of the contract market; and

ø(II) the sequence in which orders are received by

each floor broker for execution.

ø(4) The Commission may, by rule, establish standards under

which the audit trail systems required under paragraph (3) shall

record, to the extent practicable—

ø(A) the sequence of all trades made by all floor traders and

floor brokers; and

ø(B) the interval between the time of receipt and the time

of execution of each order by the floor broker executing the

order.

ø(5)(A) The Commission shall, by rule or order, make exemptions

from the requirements of paragraph (3)—

ø(i) for an exchange with respect to which the Commission

finds that—

ø(I) the volume of trading on such exchange is relatively

small and the exchange has demonstrated substantial compliance with the objectives of such paragraph; and

ø(II) the trade monitoring system at such exchange otherwise maintains a high level of compliance with this subsection; and

ø(ii) to the extent determined appropriate by the Commission, for categories of customer orders with respect to which

the Commission finds that such orders are transmitted to and

reported from the trading pit in an extremely rapid manner

such that substantial compliance with the objectives of paragraph (3) can be otherwise achieved.

ø(B) For purposes of subparagraph (A)(i)(I) the Commission shall

find that the volume of trading at an exchange is relatively small

if, among other things, the Commission determines that the average daily trading volume for each contract market for which the

board of trade is designated is less than the threshold trading level

established for the contract market under section 4j(a)(4).

ø(6) Any rule or order adopted by the Commission under paragraphs (4) and (5) shall become effective thirty legislative days or

ninety calendar days, whichever is later, after submission of such

rule or order to the Committee on Agriculture of the House of Representatives and the Committee on Agriculture, Nutrition, and Forestry of the Senate. For purposes of this paragraph, the term ‘‘legislative day’’ means any day on which either House of Congress is

in session.

øSEC. 5b. The failure or refusal of any board of trade to comply

with any of the provisions of this Act, or any of the rules, regulations, or orders of the Commission or the commission thereunder,

138

shall be cause for suspending for a period not to exceed six months

or revoking the designation of such board of trade as a ‘‘contract

market’’ in accordance with the procedure and subject to the judicial review provided in section 6(b) of this Act.¿

SEC. 5. DESIGNATION OF BOARDS OF TRADE AS CONTRACT MARKETS.

(a) APPLICATIONS.—A board of trade applying to the Commission

for designation as a contract market shall submit an application to

the Commission that includes any relevant materials and records

the Commission may require consistent with this Act.

(b) CRITERIA FOR DESIGNATION.—

(1) IN GENERAL.—To be designated as a contract market, the

board of trade shall demonstrate to the Commission that the

board of trade meets the criteria specified in this subsection.

(2) PREVENTION OF MARKET MANIPULATION.—The board of

trade shall have the capacity to prevent market manipulation

through market surveillance, compliance, and enforcement

practices and procedures, including methods for conducting

real-time monitoring of trading and comprehensive and accurate trade reconstructions.

(3) FAIR AND EQUITABLE TRADING.—The board of trade shall

establish and enforce trading rules to ensure fair and equitable

trading through the facilities of the contract market, and the

capacity to detect, investigate, and discipline any person that

violates the rules. Such rules may authorize—

(A) an exchange of—

(i) futures in connection with a cash commodity

transaction;

(ii) futures for cash commodities;

(iii) transfer trades or office trades; or

(iv) futures for swaps; and

(B) a futures commission merchant, acting as principal

or agent, to enter into or confirm the execution of a contract

for the purchase or sale of a commodity for future delivery

if the contract is reported, recorded, or cleared in accordance with the rules of the contract market or a derivatives

clearing organization.

(4) TRADE EXECUTION FACILITY.—The board of trade shall—

(A) establish and enforce rules defining, or specifications

detailing, the manner of operation of the trade execution facility maintained by the board of trade, including rules or

specifications describing the operation of any electronic

matching platform; and

(B) demonstrate that the trading facility operates in accordance with the rules or specifications.

(5) FINANCIAL INTEGRITY OF TRANSACTIONS.—The board of

trade shall establish and enforce rules and procedures for ensuring the financial integrity of transactions entered into by or

through the facilities of the contract market.

(6) DISCIPLINARY PROCEDURES.—The board of trade shall establish and enforce disciplinary procedures that authorize the

board of trade to discipline, suspend, or expel members or market participants that violate the rules of the board of trade, or

similar methods for performing the same functions, including

delegation of the functions to third parties.

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(7) PUBLIC ACCESS.—The board of trade shall provide the

public with access to the rules, regulations, and contract specifications of the board of trade.

(8) ABILITY TO OBTAIN INFORMATION.—The board of trade

shall establish and enforce rules that will allow the board of

trade to obtain any necessary information to perform any of the

functions described in this subsection, including the capacity to

carry out such international information-sharing agreements as

the Commission may require.

(c) EXISTING CONTRACT MARKETS.—A board of trade that is designated as a contract market on the effective date of the Commodity

Futures Modernization Act of 2000 shall be considered to be a designated contract market under this section.

(d) CORE PRINCIPLES FOR CONTRACT MARKETS.—

(1) IN GENERAL.—To maintain the designation of a board of

trade as a contract market, a board of trade shall comply with

the core principles specified in this subsection.

(2) COMPLIANCE WITH RULES.—The board of trade shall monitor and enforce compliance with the rules of the contract market, including the terms and conditions of any contracts to be

traded and any limitations on access to the contract market.

(3) CONTRACTS NOT READILY SUBJECT TO MANIPULATION.—

The board of trade shall list on the contract market only contracts that are not readily susceptible to manipulation.

(4) MONITORING OF TRADING.—The board of trade shall monitor trading to prevent manipulation, price distortion, and disruptions of the delivery or cash-settlement process.

(5) POSITION LIMITATIONS OR ACCOUNTABILITY.—To reduce

the potential threat of market manipulation or congestion, especially during trading in the delivery month, the board of trade

shall adopt position limitations or position accountability for

speculators, where necessary and appropriate.

(6) EMERGENCY AUTHORITY.—The board of trade shall adopt

rules to provide for the exercise of emergency authority, in consultation or cooperation with the Commission, where necessary

and appropriate, including the authority to—

(A) liquidate or transfer open positions in any contract;

(B) suspend or curtail trading in any contract; and

(C) require market participants in any contract to meet

special margin requirements.

(7) AVAILABILITY OF GENERAL INFORMATION.—The board of

trade shall make available to market authorities, market participants, and the public information concerning—

(A) the terms and conditions of the contracts of the contract market; and

(B) the mechanisms for executing transactions on or

through the facilities of the contract market.

(8) DAILY PUBLICATION OF TRADING INFORMATION.—The

board of trade shall make public daily information on settlement prices, volume, open interest, and opening and closing

ranges for actively traded contracts on the contract market.

(9) EXECUTION OF TRANSACTIONS.—The board of trade shall

provide a competitive, open, and efficient market and mechanism for executing transactions.

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(10) TRADE INFORMATION.—The board of trade shall maintain rules and procedures to provide for the recording and safe

storage of all identifying trade information in a manner that

enables the contract market to use the information for purposes

of assisting in the prevention of customer and market abuses

and providing evidence of any violations of the rules of the contract market.

(11) FINANCIAL INTEGRITY OF CONTRACTS.—The board of

trade shall establish and enforce rules providing for the financial integrity of any contracts traded on the contract market, including rules to ensure the financial integrity of any futures

commission merchants and introducing brokers and the protection of customer funds.

(12) PROTECTION OF MARKET PARTICIPANTS.—The board of

trade shall establish and enforce rules to protect market participants from abusive practices committed by any party acting as

an agent for the participants.

(13) DISPUTE RESOLUTION.—The board of trade shall establish and enforce rules regarding and provide facilities for alternative dispute resolution as appropriate for market participants

and any market intermediaries.

(14) GOVERNANCE FITNESS STANDARDS.—The board of trade

shall establish and enforce appropriate fitness standards for directors, members of any disciplinary committee, members of the

contract market, and any other persons with direct access to the

facility (including any parties affiliated with any of the persons

described in this paragraph).

(15) CONFLICTS OF INTEREST.—The board of trade shall establish and enforce rules to minimize conflicts of interest in the

decisionmaking process of the contract market and establish a

process for resolving such conflicts of interest.

(16) COMPOSITION OF BOARDS OF MUTUALLY OWNED CON- TRACT MARKETS.—In the case of a mutually owned contract

market, the board of trade shall ensure that the composition of

the governing board reflects market participants.

(17) RECORDKEEPING.—The board of trade shall—

(A) maintain full records of all activities related to the

business of the contract market in a form and manner acceptable to the Commission for a period of at least 5 years;

(B) make the records readily available during at least the

first 2 years of the 5-year period and provide the records to

the Commission at the expense of the person required to

maintain the records; and

(C) keep the records open to inspection by any representative of the Commission or the Department of Justice.

(18) ANTITRUST CONSIDERATIONS.—Unless necessary or appropriate to achieve the purposes of this Act, the board of trade

shall endeavor to avoid—

(A) adopting any rules or taking any actions that result

in any unreasonable restraints of trade; or

(B) imposing any material anticompetitive burden on

trading on the contract market.

(e) CURRENT AGRICULTURAL AND METAL COMMODITIES.—

(1) Subject to paragraph (2), a contract for purchase or sale

for future delivery of an agricultural or metal commodity enuVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00140 Fmt 6659 Sfmt 6603 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
141

merated in section 1a(3) that is available for trade on a contract market, as of the date of the enactment of this subsection,

may be traded only on a contract market designated under this

section.

(2) In order to promote responsible economic or financial innovation and fair competition, the Commission, on application

by any person, after notice and public comment and opportunity

for hearing, may prescribe rules and regulations to provide for

the offer and sale of contracts for future delivery or options

thereon to be conducted on a derivatives transaction execution

facility.

SEC. 5a. DERIVATIVES TRANSACTION EXECUTION FACILITIES.

(a) IN GENERAL.—In lieu of compliance with the contract market

designation requirements of section 5, a board of trade may elect to

operate as a registered derivatives transaction execution facility if

the facility is—

(1) designated as a contract market and meets the requirements of this section; or

(2) registered as a derivatives transaction execution facility

under subsection (c).

(b) REQUIREMENTS FOR TRADING FUTURES CONTRACTS OR OTHER

DERIVATIVES TRANSACTIONS.— (1) IN GENERAL.—A registered derivatives transaction execution facility under subsection (a) may trade any futures contract

(or option on such a contract) on or through the facility only by

satisfying the requirements of this section.

(2) REQUIREMENTS FOR UNDERLYING COMMODITIES.—A registered derivatives transaction execution facility may trade any

futures contract only if—

(A) the underlying commodity has a nearly inexhaustible

deliverable supply;

(B) the underlying commodity has a deliverable supply

that is sufficiently large that the contract is highly unlikely

to be susceptible to the threat of manipulation;

(C) the underlying commodity has no cash market; or

(D) the Commission determines, based on the market

characteristics, surveillance history, self-regulatory record,

and capacity of the facility that trading in the futures contract is highly unlikely to be susceptible to the threat of manipulation.

(3) ELIGIBLE TRADERS.—To trade on a registered derivatives

transaction execution facility, a person shall—

(A) be authorized by the board of trade to trade on the

facility; and

(B)(i) be an eligible contract participant; or

(ii) be a person trading through a futures commission

merchant that—

(I) is registered with the Commission;

(II) is a member of a futures self-regulatory organization;

(III) is a clearing member of a derivatives clearing

organization; and

(IV) has net capital of at least $20,000,000.

(4) TRADING BY CONTRACT MARKETS.—A board of trade that

is designated as a contract market shall, to the extent that the

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contract market also operates a registered derivatives transaction execution facility—

(A) provide a physical location for the contract market

trading of the board of trade that is separate from trading

on the derivatives transaction execution facility of the board

of trade; or

(B) if the board of trade uses the same electronic trading

system for trading on the contract market and derivatives

transaction execution facility of the board of trade, identify

whether the electronic trading is taking place on the contract market or the derivatives transaction execution facility.

(c) CRITERIA FOR REGISTRATION.—

(1) IN GENERAL.—To be registered as a registered derivatives

transaction execution facility, the board of trade shall demonstrate to the Commission that the board of trade meets the

criteria specified in this paragraph.

(2) DETERRENCE OF ABUSES.—The board of trade shall establish and enforce trading rules that will deter abuses and has

the capacity to detect, investigate, and enforce those rules, including means to—

(A) obtain information necessary to perform the functions

required under this section; or

(B) use technological means to—

(i) provide market participants with impartial access

to the market; and

(ii) capture information that may be used in establishing whether rule violations have occurred.

(3) TRADING PROCEDURES.—The board of trade shall establish and enforce rules or terms and conditions defining, or specifications detailing, trading procedures to be used in entering

and executing orders traded on the facilities of the board of

trade. Such rules may authorize—

(A) an exchange of—

(i) futures in connection with a cash commodity

transaction;

(ii) futures for cash commodities;

(iii) transfer trades or office trades; or

(iv) futures for swaps; and

(B) a futures commission merchant, acting as principal

or agent, to enter into or confirm the execution of a contract

for the purchase or sale of a commodity for future delivery

if the contract is reported, recorded, or cleared in accordance with the rules of the registered derivatives transaction

execution facility or a derivatives clearing organization.

(4) FINANCIAL INTEGRITY OF TRANSACTIONS.—The board of

trade shall establish and enforce rules or terms and conditions

providing for the financial integrity of transactions entered on

or through the facilities of the board of trade, including rules

or terms and conditions to ensure the financial integrity of any

futures commission merchants and introducing brokers and the

protection of customer funds.

(d) CORE PRINCIPLES FOR REGISTERED DERIVATIVES TRANSACTION EXECUTION FACILITIES.—

143

(1) IN GENERAL.—To maintain the registration of a board of

trade as a derivatives transaction execution facility, a board of

trade shall comply with the core principles specified in this subsection.

(2) COMPLIANCE WITH RULES.—The board of trade shall monitor and enforce the rules of the facility, including any terms

and conditions of any contracts traded on or through the facility and any limitations on access to the facility.

(3) MONITORING OF TRADING.—The board of trade shall monitor trading in the contracts of the facility to ensure orderly

trading in the contract and to maintain an orderly market

while providing any necessary trading information to the Commission to allow the Commission to discharge the responsibilities of the Commission under the Act.

(4) DISCLOSURE OF GENERAL INFORMATION.—The board of

trade shall disclose publicly and to the Commission information

concerning—

(A) contract terms and conditions;

(B) trading conventions, mechanisms, and practices;

(C) financial integrity protections; and

(D) other information relevant to participation in trading

on the facility.

(5) DAILY PUBLICATION OF TRADING INFORMATION.—The

board of trade shall make public daily information on settlement prices, volume, open interest, and opening and closing

ranges for actively traded contracts on the facility.

(6) FITNESS STANDARDS.—The board of trade shall establish

and enforce appropriate fitness standards for directors, members of any disciplinary committee, members, and any other

persons with direct access to the facility, including any parties

affiliated with any of the persons described in this paragraph.

(7) CONFLICTS OF INTEREST.—The board of trade shall establish and enforce rules to minimize conflicts of interest in the decisionmaking process of the derivatives transaction execution facility and establish a process for resolving such conflicts of interest.

(8) RECORDKEEPING.—The board of trade shall—

(A) maintain full records of all activities related to the

business of the derivatives transaction execution facility in

a form and manner acceptable to the Commission for a period of at least 5 years;

(B) make the records readily available during at least the

first 2 years of the 5-year period and provide the records to

the Commission at the expense of the person required to

maintain the records; and

(C) keep the records open to inspection by any representatives of the Commission or the Department of Justice.

(9) ANTITRUST CONSIDERATIONS.—Unless necessary or appropriate to achieve the purposes of this Act, the board of trade

shall endeavor to avoid—

(A) adopting any rules or taking any actions that result

in any unreasonable restraint of trade; or

(B) imposing any material anticompetitive burden on

trading on the derivatives transaction execution facility.

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(e) USE OF BROKER-DEALERS, DEPOSITORY INSTITUTIONS, AND

FARM CREDIT SYSTEM INSTITUTIONS AS INTERMEDIARIES.—

(1) IN GENERAL.—A registered derivatives transaction execution facility may by rule allow a broker-dealer, depository institution, or institution of the Farm Credit System that meets the

requirements of paragraph (2) to—

(A) act as an intermediary in transactions executed on

the facility on behalf of customers of the broker-dealer, depository institution, or institution of the Farm Credit System; and

(B) receive funds of customers to serve as margin or security for such transactions.

(2) REQUIREMENTS.—The requirements referred to in paragraph (1) are that—

(A) the broker-dealer be in good standing with the Securities and Exchange Commission, or the depository institution or institution of the Farm Credit System be in good

standing with Federal bank regulatory agencies (including

the Farm Credit Administration), as applicable; and

(B) if the broker-dealer, depository institution, or institution of the Farm Credit System carries or holds customer

accounts or funds for transactions on the derivatives transaction execution facility for more than 1 business day, the

broker-dealer, depository institution, or institution of the

Farm Credit System is registered as a futures commission

merchant and is a member of a registered futures association.

(3) IMPLEMENTATION.—The Commission shall cooperate and

coordinate with the Securities and Exchange Commission, the

Secretary of the Treasury, and Federal banking regulatory

agencies (including the Farm Credit Administration) in adopting rules and taking any other appropriate action to facilitate

the implementation of this subsection.

(f) SEGREGATION OF CUSTOMER FUNDS.—Not later than 180 days

after the effective date of the Commodity Futures Modernization Act

of 2000, consistent with regulations adopted by the Commission, a

registered derivatives transaction execution facility may authorize a

futures commission merchant to offer any customer of the futures

commission merchant that is an eligible contract participant the

right to not segregate the customer funds of the futures commission

merchant for purposes of trading on or through the facilities of the

registered derivatives transaction execution facility.

(g) ELECTION TO TRADE EXCLUDED COMMODITIES.—

(1) IN GENERAL.—A board of trade that is a registered derivatives transaction execution facility may trade on the facility any

agreements, contracts, or transactions involving excluded commodities that are otherwise excluded from this Act under section 2(c), 2(d), or 2(h).

(2) EXCLUSIVE JURISDICTION OF THE COMMISSION.—The Commission shall have exclusive jurisdiction over agreements, contracts, or transactions described in paragraph (1) to the extent

that the agreements, contracts, or transactions are traded on a

derivatives transaction execution facility.

145

SEC. 5b. DERIVATIVES CLEARING ORGANIZATIONS.

(a) REGISTRATION REQUIREMENT.—Except as provided in subsection (b), it shall be unlawful for a derivatives clearing organization, unless registered with the Commission, directly or indirectly to

make use of the mails or any means or instrumentality of interstate

commerce to perform the functions of a derivatives clearing organization described in section 1a(8) with respect to a contract of sale

of a commodity for future delivery, option on a contract of sale of

a commodity for future delivery, or option on a commodity that is

not an exclusion-eligible commodity (unless the contract or option is

described in subsection (c), (d), (f), (h), or (i) of section 2 or exempted

under section 4(c)).

(b) VOLUNTARY REGISTRATION.—A derivatives clearing organization that clears agreements, contracts, or transactions described in

subsection (c), (d), (f), (h), or (i) of section 2 or exempted under section 4(c) may register with the Commission as a derivatives clearing

organization.

(c) REGISTRATION OF DERIVATIVES CLEARING ORGANIZATIONS.—

(1) APPLICATION.—A person desiring to register as a derivatives clearing organization shall submit to the Commission an

application in such form and containing such information as

the Commission may require for the purpose of making the determinations required for approval under paragraph (2).

(2) CORE PRINCIPLES.—

(A) IN GENERAL.—To be registered and to maintain registration as a derivatives clearing organization, an applicant shall demonstrate to the Commission that the applicant complies with the core principles specified in this

paragraph. 

(B) FINANCIAL RESOURCES.—The applicant shall demonstrate that the applicant has adequate financial, operational, and managerial resources to discharge the responsibilities of a derivatives clearing organization without

interruption in various market conditions.

(C) PARTICIPANT AND PRODUCT ELIGIBILITY.—The applicant shall establish—

(i) appropriate admission and continuing eligibility

standards (including appropriate minimum financial

requirements) for members of and participants in the

organization; and

(ii) appropriate standards for determining eligibility

of agreements, contracts, or transactions submitted to

the applicant.

(D) RISK MANAGEMENT.—The applicant shall have the

ability to manage the risks associated with discharging the

responsibilities of a derivatives clearing organization

through the use of appropriate tools and procedures.

(E) SETTLEMENT PROCEDURES.—The applicant shall have

the ability to—

(i) complete settlements on a timely basis under varying circumstances;

(ii) maintain an adequate record of the flow of funds

associated with each transaction that the applicant

clears; and

146

(iii) comply with the terms and conditions of any permitted netting or offset arrangements with other clearing organizations.

(F) TREATMENT OF FUNDS.—The applicant shall have

standards and procedures designed to protect and ensure

the safety of member and participant funds.

(G) DEFAULT RULES AND PROCEDURES.—The applicant

shall have rules and procedures designed to allow for efficient, fair, and safe management of events when members

or participants become insolvent or otherwise default on

their obligations to the derivatives clearing organization.

(H) RULE ENFORCEMENT.—The applicant shall—

(i) maintain adequate arrangements and resources

for the effective monitoring and enforcement of compliance with rules of the applicant and for resolution of

disputes; and

(ii) have the authority and ability to discipline, limit,

suspend, or terminate a member’s or participant’s activities for violations of rules of the applicant.

(I) SYSTEM SAFEGUARDS.—The applicant shall demonstrate that the applicant—

(i) has established and will maintain a program of

oversight and risk analysis to ensure that the automated systems of the applicant function properly and

have adequate capacity and security; and

(ii) has established and will maintain emergency

procedures and a plan for disaster recovery, and will

periodically test backup facilities sufficient to ensure

daily processing, clearing, and settlement of transactions.

(J) REPORTING.—The applicant shall provide to the Commission all information necessary for the Commission to

conduct the oversight function of the applicant with respect

to the activities of the derivatives clearing organization.

(K) RECORDKEEPING.—The applicant shall—

(i) maintain full records of all activities related to

the business of the applicant as a derivatives clearing

organization in a form and manner acceptable to the

Commission for a period of at least 5 years;

(ii) make the records readily available during at

least the first 2 years of the 5-year period and provide

the records to the Commission at the expense of the person required to maintain the records; and

(iii) keep the records open to inspection by any representative of the Commission or the Department of

Justice.

(L) PUBLIC INFORMATION.—The applicant shall make information concerning the rules and operating procedures

governing the clearing and settlement systems (including

default procedures) available to market participants.

(M) INFORMATION SHARING.—The applicant shall—

(i) enter into and abide by the terms of all appropriate and applicable domestic and international information-sharing agreements; and

147

(ii) use relevant information obtained from the agreements in carrying out the clearing organization’s risk

management program.

(N) ANTITRUST CONSIDERATIONS.—Unless appropriate to

achieve the purposes of this Act, the derivatives clearing organization shall avoid—

(i) adopting any rule or taking any action that results in any unreasonable restraint of trade; or

(ii) imposing any material anticompetitive burden on

trading on the contract market.

(3) ORDERS CONCERNING COMPETITION.—A derivatives clearing organization may request the Commission to issue an order

concerning whether a rule or practice of the applicant is the

least anticompetitive means of achieving the objectives, purposes, and policies of this Act.

(d) EXISTING DERIVATIVES CLEARING ORGANIZATIONS.—A derivatives clearing organization shall be deemed to be registered under

this section to the extent that—

(1) the derivatives clearing organization clears agreements,

contracts, or transactions for a board of trade that has been

designated by the Commission as a contract market for such

agreements, contracts, or transactions before the date of enactment of this section; and

(2) the Commission has reviewed and approved the rules of

the derivatives clearing organization before that date.

(e) APPOINTMENT OF TRUSTEE.—

(1) IN GENERAL.—If a proceeding under section 5e results in

the suspension or revocation of the registration of a derivatives

clearing organization, or if a derivatives clearing organization

withdraws from registration, the Commission, on notice to the

derivatives clearing organization, may apply to the appropriate

United States district court where the derivatives clearing organization is located for the appointment of a trustee.

(2) ASSUMPTION OF JURISDICTION.—If the Commission applies for appointment of a trustee under paragraph (1)—

(A) the court may take exclusive jurisdiction over the derivatives clearing organization and the records and assets

of the derivatives clearing organization, wherever located;

and

(B) if the court takes jurisdiction under subparagraph

(A), the court shall appoint the Commission, or a person

designated by the Commission, as trustee with power to

take possession and continue to operate or terminate the operations of the derivatives clearing organization in an orderly manner for the protection of participants, subject to

such terms and conditions as the court may prescribe.

(f) LINKING OF REGULATED CLEARING FACILITIES.—

(1) IN GENERAL.—The Commission shall facilitate the linking

or coordination of derivatives clearing organizations registered

under this Act with other regulated clearance facilities for the

coordinated settlement of cleared transactions.

(2) COORDINATION.—In carrying out paragraph (1), the Commission shall coordinate with the Federal banking agencies and

the Securities and Exchange Commission.

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SEC. 5c. COMMON PROVISIONS APPLICABLE TO REGISTERED ENTITIES.

(a) ACCEPTABLE BUSINESS PRACTICES UNDER CORE PRINCIPLES.—

(1) IN GENERAL.—Consistent with the purposes of this Act, the

Commission may issue interpretations, or approve interpretations submitted to the Commission, of sections 5(d), 5a(d), and

5b(d)(2) to describe what would constitute an acceptable business practice under such sections.

(2) EFFECT OF INTERPRETATION.—An interpretation issued

under paragraph (1) shall not provide the exclusive means for

complying with such sections.

(b) DELEGATION OF FUNCTIONS UNDER CORE PRINCIPLES.—

(1) IN GENERAL.—A contract market or derivatives transaction execution facility may comply with any applicable core

principle through delegation of any relevant function to a registered futures association or another registered entity.

(2) RESPONSIBILITY.—A contract market or derivatives transaction execution facility that delegates a function under paragraph (1) shall remain responsible for carrying out the function.

(c) NEW CONTRACTS, NEW RULES, AND RULE AMENDMENTS.—

(1) IN GENERAL.—Subject to paragraph (2), a registered entity

may elect to list for trading any new contract or other instrument, or may elect to approve and implement any new rule or

rule amendment, by providing to the Commission (and the Secretary of the Treasury, in the case of a contract of sale for future

delivery of a government security (or option thereon) or a rule

or rule amendment specifically related to such a contract) a

written certification that the new contract, new rule, or rule

amendment complies with this Act (including regulations under

this Act).

(2) PRIOR APPROVAL.— (A) IN GENERAL.—A registered entity may request that

the Commission grant prior approval to any new contract

or other instrument, new rule, or rule amendment.

(B) PRIOR APPROVAL REQUIRED.—Notwithstanding any

other provision of this section, a designated contract market

shall submit to the Commission for prior approval each

rule amendment that materially changes the terms and

conditions, as determined by the Commission, in any contract of sale for future delivery of a commodity specifically

enumerated in section 1a(3) of this Act (or any option thereon) traded through its facilities if such rule amendment applies to contracts and delivery months which have already

been listed for trading and have open interest.

(C) DEADLINE.—If prior approval is requested under subparagraph (A), the Commission shall take final action on

the request not later than 90 days after submission of the

request, unless the person submitting the request agrees to

an extension of the time limitation established under this

subparagraph.

(3) APPROVAL.—The Commission shall approve any such new

contract or instrument, new rule, or rule amendment unless the

Commission finds that the new contract or instrument, new

rule, or rule amendment would violate this Act.

149

(d) VIOLATION OF CORE PRINCIPLES.— (1) IN GENERAL.—If the Commission has reason to believe

that a registered entity is violating any applicable provision

specified in section 5(d), 5a(d), or 5b(d)(2), the Commission

shall notify the registered entity in writing of the reasons for the

preliminary determination by the Commission of a violation, including any data, materials, and facts the Commission relied

on in making the preliminary determination.

(2) INJUNCTIVE OR ADMINISTRATIVE ACTION.—The Commission may initiate an action for an injunction under section 6c

or an administrative proceeding, to demonstrate, by the preponderance of the evidence, that—

(A) the registered entity is violating any applicable provision specified in section 5(d), 5a(d), or 5b(d)(2); and

(B) the Commission has recommended an appropriate remedial action to remove the deficiency based on an analysis

of the costs and benefits in the public interest of the Commission recommendation.

(3) BURDEN OF PROOF.—In making a determination that a

registered entity is violating any applicable provision specified

in section 5(d), 5a(d), or 5b(d)(2), the Commission shall have

the burden of proving that the registered entity is violating the

applicable core principle.

(e) RESERVATION OF EMERGENCY AUTHORITY.—Nothing in this

section shall limit or in any way affect the emergency powers of the

Commission provided in section 8a(9) of this Act.

SEC. 5d. EXEMPT BOARDS OF TRADE.

(a) IN GENERAL.—Except as otherwise provided in this section, a

contract of sale (or option on such a contract) of a commodity for

future delivery traded on or through the facilities of an exempt

board of trade shall be exempt from all provisions of this Act, other

than section 2(g).

(b) CRITERIA FOR EXEMPTION.—To qualify for an exemption under

subsection (a), a board of trade shall limit trading on or through

the facilities of the board of trade to contracts of sale of a commodity for future delivery (or options on such contracts)—

(1) that have—

(A) a nearly inexhaustible deliverable supply;

(B) a deliverable supply that is sufficiently large, and a

cash market sufficiently liquid, to render any contract traded on the commodity highly unlikely to be susceptible to the

threat of manipulation; or

(C) no cash market;

(2) that are entered into only between persons that are eligible

contract participants at the time at which the persons enter into

the contract; and

(3) that are not contracts of sale (or options on the contract)

for future delivery of any security, including any group or index

of securities or any interest in, or interest that is based on the

value of, any security.

(c) ANTIMANIPULATION REQUIREMENTS.—A party to a futures contract or related option that is traded on an exempt board of trade

shall be subject to sections 4b, 4n, 6(c), and 9(a)(2), and the Commission shall enforce those provisions with respect to any such trading.

150

(d) PRICE DISCOVERY.—If the Commission finds that an exempt

board of trade is a significant source of price discovery for any underlying commodity in any transaction traded on or through the facilities of the board of trade, the board of trade shall disseminate

publicly on a daily basis trading volume, opening and closing price

ranges, open interest, and other trading data as appropriate to the

market.

(e) JURISDICTION.—The Commission shall have exclusive jurisdiction over any account, agreement, or transaction involving a contract of sale of a commodity for future delivery, or related option,

to the extent that such account, agreement, or transaction is traded

on an exempt board of trade.

(f) SUBSIDIARIES.—A board of trade that is designated as a contract market or registered as a derivatives transaction execution facility may operate an exempt board of trade by establishing a separate subsidiary or other legal entity and otherwise satisfying the requirements of this section.

SEC. 5e. SUSPENSION OR REVOCATION OF DESIGNATION AS REGISTERED ENTITY.

The failure of a registered entity to comply with any provision of

this Act, or any regulation or order of the Commission under this

Act, shall be cause for the suspension of the registered entity for a

period not to exceed 180 days, or revocation of designation as a registered entity in accordance with the procedures and subject to the

judicial review provided in section 6(b).

SEC. 6. (a) Any øboard of trade desiring to be designated a ‘‘contract market’’ shall make application to the Commission for such

designation¿ person desiring to be designated or registered as a contract market or derivatives transaction execution facility shall make

application to the Commission for such designation or registration

and accompany the same with a showing that it complies with the

øabove conditions¿ conditions set forth in this Act, and with a sufficient assurance that it will continue to comply with the øabove requirements¿ the requirements of this Act. The Commission shall approve or deny an application for ødesignation as a contract market

within one year¿ designation or registration as a contract market

or derivatives transaction execution facility within 180 days of the

filing of the application. If the Commission notifies the øboard of

trade¿ person that its application is materially incomplete and

specifies the deficiencies in the application, the running of the

øone-year period¿ 180-day period shall be stayed from the time of

such notification until the application is resubmitted in completed

form: Provided, That the Commission shall have not less than sixty

days to approve or deny the application from the time the application is resubmitted in completed form. If the Commission denies an

application, it shall specify the grounds for the denial. In the event

of a refusal to ødesignate as a ‘‘contract market’’ any board of trade

that has made application therefor, such board of trade¿ designate

or register as a contract market or derivatives transaction execution

facility any person that has made application therefor, such person

shall be afforded an opportunity for a hearing on the record before

the Commission, with the right to appeal an adverse decision after

such hearing to the court of appeals as provided for in other cases

in subsection (b) of this section.

151

(b) The Commission is authorized to suspend for a period not to

exceed six months or to revoke the ødesignation of any board of

trade as a ‘‘contract market’’ upon¿ designation or registration of

any contract market or derivatives transaction execution facility on

a showing that such øboard of trade¿ contract market or derivatives

transaction execution facility is not enforcing or has not enforced its

rules of government made a condition of its ødesignation as set

forth in section 5 of this Act¿ designation or registration as set

forth in sections 5 through 5b or that such øboard of trade¿ contract market or derivatives transaction execution facility, or any director, officer, agent, or employee thereof, otherwise is violating or

has violated any of the provisions of this Act or any of the rules,

regulations, or orders of the Commission or the Commission thereunder. Such suspension or revocation shall only be after a notice

to the officers of the øboard of trade¿ contract market or derivatives

transaction execution facility affected and upon a hearing on the

record: Provided, That such suspension or revocation shall be final

and conclusive, unless within fifteen days after such suspension or

revocation by the Commission such øboard of trade¿ person appeals

to the court of appeals for the circuit in which it has its principal

place of business, by filing with the clerk of such court a written

petition praying that the order of the Commission be set aside or

modified in the manner stated in the petition, together with a bond

in such sum as the court may determine, conditioned that such

øboard of trade¿ person will pay the costs of the proceedings if the

court so directs. The clerk of the court in which such a petition is

filed shall immediately cause a copy thereof to be delivered to the

Commission and file in the court the record in such proceedings,

as provided in section 2112 of title 28, United States Code. The testimony and evidence taken or submitted before the Commission,

duly filed as aforesaid as a part of the record, shall be considered

by the court of appeals as the evidence in the case. Such a court

may affirm or set aside the order of the Commission or may direct

it to modify its order. No such order of the Commission shall be

modified or set aside by the court of appeals unless it is shown by

the øboard of trade¿ person that the order is unsupported by the

weight of the evidence or was issued without due notice and a reasonable opportunity having been afforded to such øboard of trade¿

person for a hearing, or infringes the Constitution of the United

States, or is beyond the jurisdiction of the Commission.

(c) If the Commission has reason to believe that any person

(other than a øcontract market¿ registered entity) is manipulating

or attempting to manipulate or has manipulated or attempted to

manipulate the market price of any commodity, in interstate commerce, or for future delivery on or subject to the rules of any øcontract market¿ registered entity, or has willfully made any false or

misleading statement of a material fact in any registration application or any report filed with the Commission under this Act, or

willfully omitted to state in any such application or report any material fact which is required to be stated therein, or otherwise is

violating or has violated any of the provisions of this Act or of the

rules, regulations, or orders of the Commission or the Commission

thereunder, it may serve upon such person a complaint stating its

charges in that respect, which complaint shall have attached or

shall contain therein a notice of hearing, specifying a day and place

152

not less than three days after the service thereof, requiring such

person to show cause why an order should not be made prohibiting

him from trading on or subject to the rules of any øcontract market¿ registered entity, and directing that all øcontract markets¿

registered entities refuse all øtrading¿ privileges to such person,

until further notice of the Commission and to show cause why the

registration of such person, if registered with the Commission in

any capacity, should not be suspended or revoked. Said hearing

may be held in Washington, District of Columbia, or elsewhere, before the Commission or before an Administrative Law Judge designated by the Commission, which Administrative Law Judge shall

cause all evidence to be reduced to writing and forthwith transmit

the same to the Commission. For the purpose of securing effective

enforcement of the provisions of this Act, for the purpose of any investigation or proceeding under this Act, and for the purpose of any

action taken under section 12(f), any member of the Commission or

any Administrative Law Judge or other officer designated by the

Commission (except as provided in the fifth sentence of this subsection) may administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence, and require the

production of any books, papers, correspondence, memoranda, or

other records that the Commission deems relevant or material to

the inquiry. The attendance of witnesses and the production of any

such records may be required from any place in the United States,

any State or any foreign country or jurisdiction at any designated

place of hearing. A subpoena issued under this section may be

served upon any person who is not to be found within the territorial jurisdiction of any court of the United States in such manner

as the Federal Rules of Civil Procedure prescribe for service of

process in a foreign country, except that a subpoena to be served

on a person who is not to be found within the territorial jurisdiction of any court of the United States may be issued only on the

prior approval of the Commission. In case of contumacy by, or refusal to obey a subpoena issued to, any person, the Commission

may invoke the aid of any court of the United States within the

jurisdiction in which the investigation or proceeding is conducted,

or where such person resides or transacts business, in requiring

the attendance and testimony of witnesses and the production of

books, papers, correspondence, memoranda, and other records.

Such court may issue an order requiring such person to appear before the Commission or member or Administrative Law Judge or

other officer designated by the Commission, there to produce

records, if so ordered, or to give testimony touching the matter

under investigation or in question. Any failure to obey such order

of the court may be punished by the court as a contempt thereof.

All process in any such case may be served in the judicial district

wherein such person is an inhabitant or transacts business or

wherever such person may be found. Upon evidence received, the

Commission may (1) prohibit such person from trading on or subject to the rules of any øcontract market¿ registered entity and require all øcontract markets¿ registered entities to refuse such person all øtrading¿ privileges thereon for such period as may be specified in the order, (2) if such person is registered with the Commission in any capacity, suspend, for a period not to exceed six

months, or revoke, the registration of such person, (3) assess such

153

person a civil penalty of not more than the higher of $100,000 or

triple the monetary gain to such person for each such violation and

(4) require restitution to customers of damages proximately caused

by violations of such persons. Notice of such order shall be sent

forthwith by registered mail or by certified mail or delivered to the

offending person and to the governing boards of said øcontract

markets¿ registered entities. After the issuance of the order by the

Commission, as aforesaid, the person against whom it is issued

may obtain a review of such order or such other equitable relief as

to the court may seem just by filing in the United States court of

appeals of the circuit in which the petitioner is doing business, or

in the case of an order denying registration, the circuit in which

the petitioner’s principal place of business listed on petitioner’s application for registration is located, a written petition, within fifteen days after the notice of such order is given to the offending

person praying that the order of the Commission be set aside. A

copy of such petition shall be forthwith transmitted by the clerk of

the court to the Commission and thereupon the Commission shall

file in the court the record theretofore made, as provided in section

2112 of title 28, United States Code. Upon the filing of the petition

the court shall have jurisdiction to affirm, to set aside, or modify

the order of the Commission, and the findings of the Commission

as to the facts, if supported by the weight of evidence, shall in like

manner be conclusive.

(d) If any person (other than a øcontract market¿ registered entity) is manipulating or attempting to manipulate or has manipulated or attempted to manipulate the market price of any commodity, in interstate commerce, or for future delivery on or subject

to the rules of any øcontract market¿ registered entity, or otherwise

is violating or has violated any of the provisions of this Act or of

the rules, regulations, or orders of the Commission or the commission thereunder, the Commission may, upon notice and hearing,

and subject to appeal as in other cases provided for in subsection

(c), make and enter an order directing that such person shall cease

and desist therefrom and, if such person thereafter and after the

lapse of the period allowed for appeal of such order or after the

affirmance of such order, shall fail or refuse to obey or comply with

such order, such person shall be guilty of a misdemeanor and, upon

conviction thereof, shall be fined not more than the higher of

$100,000 or triple the monetary gain to such person, or imprisoned

for not less than six months nor more than one year, or both, except that if such failure or refusal to obey or comply with such

order involves any offense within paragraph (a) or (b) of section 9

of this Act, such person shall be guilty of a felony and, upon conviction thereof, shall be subject to the penalties of said paragraph 9(a)

or 9(b): Provided, That any such cease and desist order against any

respondent in any case of manipulation of, or attempt to manipulate, the price of any commodity shall be issued only in conjunction

with an order issued against such respondent under subsection (c).

Each day during which such failure or refusal to obey or comply

with such order continues shall be deemed a separate offense.

(e)(1) In determining the amount of the money penalty assessed

under subsection (c), the Commission shall consider the appropriateness of such penalty to the gravity of the violation.

154

(2) Unless the person against whom a money penalty is assessed

under subsection (c) shows to the satisfaction of the Commission

within fifteen days from the expiration of the period allowed for

payment of such penalty that either an appeal as authorized by

subsection (c) has been taken or payment of the full amount of the

penalty then due has been made, at the end of such fifteen-day period and until such person shows to the satisfaction of the Commission that payment of such amount with interest thereon to date of

payment has been made—

(A) such person shall be prohibited automatically from øtrading on all contract markets¿ the privileges of all registered entities; and

(B) if such person is registered with the Commission, such

registration shall be suspended automatically.

(3) If a person against whom a money penalty is assessed under

subsection (c) takes an appeal and if the Commission prevails or

the appeal is dismissed, unless such person shows to the satisfaction of the Commission that payment of the full amount of the penalty then due has been made by the end of thirty days from the

date of entry of judgment on the appeal—

(A) such person shall be prohibited automatically from øtrading on all contract markets¿ the privileges of all registered entities; and

* * * * * * *

SEC. 6a. (a) No board of trade which has been ødesignated as a

‘‘contract market’’ shall¿ designated or registered as a contract market or a derivatives transaction execution facility exclude from membership in, and all privileges on, such board of trade, any association or corporation engaged in cash commodity business having

adequate financial responsibility which is organized under the cooperative laws of any State, or which has been recognized as a cooperative association of producers by the United States Government or by any agency thereof, if such association or corporation

complies and agrees to comply with such terms and conditions as

are or may be imposed lawfully upon other members of such board,

and as are or may be imposed lawfully upon a cooperative association of producers engaged in cash commodity business, unless such

board of trade is authorized by the Commission to exclude such association or corporation from membership and privileges after hearing held upon at least three days’ notice subsequent to the filing

of complaint by the board of trade: Provided, however, That if any

such association or corporation shall fail to meet its obligations

with any established clearing house or clearing agency of any contract market, such association or corporation shall be ipso facto

debarred from further trading on such contract market, except such

trading as may be necessary to close open trades and to discharge

existing contracts in accordance with the rules of such contract

market applicable in such cases. Such Commission may prescribe

that such association or corporation shall have and retain membership and privileges, with or without imposing conditions, or it may

permit such board of trade immediately to bar such association or

corporation from membership and privileges. Any order of said

Commission entered hereunder shall be reviewable by the court of

appeals for the circuit in which such association or corporation, or

such board of trade, has its principal place of business, on written

155

petition either of such association or corporation, or of such board

of trade, under the procedure provided in section 6(b) of this Act,

but such order shall not be stayed by the court pending review.

(b) No rule of any board of trade ødesignated as a contract market¿ designated or registered as a contract market or a derivatives

transaction execution facility shall forbid or be construed to forbid

the payment of compensation on a commodity-unit basis, or otherwise, by any federated cooperative association to its regional member-associations for services rendered or to be rendered in connection with any organization work, educational activity, or procurement of patronage, provided no part of any such compensation is

returned to patrons (whether members or nonmembers) of such cooperative association, or of its regional or local member-associations, otherwise than as a dividend on capital stock or as a patronage dividend out of the net earnings or surplus of such federated

cooperative association.

SEC. 6b. If any øcontract market¿ registered entity is not enforcing or has not enforced its rules of government made a condition

of its ødesignation as set forth in section 5 of this Act¿ designation

or registration as set forth in sections 5 through 5c, or if any øcontract market¿ registered entity, or any director, officer, agent, or

employee of any øcontract market¿ registered entity otherwise is

violating or has violated any of the provisions of this Act or any

of the rules, regulations, or orders of the Commission thereunder,

the Commission may, upon notice and hearing on the record and

subject to appeal as in other cases provided for in section 6(b) of

this Act, make and enter an order directing that such øcontract

market¿ registered entity, director, officer, agent, or employee shall

cease and desist from such violation, and assess a civil penalty of

not more than $500,000 for each such violation. If such øcontract

market¿ registered entity, director, officer, agent, or employee, after

the entry of such a cease and desist order and the lapse of the period allowed for appeal of such order or after the affirmance of such

order, shall fail or refuse to obey or comply with such order, such

øcontract market¿ registered entity, director, officer, agent, or employee shall be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $500,000 or imprisoned for not less

than six months nor more than one year, or both. Each day during

which such failure or refusal to obey such cease and desist order

continues shall be deemed a separate offense. If the offending øcontract market¿ registered entity or other person upon whom such

penalty is imposed, after the lapse of the period allowed for appeal

or after the affirmance of such penalty, shall fail to pay such penalty, the Commission shall refer the matter to the Attorney General who shall recover such penalty by action in the appropriate

United States district court. In determining the amount of the

money penalty assessed under this section, the Commission shall

consider the gravity of the offense, and in the case of a øcontract

market¿ registered entity shall further consider whether the

amount of the penalty will materially impair øthe contract market’s ability¿ the ability of the registered entity to carry on its operations and duties.

SEC. 6c. (a) Whenever it shall appear to the Commission that any

øcontract market¿ registered entity or other person has engaged, is

engaging, or is about to engage in any act or practice constituting

156

a violation of any provision of this Act or any rule, regulation, or

order thereunder, or is restraining trading in any commodity for future delivery, the Commission may bring an action in the proper

district court of the United States or the proper United States

court of any territory or other place subject to the jurisdiction of

the United States, to enjoin such act or practice, or to enforce compliance with this Act, or any rule, regulation or order thereunder,

and said courts shall have jurisdiction to entertain such actions:

Provided, That no restraining order (other than a restraining order

which prohibits any person from destroying, altering or disposing

of, or refusing to permit authorized representatives of the Commission to inspect, when and as requested, any books and records or

other documents or which prohibits any person from withdrawing,

transferring, removing, dissipating, or disposing of any funds, assets, or other property, and other than an order appointing a temporary receiver to administer such restraining order and to perform

such other duties as the court may consider appropriate) or injunction for violation of the provisions of this Act shall be issued ex

parte by said court.

* * * * * * *

SEC. 6d. (1) Whenever it shall appear to the attorney general of

any State, the administrator of the securities laws of any State, or

such other official as a State may designate, that the interests of

the residents of that State have been, are being, or may be threatened or adversely affected because any person (other than a contract market, derivatives transaction execution facility, clearinghouse, floor broker, or floor trader) has engaged in, is engaging or

is about to engage in, any act or practice constituting a violation

of any provision of this Act or any rule, regulation, or order of the

Commission thereunder, the State may bring a suit in equity or an

action at law on behalf of its residents to enjoin such act or practice, to enforce compliance with this Act, or any rule, regulation, or

order of the Commission thereunder, to obtain damages on behalf

of their residents, or to obtain such further and other relief as the

court may deem appropriate.

* * * * * * *

SEC. 7. Any øboard of trade¿ person that has been designated or

registered a øcontract market¿ registered entity in the manner herein provided may have such designation or registration vacated and

set aside by giving notice in writing to the Commission requesting

that its designation or registration as a øcontract market¿ registered entity be vacated, which notice shall be served at least ninety days prior to the date named therein as the date when the vacation of designation or registration shall take effect. Upon receipt of

such notice the Commission shall forthwith order the vacation of

the ødesignation of such board of trade as a contract market¿ designation or registration of the registered entity, effective upon the

day named in the notice, and shall forthwith send a copy of the notice and its order to all other øcontract markets¿ registered entities.

From and after the date upon which the vacation became effective

the said øboard of trade¿ person can thereafter be ødesignated

again a contract market¿ designated or registered again a registered entity by making application to the Commission in the manner herein provided for an original application.

157

SEC. 8. (a) * * *

* * * * * * *

(c) The Commission may make or issue such reports as it deems

necessary, or such opinions or orders as may be required under

other provisions of law, relative to the conduct of any øboard of

trade¿ registered entity or to the transactions of any person found

guilty of violating the provisions of this Act or the rules, regulations, or orders of the Commission thereunder in proceedings

brought under section 6 of this Act. In any such report or opinion,

the Commission may set forth the facts as to any actual transaction or any information referred to in subsection (b) of this section, if such facts or information have previously been disclosed

publicly in connection with a congressional proceeding, or in an administrative or judicial proceeding brought under this Act.

* * * * * * *

SEC. 8a. The Commission is authorized—

(1) * * *

(2) upon notice, but without a hearing and pursuant to such

rules, regulations, or orders as the Commission may adopt, to

refuse to register, to register conditionally, or to suspend or

place restrictions upon the registration of, any person and with

such a hearing as may be appropriate to revoke the registration of any person—

(A) * * *

* * * * * * *

(F) if such person is subject to an outstanding order of

the Commission denying øtrading¿ privileges on any øcontract market¿ registered entity to such person, denying,

suspending, or revoking such person’s membership in any

øcontract market¿ registered entity or registered futures

association, or barring or suspending such person from

being associated with a registrant under this Act or with

a member of a øcontract market¿ registered entity or with

a member of a registered futures association;

* * * * * * *

(3) to refuse to register or to register conditionally any person, if it is found, after opportunity for hearing, that—

(A) * * *

* * * * * * *

(J) such person is subject to an outstanding order denying, suspending, or expelling such person from membership in a øcontract market¿ registered entity, a registered

futures association, any other self-regulatory organization,

or any foreign regulatory body that the Commission recognizes as having a comparable regulatory program or barring or suspending such person from being associated with

any member or members of such øcontract market¿ registered entity, association, self-regulatory organization, or

foreign regulatory body;

* * * * * * *

(4) in accordance with the procedure provided for in section

6(c) of this Act, to suspend, revoke, or place restrictions upon

158

the registration of any person registered under this Act if

cause exists under paragraph (3) of this section which would

warrant a refusal of registration of such person, and to suspend or revoke the registration of any futures commission merchant or introducing broker who shall knowingly accept any

order for the purchase or sale of any commodity for future delivery on or subject to the rules of any øcontract market¿ registered entity from any person if such person has been denied

trading privileges on any øcontract market¿ registered entity

by order of the Commission under section 6(c) of this Act and

the period of denial specified in such order shall not have expired: Provided, That such person may appeal from a decision

to suspend, revoke, or place restrictions upon registration

made pursuant to this paragraph in the manner provided in

section 6(c) of this Act;

* * * * * * *

(6) to communicate to the proper committee or officer of any

øcontract market¿ registered entity, registered futures association, or self-regulatory organization as defined in section

3(a)(26) of the Securities Exchange Act of 1934, notwithstanding the provisions of section 8 of this Act, the full facts

concerning any transaction or market operation, including the

names of parties thereto, which in the judgment of the Commission disrupts or tends to disrupt any market or is otherwise

harmful or against the best interests of producers, consumers,

or investors, or which is necessary or appropriate to effectuate

the purposes of this Act: Provided, That any information furnished by the Commission under this paragraph shall not be

disclosed by such øcontract market¿ registered entity, registered futures association, or self-regulatory organization except in any self-regulatory action or proceeding;

(7) to alter or supplement the rules of a øcontract market¿

registered entity insofar as necessary or appropriate by rule or

regulation or by order, if after making the appropriate request

in writing to a øcontract market¿ registered entity that such

øcontract market¿ registered entity effect on its own behalf

specified changes in its rules and practices, and after appropriate notice and opportunity for hearing, the Commission determines that such øcontract market¿ registered entity has not

made the changes so required, and that such changes are necessary or appropriate for the protection of persons producing,

handling, processing, or consuming any commodity traded for

future delivery on such øcontract market¿ registered entity, or

the product or byproduct thereof, or for the protection of traders or to insure fair dealing in commodities traded for future

delivery on such øcontract market¿ registered entity. Such

rules, regulations, or orders may specify changes with respect

to such matters as—

(A) terms or conditions in contracts of sale to be executed on or subject to the rules of such øcontract market¿

registered entity;

* * * * * * *

(8) to make and promulgate such rules and regulations with

respect to those persons registered under this Act, who are not

159

members of a øcontract market¿ registered entity, as in the

judgment of the Commission are reasonably necessary to protect the public interest and promote just and equitable principles of trade, including but not limited to the manner, method, and place of soliciting business, including the content of

such solicitation;

(9) to direct the øcontract market¿ registered entity, whenever it has reason to believe that an emergency exists, to take

such action as in the Commission’s judgment is necessary to

maintain or restore orderly trading in or liquidation of any futures contract, including, but not limited to, the setting of temporary emergency margin levels on any futures contract, and

the fixing of limits that may apply to a market position acquired in good faith prior to the effective date of the Commission’s action. The term ‘‘emergency’’ as used herein shall mean,

in addition to threatened or actual market manipulations and

corners, any act of the United States or a foreign government

affecting a commodity or any other major market disturbance

which prevents the market from accurately reflecting the

forces of supply and demand for such commodity. Any action

taken by the Commission under this paragraph shall be subject to review only in the United States Court of Appeals for

the circuit in which the party seeking review resides or has its

principal place of business, or in the United States Court of

Appeals for the District of Columbia Circuit. Such review shall

be based upon an examination of all the information before the

Commission at the time the determination was made. The

court reviewing the Commission’s action shall not enter a stay

or order of mandamus unless it has determined, after notice

and hearing before a panel of the court, that the agency action

complained of was arbitrary, capricious, an abuse of discretion,

or otherwise not in accordance with law. Nothing herein shall

be deemed to limit the meaning or interpretation given by a

øcontract market¿ registered entity to the terms ‘‘market emergency’’, ‘‘emergency’’, or equivalent language in its own bylaws,

rules, regulations, or resolutions;

* * * * * * *

SEC. 8b. It shall be unlawful for any person, against whom there

is outstanding any order of the Commission prohibiting him from

trading on or subject to the rules of any øcontract market¿ registered entity, to make or cause to be made in contravention of such

order, any contract for future delivery of any commodity, on or subject to the rules of any øcontract market¿ registered entity. SEC. 8c. (a)

* * * * * * * * * *

(e)(1) The Commission shall issue regulations requiring each contract market to establish and make available to the public a schedule of major violations of any rule within the disciplinary jurisdiction of such øcontract market¿ registered entity.

* * * * * * *

SEC. 8e. COMMISSION OVERSIGHT; DEFICIENCY ORDERS.

(a) ASSESSMENTS.—At least once every two years, to the extent

practicable, the Commission shall assess whether the trade moniVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00159 Fmt 6659 Sfmt 6602 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
160

toring system of each øcontract market¿ registered entity satisfies

øsection 5a(b)¿ sections 5 through 5c.

(b) DEFICIENCY ORDERS.—

(1) CAUSES.—The Commission may issue a proposed deficiency order in accordance with paragraph (2), or take such

other administrative or enforcement action as the Commission

determines is appropriate, if, based on its assessment or on

other information, the Commission at any time has reason to

believe that øa contract market’s trade monitoring system implemented pursuant to section 5a(b)¿ the trade monitoring system of a registered entity implemented pursuant to sections 5

through 5c does not satisfy one or more of the requirements of

such section.

* * * * * * *

(2) CONTENTS.—A proposed deficiency order issued under

this subsection shall specify—

(A) the deficiencies the Commission has reason to believe exist in the trade monitoring system of the øcontract

market¿ registered entity and a statement of reasons supporting the Commission’s belief that those deficiencies

exist;

(B) the corrective action that the Commission believes

that the øcontract market¿ registered entity must take and

an acceptable timetable for such corrective action; and

(C) a date, not less than twenty days from the date of

issuance of the proposed deficiency order, when such deficiency order will become final, subject to subsection (d).

ø(3) REMEDIES.—On becoming final, the Commission deficiency order may—

ø(A) require the contract market to—

ø(i) institute appropriate improvements in its trade

monitoring system necessary to correct the deficiencies

noted therein;

ø(ii) satisfy stated objective performance criteria to

correct such deficiencies;

ø(iii) upgrade or reconfigure existing systems for collecting or processing relevant data on trading and

trader or broker activity, including, where appropriate,

the commitment of additional resources; or

ø(B) revoke any exemption of the contract market from

the regulations prohibiting the privilege of dual trading

under section 4j(a), if the deficiency noted in such deficiency order relates to—

ø(i) the audit trail system the contract market is required to maintain under paragraph (2), (3), or (4) of

section 5a(b); or

ø(ii) the prevention, detection, or disciplining of violations attributable to such trading at such, subject to

the standards, exceptions, and duration provisions of

section 4j(a); or

ø(C) take any combination of the actions described in

subparagraphs (A) and (B).¿

(3) REMEDIES.—On becoming final, the Commission deficiency order may require the registered entity to—

161

(A) institute appropriate improvements in its trade monitoring system necessary to correct the deficiencies in the

order;

(B) satisfy stated objective performance criteria to correct

the deficiencies;

(C) upgrade or reconfigure existing systems for collecting

or processing relevant data on trading and trader or broker

activity, including, where appropriate, the commitment of

additional resources.

(4) REMOVAL.—If the Commission finds, after notice and opportunity for a hearing on the record prior to such deficiency

order becoming final, that a named officer, director, committee

member, or employee of such øcontract market¿ registered entity has willfully—

(A) violated this Act, the rules or regulations of the Commission thereunder, or the rules of such øcontract market¿

registered entity;

(B) abused the authority of such person; or

(C) without reasonable justification or excuse, failed to

enforce compliance with any provision of the rules of such

øcontract market¿ registered entity by any member or person associated with a member thereof,

the Commission may issue a deficiency order under this section

to remove such officer, director, committee member, or employee.

(5) øDESIGNATION AS CONTRACT MARKET¿ DESIGNATION OR

REGISTRATION AS REGISTERED ENTITY.—Notwithstanding section 6, during the period that a proposed or final deficiency

order under this section is in effect, the Commission may refrain from approving any application for designation or registration as a øcontract market¿ registered entity made by the

øboard of trade¿ person whose øcontract market¿ registered entity is the subject of such deficiency order.

(6) DELEGATION.—The Commission shall not delegate the authority to issue deficiency orders under this subsection.

(c) RESCISSION, MODIFICATION, OR DELAY OF DEFICIENCY ORDERS.—Before any proposed deficiency order issued by the Commission under subsection (b) may become final, the Commission

shall—

(1) provide the affected øcontract market¿ registered entity

with an opportunity for a hearing through submission of written data, views, or arguments and, under terms set by the

Commission at the request of the øcontract market¿ registered

entity, through an oral presentation of views and comments to

the Commission, in order to petition the Commission to rescind, modify, or delay such deficiency order; and

(2) rule on such petition, not less than twenty days before

the deficiency order takes effect, making findings, as appropriate, as to whether—

(A) the deficiencies cited by the Commission have been

corrected or are being corrected under an expeditious timetable acceptable to the Commission;

(B) the trade monitoring system of the øcontract market¿ registered entity is deficient as noted in the deficiency

order; or

162

(C) the timetable for corrective action by the øcontract

market¿ registered entity in the proposed deficiency order,

and the particular corrective action proposed, is appropriate in light of the deficiencies noted and the purposes

of this Act.

(d) PENALTIES.—Violation of a final deficiency order issued under

subsection (c) shall be considered a violation of an order of the

Commission for purposes of—

(1) establishing liability and assessing penalties against a

øcontract market¿ registered entity or any director, officer,

agent, or employee thereof under section 6b or 6c; or

(2) initiating proceedings under section ø5b¿ 5e or 6(a).

(e) JUDICIAL REVIEW.— (1) PERSONS.—Any person, other than a øcontract market¿

registered entity, aggrieved by a deficiency order issued under

subsection (b)(4), may obtain review of such deficiency order

when issued by the Commission under the terms and conditions in section 6(b).

(2) øCONTRACT MARKETS¿ REGISTERED ENTITIES.—Any øcontract market¿ registered entity that has petitioned the Commission to rescind, modify, or delay any proposed deficiency order

issued under subsection (b) may obtain judicial review of any

final such deficiency order only in the United States Court of

Appeals for the circuit in which the party seeking review resides or has its principal place of business, or in the United

States Court of Appeals for the District of Columbia Circuit,

under the standards applicable to rulemaking proceedings

under section 553 of title 5, United States Code.

SEC. 9. (a) It shall be a felony punishable by a fine of not more than $1,000,000 (or $500,000 in the case of a person who is an individual) or imprisonment for not more than five years, or both, together with the costs of prosecution, for:

(1) * * *

(2) Any person to manipulate or attempt to manipulate the

price of any commodity in interstate commerce, or for future

delivery on or subject to the rules of any øcontract market¿

registered entity, or to corner or attempt to corner any such

commodity or knowingly to deliver or cause to be delivered for

transmission through the mails or interstate commerce by telegraph, telephone, wireless, or other means of communication

false or misleading or knowingly inaccurate reports concerning

crop or market information or conditions that affect or tend to

affect the price of any commodity in interstate commerce, or

knowingly to violate the provisions of section 4, section 4b, subsections (a) through (e) of subsection 4c, section 4h, section

ø4o(1)¿ 4n(1), or section 19.

(3) Any person knowingly to make, or cause to be made, any

statement in any application, report, or document required to

be filed under this Act or any rule or regulation thereunder or

any undertaking contained in a registration statement required under this Act, or by any øcontract market¿ registered

entity or registered futures association in connection with an

application for membership or participation therein or to become associated with a member thereof, which statement was

false or misleading with respect to any material fact, or knowVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00162 Fmt 6659 Sfmt 6601 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
163

ingly to omit any material fact required to be stated therein or

necessary to make the statements therein not misleading.

(4) Any person willfully to falsify, conceal, or cover up by any

trick, scheme, or artifice a material fact, make any false, fictitious, or fraudulent statements or representations, or make or

use any false writing or document knowing the same to contain

any false, fictitious, or fraudulent statement or entry to a øcontract market¿ registered entity, board of trade, or futures association designated or registered under this Act acting in furtherance of its official duties under this Act.

* * * * * * *

(f) It shall be a felony for any person—

(1) who is an employee, member of the governing board, or

member of any committee of a board of trade, øcontract market¿ registered entity, or registered futures association, in violation of a regulation issued by the Commission, willfully and

knowingly to trade for such person’s own account, or for or on

behalf of any other account, in contracts for future delivery or

options thereon on the basis of, or willfully and knowingly to

disclose for any purpose inconsistent with the performance of

such person’s official duties as an employee or member, any

material nonpublic information obtained through special access

related to the performance of such duties.

(2) willfully and knowingly to trade for such person’s own account, or for or on behalf of any other account, in contracts for

future delivery or options thereon on the basis of any material

nonpublic information that such person knows was obtained in

violation of paragraph (1) from an employee, member of the

governing board, or member of any committee of a board of

trade, øcontract market¿ registered entity, or registered futures

association.

Such felony shall be punishable by a fine of not more than

$500,000, plus the amount of any profits realized from such trading

or disclosure made in violation of this subsection, or imprisonment

for not more than five years, or both, together with the costs of

prosecution.

* * * * * * *

SEC. 12. (a)***

* * * * * * *

(d) There are authorized to be appropriated such sums as are

necessary to carry out this Act for each of fiscal years 1995 through

ø2000¿ 2005.

(e) Nothing in this Act shall supersede or preempt—

(1) criminal prosecution under any Federal criminal statute;

ø(2) the application of any Federal or State statute, including

any rule or regulation thereunder, to any transaction in or involving any commodity, product, right, service, or interest (A)

that is not conducted on or subject to the rules of a contract

market, or, in the case of any State or local law that prohibits

or regulates gaming or the operation of ‘‘bucket shops’’ (other

than antifraud provisions of general applicability), that is not

a transaction or class of transactions that has received or is

covered by the terms of any exemption previously granted by

164

the Commission under subsection (c) of section 4 of this Act,

or (B) (except as otherwise specified by the Commission by rule

or regulation) that is not conducted on or subject to the rules

of any board of trade, exchange, or market located outside the

United States, its territories or possessions, or (C) that is not

subject to regulation by the Commission under section 4c or 19

of this Act; or¿

(2) the application of any Federal or State law (including any

regulation) to an agreement, contract, or transaction in or involving any commodity, product, right, service, or interest, except that this Act shall supersede and preempt—

(A) in the case of any such agreement, contract, or

transaction—

(i) that is conducted on or subject to the rules of a

registered entity or exempt board of trade;

(ii) that is conducted on or subject to the rules of any

board of trade, exchange, or market located outside the

United States, or any territory or possession of the

United States (in accordance with any terms or conditions specified by the Commission by regulation); and

(iii) that is subject to regulation by the Commission

under section 4c or 19; and

(B) any State or local law that prohibits or regulates

gaming or the operation of bucket shops (other than antifraud provisions of general applicability) in the case of—

(i) an electronic trading facility under section 2(e); or

(ii) an agreement, contract, or transaction that is excluded or exempt under section 2(c), 2(d), 2(f), or 2(h)

or is covered by the terms of an exemption granted by

the Commission under section 4(c) (regardless of

whether any such agreement, contract, or transaction is

otherwise subject to this Act); or

* * * * * * *

SEC. 14. (a)(1) Any person complaining of any violation of any

provision of this Act, or any rule, regulation, or order issued pursuant to this Act, by any person who is registered under this Act

may, at any time within two years after the cause of action accrues, apply to the Commission for an order awarding—

(A) * * *

(B) in the case of any action arising from a willful and intentional violation in the execution of an order on the floor of a

øcontract market¿ registered entity, punitive or exemplary

damages equal to no more than two times the amount of such

actual damages. If an award of punitive or exemplary damages

is made against a floor broker in connection with the execution

of a customer order, and the futures commission merchant

which selected the floor broker for the execution of the customer order is held to be responsible under section 2(a)(1) for

the floor broker’s violation, such futures commission merchant

may be required to satisfy such award if the floor broker fails

to do so, except that such requirement shall apply to the futures commission merchant only if it willfully and intentionally

165

selected the floor broker with the intent to assist or facilitate

the floor broker’s violation.

* * * * * * *

(f) Unless the party against whom a reparation order has been

issued shows to the satisfaction of the Commission within fifteen

days from the expiration of the period allowed for compliance with

such order that either an appeal as herein authorized has been

taken or payment of the full amount of the order (or any agreed

settlement thereof) has been made, such party shall be prohibited

automatically from trading on all øcontract markets¿ registered entities and, if the party is registered with the Commission, such registration shall be suspended automatically at the expiration of such

fifteen-day period until such party shows to the satisfaction of the

Commission that payment of such amount with interest thereon to

date of payment has been made: Provided, That if on appeal the

appellee prevails or if the appeal is dismissed, the automatic prohibition against trading and suspension of registration shall become

effective at the expiration of thirty days from the date of judgment

on the appeal, but if the judgment is stayed by a court of competent jurisdiction, the suspension shall become effective ten days

after the expiration of such stay, unless prior thereto the judgment

of the court has been satisfied.

ø(g) The provisions of this section shall not become effective until

fifteen months after the date of its enactment: Provided, That

claims which arise within one year immediately prior to the effective date of this section may be heard by the Commission after

such 15-month period.¿

(g) PREDISPUTE RESOLUTION AGREEMENTS FOR INSTITUTIONAL

CUSTOMERS.—Nothing in this section prohibits a registered futures

commission merchant from requiring a customer that is an eligible

contract participant, as a condition to the commission merchant’s

conducting a transaction for the customer, to enter into an agreement waiving the right to file a claim under this section.

øSEC. 15. The Commission¿

SEC. 15. CONSIDERATION OF COSTS AND BENEFITS AND ANTITRUST

LAWS.

(a) COSTS AND BENEFITS.—

(1) IN GENERAL.—Before promulgating a regulation under

this Act or issuing an order (except as provided in paragraph

(3)), the Commission shall consider the costs and benefits of the

action of the Commission.

(2) CONSIDERATIONS.—The costs and benefits of the proposed

Commission action shall be evaluated in light of—

(A) considerations of protection of market participants

and the public;

(B) considerations of the efficiency, competitiveness, and

financial integrity of futures markets;

(C) considerations of price discovery;

(D) considerations of sound risk management practices;

and

(E) other public interest considerations.

(3) APPLICABILITY.—This subsection does not apply to the following actions of the Commission:

166

(A) An order that initiates, is part of, or is the result of

an adjudicatory or investigative process of the Commission.

(B) An emergency action.

(C) A finding of fact regarding compliance with a requirement of the Commission.

(b) ANTITRUST LAWS.—The Commission shall take into consideration the public interest to be protected by the antitrust laws and

endeavor to take the least anticompetitive means of achieving the

objectives of this Act, as well as the policies and purposes of this

Act, in issuing any order or adopting any Commission rule or regulation (including any exemption under section 4(c) or 4c(b)), or in

requiring or approving any bylaw, rule, or regulation of a contract

market or registered futures association established pursuant to

section 17 of this Act.

* * * * * * *

SEC. 17. (a)***

(b) An applicant association shall not be registered as a futures

association unless the Commission finds, under standards established by the Commission, that—

(1) * * *

(2) the rules of the association provide that any person registered under this Act, øcontract market¿ registered entity, or

any other person designated pursuant to the rules of the Commission as eligible for membership may become a member of

such association, except such as are excluded pursuant to paragraph (3) or (4) of this subsection, or a rule of the association

permitted under this paragraph. The rules of the association

may restrict membership in such association on such specified

basis relating to the type of business done by its members, or

on such other specified and appropriate basis, as appears to

the Commission to be necessary or appropriate in the public interest and to carry out the purpose of this section. Rules adopted by the association may provide that the association may,

unless the Commission directs otherwise in cases in which the

Commission finds it appropriate in the public interest so to direct, deny admission to, or refuse to continue in such association any person if (i) such person, whether prior of subsequent

to becoming registered as such, or (ii) any person associated

within the meaning of ‘‘associated person’’ as set forth in section 4k of this Act, whether prior or subsequent to becoming

so associated, has been and is suspended or expelled from a

øcontract market¿ registered entity or has been and is barred

or suspended from being associated with all members of such

øcontract market¿ registered entity, for violation of any rule of

such øcontract market¿ registered entity;

(3) the rules of the association provide that, except with the

approval or at the direction of the Commission in cases in

which the Commission finds it appropriate in the public interest so to approve or direct, no person shall be admitted to or

continued in membership in such association, if such person—

(A) has been and is suspended or expelled from a registered futures association or from a øcontract market¿

registered entity or has been and is barred or suspended

from being associated with all members of such association

or from being associated with all members of such øconVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00166 Fmt 6659 Sfmt 6602 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
167

tract market¿ registered entity, for violation of any rule of

such association or øcontract market¿ registered entity

which prohibits any act or transaction constituting conduct

inconsistent with just and equitable principles of trade, or

requires any act the omission of which constitutes conduct

inconsistent with just and equitable principles of trade;

(B) is subject to an order of the Commission denying,

suspending, or revoking his registration pursuant to section 6(c) of this Act, or expelling or suspending him from

membership in a registered futures association or a øcontract market¿ registered entity, or barring or suspending

him from being associated with a futures commission merchant;

(C) whether prior or subsequent to becoming a member,

by his conduct while associated with a member, was a

cause of any suspension, expulsion, or order of the character described in clause (A) or (B) which is in effect with

respect to such member, and in entering such a suspension, expulsion, or order, the Commission or any such

øcontract market¿ registered entity or association shall

have jurisdiction to determine whether or not any person

was a cause thereof; or

* * * * * * *

(10) the rules of the association provide a fair, equitable, and

expeditious procedure through arbitration or otherwise for the

settlement of customers’ claims and grievances against any

member or employee thereof: Provided, That (A) the use of

such procedure by a customer shall be voluntary, (B) the term

‘‘customer’’ as used in this paragraph shall not include another

member of the association, and (C) in the case of a claim arising from a violation in the execution of an order on the floor

of a øcontract market¿ registered entity, such procedure shall

provide, to the extent appropriate—

(i) * * *

* * * * * * *

(o)(1) The Commission may require any futures association registered pursuant to this section to perform any portion of the registration functions under this Act with respect to each member of

the association other than a øcontract market¿ registered entity

and with respect to each associated person of such member, in accordance with rules, notwithstanding any other provision of law,

adopted by such futures association and submitted to the Commission pursuant to section 17(j) of this Act, and subject to the provisions of this Act applicable to registrations granted by the Commission.

* * * * * * *

(q)(1) The Commission shall issue regulations requiring each registered futures association to establish and make available to the

public a schedule of major violations of any rule within the disciplinary jurisdiction of such registered futures association.

(2) The regulations issued by the Commission pursuant to this

subsection shall prohibit, for a period of time to be determined by

the Commission, any member of a registered futures association

168

who is found to have committed any major violation from service

on the governing board of any registered futures association or

øcontract market¿ registered entity, or on any disciplinary committee thereof.

* * * * * * *

SEC. 22. (a)(1) Any person (other than a øcontract market, clearing organization of a contract market, licensed board of trade,¿ registered entity or registered futures association) who violates this

Act or who willfully aids, abets, counsels, induces, or procures the

commission of a violation of this Act shall be liable for actual damages resulting from one or more of the transactions referred to in

subparagraphs (A) through (D) of this paragraph and caused by

such violation to any other person—

(A) * * *

* * * * * * *

(C) who purchased from or sold to such person or placed

through such person an order for the purchase or sale of—

(i) an option subject to section 4c of this Act (other than

an option purchased or sold on a øcontract market¿ registered entity or other board of trade);

* * * * * * *

(2) Except as provided in subsection (b), the rights of action authorized by this subsection and by sections ø5a(11),¿ 5(d)(13),

5b(b)(1)(E), 14, and 17(b)(10) of this Act shall be the exclusive remedies under this Act available to any person who sustains loss as

a result of any alleged violation of this Act. Nothing in this subsection shall limit or abridge the rights of the parties to agree in

advance of a dispute upon any forum for resolving claims under

this section, including arbitration.

(3) In any action arising from a violation in the execution of an

order on the floor of a øcontract market¿ registered entity, the person referred to in paragraph (1) shall be liable for—

(A) * * *

(4) CONTRACT ENFORCEMENT BETWEEN ELIGIBLE

COUNTERPARTIES.—

(A) IN GENERAL.—No agreement, contract, or transaction involving a party described in subclauses (I) through (VI) of section 2(c)(2)(B)(ii) or between eligible contract participants shall

be void, voidable, or unenforceable, and no such counterparty or

eligible contract participant shall be entitled to rescind, or recover any payment made with respect to, such an agreement,

contract, or transaction, under this section or any other provision of Federal or State law based solely on the failure of the

agreement, contract, or transaction to comply with the terms or

conditions of an exemption or exclusion from any provision of

this Act or regulations of the Commission.

(B) EXCEPTION.—This paragraph shall not apply to any swap

agreement (as defined in section 206(b) of the Gramm-LeachBliley Act) with any party who is not an eligible contract participant unless such swap agreement is entered into after final

regulations have been prescribed under section 49 of the Federal Deposit Insurance Act.

169

(b)(1)(A) A øcontract market or clearing organization of a contract market¿ registered entity that fails to enforce any bylaw, rule,

regulation, or resolution that it is required to enforce by øsection

5a(8) and section 5a(9) of this Act¿ sections 5 through 5c, (B) a licensed board of trade that fails to enforce any bylaw, rule, regulation, or resolution that it is required to enforce by the Commission,

or (C) any øcontract market, clearing organization of a contract

market, or licensed board of trade¿ registered entity that in enforcing any such bylaw, rule, regulation, or resolution violates this Act

or any Commission rule, regulation, or order, shall be liable for actual damages sustained by a person who engaged in any transaction on or subject to the rules of such øcontract market or licensed board of trade¿ registered entity to the extent of such person’s actual losses that resulted from such transaction and were

caused by such failure to enforce or enforcement of such bylaws,

rules, regulations, or resolutions.

* * * * * * *

(3) Any individual who, in the capacity as an officer, director,

governor, committee member, or employee of øa contract market,

clearing organization, licensed board of trade,¿ registered entity or

a registered futures association willfully aids, abets, counsels, induces, or procures any failure by any such entity to enforce (or any

violation of the Act in enforcing) any bylaw, rule, regulation, or resolution referred to in paragraph (1) or (2) of this subsection, shall

be liable for actual damages sustained by a person who engaged in

any transaction specified in subsection (a) of this section on, or subject to the rules of, such øcontract market, licensed board of trade¿

registered entity or, in the case of an officer, director, governor,

committee member, or employee of a registered futures association,

any transaction specified in subsection (a) of this section, in either

case to the extent of such person’s actual losses that resulted from

such transaction and were caused by such failure or violation.

(4) A person seeking to enforce liability under this section must

establish that the øcontract market, licensed board of trade, clearing organization¿ registered entity, registered futures association,

officer, director, governor, committee member, or employee acted in

bad faith in failing to take action or in taking such action as was

taken, and that such failure or action caused the loss.

(5) The rights of action authorized by this subsection shall be the

exclusive remedy under this Act available to any person who sustains a loss as a result of (A) the alleged failure by a øcontract

market, licensed board of trade, clearing organization,¿ registered

entity or registered futures association or by any officer, director,

governor, committee member, or employee to enforce any bylaw,

rule, regulation, or resolution referred to in paragraph (1) or (2) of

this subsection, or (B) the taking of action in enforcing any bylaw,

rule, regulation, or resolution referred to in this subsection that is

alleged to have violated this Act, or any Commission rule, regulation, or order.

* * * * * * *

FEDERAL DEPOSIT INSURANCE CORPORATION

IMPROVEMENT ACT OF 1991

* * * * * * *

170

TITLE IV—MISCELLANEOUS

PROVISIONS

Subtitle A—Payment System Risk

Reduction

CHAPTER 1—BILATERAL AND CLEARING ORGANIZATION

NETTING

* * * * * * *

SEC. 402. DEFINITIONS.

For purposes of this øsubtitle¿ chapter—

(1) * * *

* * * * * * *

(2) CLEARING ORGANIZATION.—The term ‘‘clearing organization’’ means a clearinghouse, clearing association, clearing corporation, or similar organization—

(A) that provides clearing, netting, or settlement services

for its members and—

(i) in which all members other than the clearing organization itself are financial institutions or other

clearing organizations; or

(ii) which is registered as a clearing agency under

the Securities Exchange Act of 1934 or exempt from

such registration pursuant to an order of the Securities

and Exchange Commission; or

ø(B) that performs clearing functions for a contract market designated pursuant to the Commodity Exchange Act.¿

(B) that is registered as a derivatives clearing organization under section 5b of the Commodity Exchange Act or

that has been granted an exemption pursuant to section

4(c)(1) of such Act.

* * * * * * *

(6) DEPOSITORY INSTITUTION.—The term ‘‘depository institution’’ means—

(A) a depository institution as defined in section

19(b)(1)(A) of the Federal Reserve Act (other than clause

(vii));

ø(B) a branch or agency as defined in section 1(b) of the

International Banking Act of 1978;¿

(B) an uninsured national bank or an uninsured State

bank that is a member of the Federal Reserve System if the

national bank or State member bank is not eligible to make

application to become an insured bank under section 5 of

the Federal Deposit Insurance Act;

(C) a branch or agency of a foreign bank, a foreign bank

and any branch or agency of the foreign bank, or the foreign bank that established the branch or agency, as those

terms are defined in section 1(b) of the International Banking Act of 1978;

ø(C)¿ (D) a corporation chartered under section 25(a) of

the Federal Reserve Act; or

171

ø(D)¿ (E) a corporation having an agreement or undertaking with the Board of Governors of the Federal Reserve

System under section 25 of the Federal Reserve Act.

* * * * * * *

(11) MEMBER.—The term ‘‘member’’ means a member of or

participant in a clearing organization, and includes the clearing organization and any other clearing organization with

which such clearing organization has a netting contract.

* * * * * * *

(14) NETTING CONTRACT.—

(A) IN GENERAL.—The term ‘‘netting contract’’—

ø(i) means a contract or agreement between 2 or

more financial institutions or members, that—

ø(I) is governed by the laws of the United

States, any State, or any political subdivision of

any State, and

ø(II) provides for netting present or future payment obligations or payment entitlements (including liquidation or close-out values relating to the

obligations or entitlements) among the parties to

the agreement; and¿

(i) means a contract or agreement between two or

more financial institutions, clearing organizations, or

members that provides for netting present or future

payment obligations or payment entitlements (including liquidation or closeout values relating to such obligations or entitlements) among the parties to the agreement; and

* * * * * * *

(15) PAYMENT.—The term ‘‘payment’’ means a payment of

United States dollars, another currency, or a composite currency, and a noncash delivery, including a payment or delivery

to liquidate an unmatured obligation.

* * * * * * *

SEC. 403. BILATERAL NETTING.

ø(a) GENERAL RULE.—Notwithstanding any other provision of

law, the covered contractual payment obligations and the covered

contractual payment entitlements between any 2 financial institutions shall be netted in accordance with, and subject to the conditions of, the terms of any applicable netting contract.¿

(a) GENERAL RULE.—Notwithstanding any other provision of

State or Federal law (other than paragraphs (8)(E), (8)(F), and

(10)(B) of section 11(e) of the Federal Deposit Insurance Act or any

order authorized under section 5(b)(2) of the Securities Investor Protection Act of 1970), the covered contractual payment obligations

and the covered contractual payment entitlements between any two

financial institutions shall be netted in accordance with, and subject to the conditions of, the terms of any applicable netting contract

(except as provided in section 561(b)(2) of title 11, United States

Code).

* * * * * * *

172

(f) ENFORCEABILITY OF SECURITY AGREEMENTS.—The provisions

of any security agreement or arrangement or other credit enhancement related to 1 or more netting contracts between any two financial institutions shall be enforceable in accordance with their terms

(except as provided in section 561(b)(2) of title 11, United States

Code) and shall not be stayed, avoided, or otherwise limited by any

State or Federal law (other than paragraphs (8)(E), (8)(F), and

(10)(B) of section 11(e) of the Federal Deposit Insurance Act and section 5(b)(2) of the Securities Investor Protection Act of 1970).

SEC. 404. CLEARING ORGANIZATION NETTING.

ø(a) GENERAL NETTING RULE.—Notwithstanding any other provision of law, the covered contractual payment obligations and covered contractual payment entitlements of a member of a clearing

organization to and from all other members of a clearing organization shall be netted in accordance with and subject to the conditions of any applicable netting contract.¿

(a) GENERAL RULE.—Notwithstanding any other provision of

State or Federal law (other than paragraphs (8)(E), (8)(F), and

(10)(B) of section 11(e) of the Federal Deposit Insurance Act and any

order authorized under section 5(b)(2) of the Securities Investor Protection Act of 1970), the covered contractual payment obligations

and the covered contractual payment entitlements of a member of a

clearing organization to and from all other members of a clearing

organization shall be netted in accordance with and subject to the

conditions of any applicable netting contract (except as provided in

section 561(b)(2) of title 11, United States Code).

* * * * * * *

(h) ENFORCEABILITY OF SECURITY AGREEMENTS.—The provisions

of any security agreement or arrangement or other credit enhancement related to 1 or more netting contracts between any two members of a clearing organization shall be enforceable in accordance

with their terms (except as provided in section 561(b)(2) of title 11,

United States Code) and shall not be stayed, avoided, or otherwise

limited by any State or Federal law (other than paragraphs (8)(E),

(8)(F), and (10)(B) of section 11(e) of the Federal Deposit Insurance

Act and section 5(b)(2) of the Securities Investor Protection Act of

1970).

* * * * * * *

SEC. 407. TREATMENT OF CONTRACTS WITH UNINSURED NATIONAL

BANKS AND UNINSURED FEDERAL BRANCHES AND AGENCIES.

(a) IN GENERAL.—Notwithstanding any other provision of law,

paragraphs (8), (9), (10), and (11) of section 11(e) of the Federal Deposit Insurance Act shall apply to an uninsured national bank or

uninsured Federal branch or Federal agency except—

(1) any reference to the ‘‘Corporation as receiver’’ or ‘‘the receiver or the Corporation’’ shall refer to the receiver of an uninsured national bank or uninsured Federal branch or Federal

agency appointed by the Comptroller of the Currency;

(2) any reference to the ‘‘Corporation’’ (other than in section

11(e)(8)(D) of such Act), the ‘‘Corporation, whether acting as

such or as conservator or receiver’’, a ‘‘receiver’’, or a ‘‘conservator’’ shall refer to the receiver or conservator of an uninsured

173

national bank or uninsured Federal branch or Federal agency

appointed by the Comptroller of the Currency; and

(3) any reference to an ‘‘insured depository institution’’ or ‘‘depository institution’’ shall refer to an uninsured national bank

or an uninsured Federal branch or Federal agency.

(b) LIABILITY.—The liability of a receiver or conservator of an uninsured national bank or uninsured Federal branch or agency shall

be determined in the same manner and subject to the same limitations that apply to receivers and conservators of insured depository

institutions under section 11(e) of the Federal Deposit Insurance

Act.

(c) REGULATORY AUTHORITY.— (1) IN GENERAL.—The Comptroller of the Currency, in consultation with the Federal Deposit Insurance Corporation, may

promulgate regulations to implement this section.

(2) SPECIFIC REQUIREMENT.—In promulgating regulations to

implement this section, the Comptroller of the Currency shall

ensure that the regulations generally are consistent with the

regulations and policies of the Federal Deposit Insurance Corporation adopted pursuant to the Federal Deposit Insurance

Act.

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

branch’’, ‘‘Federal agency’’, and ‘‘foreign bank’’ have the same meaning as in section 1(b) of the International Banking Act.

SEC. ø407.¿ 407A. NATIONAL EMERGENCIES.

The provisions of this subtitle may not be construed to limit the

authority of the President under the Trading With the Enemy Act

(50 U.S.C. App. 1 et seq.) or the International Emergency Economic

Powers Act (50 U.S.C. 1701 et seq.).

* * * * * * *

CHAPTER 2—MULTILATERAL CLEARING

ORGANIZATIONS

SEC. 408. DEFINITIONS.

For purposes of this chapter, the following definitions shall apply:

(1) MULTILATERAL CLEARING ORGANIZATION.—The term ‘‘multilateral clearing organization’’ means a system utilized by more

than 2 participants in which the bilateral credit exposures of

participants arising from the transactions cleared are effectively

eliminated and replaced by a system of guarantees, insurance,

or mutualized risk of loss.

(2) OVER-THE-COUNTER DERIVATIVE INSTRUMENT.—The term

‘‘over-the-counter derivative instrument’’ means—

(A) any agreement, contract, or transaction, including the

terms and conditions incorporated by reference in any such

agreement, contract, or transaction, which is an interest

rate swap, option, or forward agreement, including a rate

floor, rate cap, rate collar, cross-currency rate swap, basis

swap, and forward rate agreement; a spot, same day-tomorrow, tomorrow-next, forward, or other foreign exchange or

precious metals agreement; a currency swap, option, or forward agreement; an equity index or equity swap, option, or

forward agreement; a debt index or debt swap, option, or

forward agreement; a credit spread or credit swap, option,

174

or forward agreement; a commodity index or commodity

swap, option, or forward agreement; and a weather swap,

weather derivative, or weather option;

(B) any agreement, contract or transaction similar to any

other agreement, contract, or transaction referred to in this

clause that is presently, or in the future becomes, regularly

entered into by parties that participate in swap transactions (including terms and conditions incorporated by

reference in such agreement) and that is a forward, swap,

or option on 1 or more occurrences of any event, rates, currencies, commodities, equity securities or other equity instruments, debt securities or other debt instruments, economic or other indices or measures of economic or other

risk or value;

(C) any contract of sale of a commodity for future delivery or commodity option described in subsection (c), (d), (f),

(h), or (i) of section 2 of the Commodity Exchange Act or

exempted under section 4(c) of such Act; and

(D) any option to enter into any, or any combination of,

agreements, contracts or transactions referred to in this

subparagraph.

(3) OTHER DEFINITIONS.—The terms ‘‘State member bank’’

and ‘‘affiliate’’ have the meanings given the terms in section 3

of the Federal Deposit Insurance Act.

SEC. 409. MULTILATERAL CLEARING ORGANIZATIONS.

(a) IN GENERAL.—Except with respect to clearing organizations

described in subsection (b), no person may operate a multilateral

clearing organization for over-the-counter derivative instruments, or

otherwise engage in activities that constitute such a multilateral

clearing organization unless the person is a national bank, State

member bank, an affiliate of a national bank or a State member

bank, or a corporation chartered under section 25A of the Federal

Reserve Act.

(b) CLEARING ORGANIZATIONS.—Subsection (a) shall not apply to

any clearing organization that—

(1) is registered as a clearing agency under the Securities Exchange Act of 1934;

(2) performs clearing functions for a contract market designated pursuant to the Commodity Exchange Act; or

(3) is supervised by a foreign financial regulator that an appropriate Federal financial regulatory agency has determined

satisfies appropriate standards.

* * * * * * *

FEDERAL RESERVE ACT

* * * * * * *

STATE BANKS AS MEMBERS.

SEC. 9. Any bank incorporated by special law of any State, or organized under the general laws of any State or of the United

States, including Morris Plan banks and other incorporated banking institutions engaged in similar business, desiring to become a

175

member of the Federal Reserve System, may make application to

the Board of Governors of the Federal Reserve System, under such

rules and regulations as it may prescribe, for the right to subscribe

to the stock of the Federal reserve bank organized within the district in which the applying bank is located. Such application shall

be for the same amount of stock that the applying bank would be

required to subscribe to as a national bank. For the purposes of

membership of any such bank the terms ‘‘capital’’ and ‘‘capital

stock’’ shall include the amount of outstanding capital notes and

debentures legally issued by the applying bank and purchased by

the Reconstruction Finance Corporation. The Board of Governors of

the Federal Reserve System, subject to the provisions of this Act

and to such conditions as it may prescribe pursuant thereto may

permit the applying bank to become a stockholder of such Federal

reserve bank.

* * * * * * *

(24) ENFORCEMENT AUTHORITY.—Section 3(u), subsections (j)

and (k) of section 7, subsections (b) through (n), (s), (u), and (v)

of section 8, and section 19 of the Federal Deposit Insurance Act

shall apply to a State member bank which is not an insured depository institution (as defined in section 3 of the Federal Deposit Insurance Act) in the same manner and to the same extent

as such provisions apply to State member insured banks, and

any reference in such sections to an insured depository institution shall be deemed to include a reference to any such noninsured State member bank.

* * * * * * *

SEC. 9B. RESOLUTION OF CLEARING BANKS.

(a) CONSERVATORSHIP OR RECEIVERSHIP.— (1) APPOINTMENT.—The Board may appoint a conservator or

receiver to take possession and control of any uninsured State

member bank which operates, or operates as, a multilateral

clearing organization pursuant to section 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991 to the

same extent and in the same manner as the Comptroller of the

Currency may appoint a conservator or receiver for a national

bank.

(2) POWERS.—The conservator or receiver for an uninsured

State member bank referred to in paragraph (1) shall exercise

the same powers, functions, and duties, subject to the same limitations, as a conservator or receiver for a national bank.

(b) BOARD AUTHORITY.—The Board shall have the same authority

with respect to any conservator or receiver appointed under subsection (a), and the uninsured State member bank for which the

conservator or receiver has been appointed, as the Comptroller of the

Currency has with respect to a conservator or receiver for a national

bank and the national bank for which the conservator or receiver

has been appointed.

(c) BANKRUPTCY PROCEEDINGS.—The Board (in the case of an uninsured State member bank which operates, or operates as, such a

multilateral clearing organization) may direct a conservator or receiver appointed for such bank to file a petition pursuant to title 11,

United States Code, in which case, title 11, United States Code,

176

shall apply to such bank in lieu of otherwise applicable Federal or

State insolvency law.

* * * * * * *

BANKING CORPORATIONS AUTHORIZED TO DO FOREIGN BANKING

BUSINESS

SEC. 25A. Corporations to be organized for the purpose of engaging in international or foreign banking or other international or

foreign financial operations, or in banking or other financial operations in a dependency or insular possession of the United States,

either directly or through the agency, ownership, or control of local

institutions in foreign countries, or in such dependencies or insular

possessions as provided by this section, and to act when required

by the Secretary of the Treasury as fiscal agents of the United

States, may be formed by any number of natural persons, not less

in any case than five: Provided, That nothing in this section shall

be construed to deny the right of the Secretary of the Treasury to

use any corporation organized under this section as depositaries in

Panama and the Panama Canal Zone, or in the Philippine Islands

and other insular possessions and dependencies of the United

States.

* * * * * * *

øWhenever the Board of Governors of the Federal Reserve System shall become satisfied of the insolvency of any such corporation, it may appoint a receiver who shall take possession of all of

the property and assets of the corporation and exercise the same

rights, privileges, powers, and authority with respect thereto as are

now exercised by receivers of national banks appointed by the

Comptroller of the Currency of the United States: Provided, however, That the assets of the corporation subject to the laws of other

countries or jurisdictions shall be dealt with in accordance with the

terms of such laws.¿

(16) APPOINTMENT OF RECEIVER OR CONSERVATOR.—

(A) IN GENERAL.—The Board may appoint a conservator

or receiver for a corporation organized under the provisions

of this section to the same extent and in the same manner

as the Comptroller of the Currency may appoint a conservator or receiver for a national bank, and the conservator

or receiver for such corporation shall exercise the same

powers, functions, and duties, subject to the same limitations, as a conservator or receiver for a national bank.

(B) EQUIVALENT AUTHORITY.—The Board shall have the

same authority with respect to any conservator or receiver

appointed for a corporation organized under the provisions

of this section under this paragraph and any such corporation as the Comptroller of the Currency has with respect to

a conservator or receiver of a national bank and the national bank for which a conservator or receiver has been

appointed.

(C) TITLE 11 PETITIONS.—The Board may direct the conservator or receiver of a corporation organized under the

provisions of this section to file a petition pursuant to title

11, United States Code, in which case, title 11, United

177

States Code, shall apply to the corporation in lieu of otherwise applicable Federal or State insolvency law.

* * * * * * *

TITLE 11, UNITED STATES CODE

* * * * * * *

CHAPTER 1—GENERAL PROVISIONS

* * * * * * *

§ 101. Definitions

In this title—

(1) * * *

* * * * * * *

ø(22) ‘‘financial institution’’ means a person that is a commercial or savings bank, industrial savings bank, savings and

loan association, or trust company and, when any such person

is acting as agent or custodian for a customer in connection

with a securities contract, as defined in section 741 of this

title, such customer;¿

(22) the term ‘‘financial institution’’—

(A) means a Federal reserve bank or an entity (domestic

or foreign) that is a commercial or savings bank, industrial

savings bank, savings and loan association, trust company,

a bank or a corporation organized under section 25A of the

Federal Reserve Act and, when any such bank or entity is

acting as agent or custodian for a customer in connection

with a securities contract, as defined in section 741, such

customer; and

(B) includes any person described in subparagraph (A)

which operates, or operates as, a multilateral clearing organization pursuant to section 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991;

(22A) ‘‘financial participant’’ means an entity that, at the

time it enters into a securities contract, commodity contract or

forward contract, or at the time of the filing of the petition, has

1 or more agreements or transactions described in paragraph

(1), (2), (3), (4), (5), or (6) of section 561(a) with the debtor or

any other entity (other than an affiliate) of a total gross dollar

value of at least $1,000,000,000 in notional or actual principal

amount outstanding on any day during the previous 15-month

period, or has gross mark-to-market positions of at least

$100,000,000 (aggregated across counterparties) in 1 or more

such agreement or transaction with the debtor or any other entity (other than an affiliate) on any day during the previous 15-

month period;

* * * * * * *

(25) ‘‘forward contract’’ ømeans a contract¿ means—

(A) a contract (other than a commodity contract) for the

purchase, sale, or transfer of a commodity, as defined in

section 761(8) of this title, or any similar good, article,

service, right, or interest which is presently or in the fuVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00177 Fmt 6659 Sfmt 6601 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
178

ture becomes the subject of dealing in the forward contract

trade, or product or byproduct thereof, with a maturity

date more than two days after the date the contract is entered into, including, but not limited to, a repurchase

transaction, reverse repurchase transaction, consignment,

lease, swap, hedge transaction, deposit, loan, option, allocated transaction, unallocated transactionø, or any combination thereof or option thereon;¿, or any other similar

agreement;

(B) any combination of agreements or transactions referred to in subparagraphs (A) and (C);

(C) any option to enter into an agreement or transaction

referred to in subparagraph (A) or (B);

(D) a master agreement that provides for an agreement

or transaction referred to in subparagraph (A), (B), or (C),

together with all supplements to any such master agreement, without regard to whether such master agreement

provides for an agreement or transaction that is not a forward contract under this paragraph, except that such master agreement shall be considered to be a forward contract

under this paragraph only with respect to each agreement

or transaction under such master agreement that is referred to in subparagraph (A), (B) or (C); or

(E) any security agreement or arrangement, or other credit enhancement related to any agreement or transaction referred to in subparagraph (A), (B), (C), or (D), but not to

exceed the actual value of such contract on the date of the

filing of the petition;

ø(26) ‘‘forward contract merchant’’ means a person whose

business consists in whole or in part of entering into forward

contracts as or with merchants in a commodity, as defined in

section 761(8) of this title, or any similar good, article, service,

right, or interest which is presently or in the future becomes

the subject of dealing in the forward contract trade;¿

(26) ‘‘forward contract merchant’’ means a Federal reserve

bank, or an entity whose business consists in whole or in part

of entering into forward contracts as or with merchants or in

a commodity, as defined or in section 761, or any similar good,

article, service, right, or interest which is presently or in the future becomes the subject of dealing or in the forward contract

trade;

* * * * * * *

(38A) ‘‘master netting agreement’’ means an agreement providing for the exercise of rights, including rights of netting,

setoff, liquidation, termination, acceleration, or closeout, under

or in connection with 1 or more contracts that are described in

any 1 or more of paragraphs (1) through (5) of section 561(a),

or any security agreement or arrangement or other credit enhancement related to 1 or more of the foregoing. If a master netting agreement contains provisions relating to agreements or

transactions that are not contracts described in paragraphs (1)

through (5) of section 561(a), the master netting agreement

shall be deemed to be a master netting agreement only with respect to those agreements or transactions that are described in

179

any 1 or more of the paragraphs (1) through (5) of section

561(a);

(38B) ‘‘master netting agreement participant’’ means an entity

that, at any time before the filing of the petition, is a party to

an outstanding master netting agreement with the debtor;

* * * * * * *

(46) ‘‘repo participant’’ means an entity that, øon any day

during the period beginning 90 days before the date of¿ at any

time before the filing of the petition, has an outstanding repurchase agreement with the debtor;

ø(47) ‘‘repurchase agreement’’ (which definition also applies

to a reverse repurchase agreement) means an agreement, including related terms, which provides for the transfer of certificates of deposit, eligible bankers’ acceptances, or securities that

are direct obligations of, or that are fully guaranteed as to

principal and interest by, the United States or any agency of

the United States against the transfer of funds by the transferee of such certificates of deposit, eligible bankers’ acceptances, or securities with a simultaneous agreement by such

transferee to transfer to the transferor thereof certificates of

deposit, eligible bankers’ acceptances, or securities as described

above, at a date certain not later than one year after such

transfers or on demand, against the transfer of funds;¿

(47) ‘‘repurchase agreement’’ (which definition also applies to

a ‘‘reverse repurchase agreement’’)—

(A) means—

(i) an agreement, including related terms, which provides for the transfer of 1 or more certificates of deposit, mortgage-related securities (as defined in the Securities Exchange Act of 1934), mortgage loans, interests in mortgage-related securities or mortgage loans,

eligible bankers’ acceptances, qualified foreign government securities, or securities that are direct obligations

of, or that are fully guaranteed by, the United States

or any agency of the United States against the transfer

of funds by the transferee of such certificates of deposit,

eligible bankers’ acceptances, securities, loans, or interests, with a simultaneous agreement by such transferee

to transfer to the transferor thereof certificates of deposit, eligible bankers’ acceptance, securities, loans, or

interests of the kind described above, at a date certain

not later than 1 year after such transfer or on demand,

against the transfer of funds;

(ii) any combination of agreements or transactions

referred to in clauses (i) and (iii);

(iii) an option to enter into an agreement or transaction referred to in clause (i) or (ii);

(iv) a master agreement that provides for an agreement or transaction referred to in clause (i), (ii), or

(iii), together with all supplements to any such master

agreement, without regard to whether such master

agreement provides for an agreement or transaction

that is not a repurchase agreement under this paragraph, except that such master agreement shall be considered to be a repurchase agreement under this paraVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00179 Fmt 6659 Sfmt 6603 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
180

graph only with respect to each agreement or transaction under the master agreement that is referred to

in clause (i), (ii), or (iii); or

(v) any security agreement or arrangement or other

credit enhancement related to any agreement or transaction referred to in clause (i), (ii), (iii), or (iv), but not

to exceed the actual value of such contract on the date

of the filing of the petition; and

(B) does not include a repurchase obligation under a participation in a commercial mortgage loan,

and, for purposes of this paragraph, the term ‘‘qualified foreign

government security’’ means a security that is a direct obligation of, or that is fully guaranteed by, the central government

of a member of the Organization for Economic Cooperation and

Development;

(48) ‘‘securities clearing agency’’ means person that is registered as a clearing agency under section 17A of the Securities

Exchange Act of 1934 or exempt from such registration under

such section pursuant to an order of the Securities and Exchange Commission or whose business is confined to the performance of functions of a clearing agency with respect to exempted securities, as defined in section 3(a)(12) of such Act for

the purposes of such section 17A;

* * * * * * *

ø(53B) ‘‘swap agreement’’ means—

ø(A) an agreement (including terms and conditions incorporated by reference therein) which is a rate swap agreement, basis swap, forward rate agreement, commodity

swap, interest rate option, forward foreign exchange agreement, spot foreign exchange agreement, rate cap agreement, rate floor agreement, rate collar agreement, currency swap agreement, cross-currency rate swap agreement, currency option, any other similar agreement (including any option to enter into any of the foregoing);

ø(B) any combination of the foregoing; or

ø(C) a master agreement for any of the foregoing together with all supplements;¿

(53B) ‘‘swap agreement’’—

(A) means—

(i) any agreement, including the terms and conditions incorporated by reference in such agreement,

which is an interest rate swap, option, future, or forward agreement, including a rate floor, rate cap, rate

collar, cross-currency rate swap, and basis swap; a

spot, same day-tomorrow, tomorrow-next, forward, or

other foreign exchange or precious metals agreement; a

currency swap, option, future, or forward agreement;

an equity index or an equity swap, option, future, or

forward agreement; a debt index or a debt swap, option, future, or forward agreement; a credit spread or

a credit swap, option, future, or forward agreement; a

commodity index or a commodity swap, option, future,

or forward agreement; or a weather swap, weather derivative, or weather option;

181

(ii) any agreement or transaction similar to any

other agreement or transaction referred to in this paragraph that—

(I) is presently, or in the future becomes, regularly entered into in the swap market (including

terms and conditions incorporated by reference

therein); and

(II) is a forward, swap, future, or option on 1 or

more rates, currencies, commodities, equity securities, or other equity instruments, debt securities or

other debt instruments, or economic indices or

measures of economic risk or value;

(iii) any combination of agreements or transactions

referred to in this paragraph;

(iv) any option to enter into an agreement or transaction referred to in this paragraph;

(v) a master agreement that provides for an agreement or transaction referred to in clause (i), (ii), (iii),

or (iv), together with all supplements to any such master agreement, and without regard to whether the master agreement contains an agreement or transaction

that is not a swap agreement under this paragraph, except that the master agreement shall be considered to

be a swap agreement under this paragraph only with

respect to each agreement or transaction under the

master agreement that is referred to in clause (i), (ii),

(iii), or (iv); or

(B) any security agreement or arrangement or other credit enhancement related to any agreements or transactions

referred to in subparagraph (A), but not to exceed the actual value of such contract on the date of the filing of the

petition; and

(C) is applicable for purposes of this title only and shall

not be construed or applied so as to challenge or affect the

characterization, definition, or treatment of any swap

agreement under any other statute, regulation, or rule, including the Securities Act of 1933, the Securities Exchange

Act of 1934, the Public Utility Holding Company Act of

1935, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the

Securities Investor Protection Act of 1970, the Commodity

Exchange Act, and the regulations prescribed by the Securities and Exchange Commission or the Commodity Futures

Trading Commission.

* * * * * * *

(54A) the term ‘‘uninsured State member bank’’ means a State

member bank (as defined in section 3 of the Federal Deposit Insurance Act) the deposits of which are not insured by the Federal Deposit Insurance Corporation; and

* * * * * * *

182

§ 103. Applicability of chapters

(a) * * *

* * * * * * *

(e) SCOPE OF APPLICATION.—Subchapter V of chapter 7 of this

title shall apply only in a case under such chapter concerning the

liquidation of an uninsured State member bank, or a corporation

organized under section 25A of the Federal Reserve Act, which operates, or operates as, a multilateral clearing organization pursuant

to section 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991.

ø(e)¿ (f) Except as provided in section 901 of this title, only chapters 1 and 9 of this title apply in a case under such chapter 9.

ø(f)¿ (g) Except as provided in section 901 of this title, subchapters I, II, and III of chapter 11 of this title apply only in a case

under such chapter.

ø(g)¿ (h) Subchapter IV of chapter 11 of this title applies only in

a case under such chapter concerning a railroad.

ø(h)¿ (i) Chapter 13 of this title applies only in a case under such

chapter.

ø(i)¿ (j) Chapter 12 of this title applies only in a case under such

chapter.

* * * * * * *

§ 109. Who may be a debtor

(a) * * *

(b) A person may be a debtor under chapter 7 of this title only

if such person is not—

(1) a railroad;

(2) a domestic insurance company, bank, savings bank, cooperative bank, savings and loan association, building and loan

association, homestead association, a small business investment company licensed by the Small Business Administration

under subsection (c) or (d) of section 301 of the Small Business

Investment Act of 1958, credit union, or industrial bank or

similar institution which is an insured bank as defined in section 3(h) of the Federal Deposit Insurance Actø; or¿, except that

an uninsured State member bank, or a corporation organized

under section 25A of the Federal Reserve Act, which operates,

or operates as, a multilateral clearing organization pursuant to

section 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991 may be a debtor if a petition is filed at

the direction of the Board of Governors of the Federal Reserve

System; or

* * * * * * *

ø(d) Only a person that may be a debtor under chapter 7 of this

title, except a stockbroker or a commodity broker, and a railroad

may be a debtor under chapter 11 of this title.¿

(d) Only a railroad, a person that may be a debtor under chapter

7 of this title (except a stockbroker or a commodity broker), and an

uninsured State member bank, or a corporation organized under

section 25A of the Federal Reserve Act, which operates, or operates

as, a multilateral clearing organization pursuant to section 409 of

183

the Federal Deposit Insurance Corporation Improvement Act of 1991

may be a debtor under chapter 11 of this title.

* * * * * * *

CHAPTER 3—CASE ADMINISTRATION

* * * * * * *

SUBCHAPTER I—COMMENCEMENT OF A CASE

* * * * * * *

§ 304. Cases ancillary to foreign proceedings

(a) * * *

* * * * * * *

(d) Any provisions of this title relating to securities contracts,

commodity contracts, forward contracts, repurchase agreements,

swap agreements, or master netting agreements shall apply in a

case ancillary to a foreign proceeding under this section or any

other section of this title so that enforcement of contractual provisions of such contracts and agreements in accordance with their

terms will not be stayed or otherwise limited by operation of any

provision of this title or by order of a court in any proceeding under

this title, and to limit avoidance powers to the same extent as in a

proceeding under chapter 7 or 11 (such enforcement not to be limited based on the presence or absence of assets of the debtor in the

United States).

SUBCHAPTER IV—ADMINISTRATIVE POWERS

* * * * * * *

§ 362. Automatic stay

(a) * * *

* * * * * * *

(b) The filing of a petition under section 301, 302, or 303 of this

title, or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970, does not operate as a stay—

(1) * * *

* * * * * * *

(6) under subsection (a) of this section, of the setoff by a commodity broker, forward contract merchant, stockbroker, øfinancial institutions,¿ financial institution, financial participant or

securities clearing agency of any mutual debt and claim under

or in connection with commodity contracts, as defined in section 761 of this title, forward contracts, or securities contracts,

as defined in section 741 of this title, that constitutes the setoff

of a claim against the debtor for a margin payment, as defined

in section 101, 741, or 761 of this title, or settlement payment,

as defined in section 101 or 741 of this title, arising out of commodity contracts, forward contracts, or securities contracts

against cash, securities, or other property held by, pledged to

and under the control of, or due from such commodity broker,

forward contract merchant, stockbroker, øfinancial institutions,¿ financial institution, financial participant or securities

184

clearing agency to margin, guarantee, secure, or settle commodity contracts, forward contracts, or securities contracts;

(7) under subsection (a) of this section, of the setoff by a repo

participant, of any mutual debt and claim under or in connection with repurchase agreements that constitutes the setoff of

a claim against the debtor for a margin payment, as defined

in section 741 or 761 of this title, or settlement payment, as

defined in section 741 of this title, arising out of repurchase

agreements against cash, securities, or other property held by,

pledged to and under the control of, or due from such repo participant to margin, guarantee, secure or settle repurchase

agreements;

* * * * * * *

ø(17) under subsection (a) of this section, of the setoff by a

swap participant, of any mutual debt and claim under or in

connection with any swap agreement that constitutes the setoff

of a claim against the debtor for any payment due from the

debtor under or in connection with any swap agreement

against any payment due to the debtor from the swap participant under or in connection with any swap agreement or

against cash, securities, or other property of the debtor held by

or due from such swap participant to guarantee, secure or settle any swap agreement; or¿

(17) under subsection (a), of the setoff by a swap participant

of a mutual debt and claim under or in connection with 1 or

more swap agreements that constitutes the setoff of a claim

against the debtor for any payment or other transfer of property

due from the debtor under or in connection with any swap

agreement against any payment due to the debtor from the

swap participant under or in connection with any swap agreement or against cash, securities, or other property held by,

pledged to and under the control of, or due from such swap participant to margin, guarantee, secure, or settle any swap agreement;

(18) under subsection (a) of the creation or perfection of a

statutory lien for an ad valorem property tax imposed by the

District of Columbia, or a political subdivision of a State, if

such tax comes due after the filing of the petitionƒ.≈; or

(19) under subsection (a), of the setoff by a master netting

agreement participant of a mutual debt and claim under or in

connection with 1 or more master netting agreements or any

contract or agreement subject to such agreements that constitutes the setoff of a claim against the debtor for any payment

or other transfer of property due from the debtor under or in

connection with such agreements or any contract or agreement

subject to such agreements against any payment due to the

debtor from such master netting agreement participant under or

in connection with such agreements or any contract or agreement subject to such agreements or against cash, securities, or

other property held by, pledged to and under the control of, or

due from such master netting agreement participant to margin,

guarantee, secure, or settle such agreements or any contract or

agreement subject to such agreements, to the extent such participant is eligible to exercise such offset rights under paragraph

185

(6), (7), or (17) for each individual contract covered by the master netting agreement in issue.

* * * * * * *

(i) LIMITATION.—The exercise of rights not subject to the stay arising under subsection (a) pursuant to paragraph (6), (7), or (17), or

(32) of subsection (b) shall not be stayed by any order of a court or

administrative agency in any proceeding under this title.

* * * * * * *

CHAPTER 5—CREDITORS, THE DEBTOR, AND THE

ESTATE

* * * * * * *

SUBCHAPTER III—THE ESTATE

541. Property of the estate.

* * * * * * *

ø555. Contractual right to liquidate a securities contract.

ø556. Contractual right to liquidate a commodity contract or forward contract.¿

555. Contractual right to liquidate, terminate, or accelerate a securities contract.

556. Contractual right to liquidate, terminate, or accelerate a commodities contract

or forward contract.

* * * * * * *

ø559. Contractual right to liquidate a repurchase agreement.

ø560. Contractual right to terminate a swap agreement.¿

559. Contractual right to liquidate, terminate, or accelerate a repurchase agreement.

560. Contractual right to liquidate, terminate, or accelerate a swap agreement.

561. Contractual right to terminate, liquidate, accelerate, or offset under a master

netting agreement and across contracts.

562. Damage measure in connection with swap agreements, securities contracts, forward contracts, commodity contracts, repurchase agreements, or master

netting agreements.

* * * * * * *

SUBCHAPTER I—CREDITORS AND CLAIMS

* * * * * * *

§ 502. Allowance of claims or interests

(a) * * *

* * * * * * *

(g)(1) A claim arising from the rejection, under section 365 of this

title or under a plan under chapter 9, 11, 12, or 13 of this title,

of an executory contract or unexpired lease of the debtor that has

not been assumed shall be determined, and shall be allowed under

subsection (a), (b), or (c) of this section or disallowed under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing of the petition.

(2) A claim for damages calculated in accordance with section 562

shall be allowed under subsection (a), (b), or (c), or disallowed

under subsection (d) or (e), as if such claim had arisen before the

date of the filing of the petition.

* * * * * * *

186

SUBCHAPTER III—THE ESTATE

§ 541. Property of the estate

(a) * * *

* * * * * * *

(b) Property of the estate does not include—

(1) * * *

* * * * * * *

(4) any interest of the debtor in liquid or gaseous hydrocarbons to the extent that—

(A) * * *

* * * * * * *

(B)(i) * * *

(ii) but for the operation of this paragraph, the estate

could include the interest referred to in clause (i) only by

virtue of section 542 of this title; øor¿

(5) any eligible asset (or proceeds thereof), to the extent that

such eligible asset was transferred by the debtor before the date

of commencement of the case, to an eligible entity in connection

with an asset-backed securitization, except to the extent such

asset (or proceeds or value thereof) may be recovered by the

trustee under section 550 by virtue of avoidance under section

548(a)(1); or

ø(5)¿ (6) any interest in cash or cash equivalents that constitute proceeds of a sale by the debtor of a money order that

is made—

(A) * * *

* * * * * * *

(e) For purposes of this section, the following definitions shall

apply:

(1) the term ‘‘asset-backed securitization’’ means a transaction

in which eligible assets transferred to an eligible entity are used

as the source of payment on securities, including all securities

issued by governmental units, at least 1 class or tranche of

which is rated investment grade by 1 or more nationally recognized securities rating organizations, when the securities are

initially issued by an issuer;

(2) the term ‘‘eligible asset’’ means—

(A) financial assets (including interests therein and proceeds thereof), either fixed or revolving, whether or not such

assets are in existence as of the date of the transfer, including residential and commercial mortgage loans, consumer

receivables, trade receivables, assets of governmental units

(including payment obligations relating to taxes, receipts,

fines, tickets, and other sources of revenue), and lease receivables, that, by their terms, convert into cash within a

finite time period, plus any residual interest in property

subject to receivables included in such financial assets plus

any rights or other assets designed to assure the servicing

or timely distribution of proceeds to security holders;

(B) cash; and

(C) securities, including all securities issued by governmental units.

187

(3) the term ‘‘eligible entity’’ means—

(A) an issuer; or

(B) a trust, corporation, partnership, governmental unit,

limited liability company (including a single member limited liability company), or other entity engaged exclusively

in the business of acquiring and transferring eligible assets

directly or indirectly to an issuer and taking actions ancillary thereto;

(4) the term ‘‘issuer’’ means a trust, corporation, partnership,

governmental unit, limited liability company (including a single member limited liability company), or other entity engaged

exclusively in the business of acquiring and holding eligible assets, issuing securities backed by eligible assets, and taking actions ancillary thereto; and

(5) the term ‘‘transferred’’ means the debtor, pursuant to a

written agreement, represented and warranted that eligible assets were sold, contributed, or otherwise conveyed with the intention of removing them from the estate of the debtor pursuant

to subsection (b)(5) (whether or not reference is made to this

title or any section of this title), irrespective, without limitation,

of—

(A) whether the debtor directly or indirectly obtained or

held an interest in the issuer or in any securities issued by

the issuer;

(B) whether the debtor had an obligation to repurchase

or to service or supervise the servicing of all or any portion

of such eligible assets; or

(C) the characterization of such sale, contribution, or

other conveyance for tax, accounting, regulatory reporting,

or other purposes.

* * * * * * *

§ 546. Limitations on avoiding powers

(a) * * *

* * * * * * *

(e) Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and

548(b) of this title, the trustee may not avoid a transfer that is a

margin payment, as defined in section 101, 741, or 761 of this title,

or settlement payment, as defined in section 101 or 741 of this

title, made by or to a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or

securities clearing agency, that is made before the commencement

of the case, except under section 548(a)(1)(A) of this title.

* * * * * * *

(g) Notwithstanding sections 544, 545, 547, 548(a)(1)(B) and

548(b) of this title, the trustee may not avoid a transfer øunder a

swap agreement¿, made by or to a swap participant, øin connection

with a swap agreement¿ under or in connection with any swap

agreement and that is made before the commencement of the case,

except under section 548(a)(1)(A) of this title.

* * * * * * *

(j) Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and

548(b), the trustee may not avoid a transfer made by or to a master

188

netting agreement participant under or in connection with any master netting agreement or any individual contract covered thereby

that is made before the commencement of the case, except under section 548(a)(1)(A), and except to the extent the trustee could otherwise

avoid such a transfer made under an individual contract covered by

such master netting agreement.

* * * * * * *

§ 548. Fraudulent transfers and obligations

(a) * * *

* * * * * * *

(d)(1) * * *

(2) In this section—

(A) * * *

(B) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities

clearing agency that receives a margin payment, as defined in

section 101, 741, or 761 of this title, or settlement payment, as

defined in section 101 or 741 of this title, takes for value to the

extent of such payment;

(C) a repo participant that receives a margin payment, as defined in section 741 or 761 of this title, or settlement payment,

as defined in section 741 of this title, in connection with a repurchase agreement, takes for value to the extent of such payment; øand¿

(D) a swap participant that receives a transfer in connection

with a swap agreement takes for value to the extent of such

transferø.¿; and

(E) a master netting agreement participant that receives a

transfer in connection with a master netting agreement or any

individual contract covered thereby takes for value to the extent

of such transfer, except, with respect to a transfer under any individual contract covered thereby, to the extent such master netting agreement participant otherwise did not take (or is otherwise not deemed to have taken) such transfer for value.

* * * * * * *

§ 553. Setoff

(a) Except as otherwise provided in this section and in sections

362 and 363 of this title, this title does not affect any right of a

creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title

against a claim of such creditor against the debtor that arose before the commencement of the case, except to the extent that—

(1) * * *

* * * * * * *

(3) the debt owed to the debtor by such creditor was incurred

by such creditor—

(A) * * *

* * * * * * *

(C) for the purpose of obtaining a right of setoff against

the debtor (except for a setoff of a kind described in section

189

362(b)(6), 362(b)(7), 362(b)(17), 362(b)(32), 555, 556, 559,

560 or 561).

(b)(1) Except with respect to a setoff of a kind described in section 362(b)(6), 362(b)(7), ø362(b)(14)¿ 362(b)(17), 362(b)(32), 555,

556, 559, 560, 561, 365(h), 546(h), or 365(i)(2) of this title, if a creditor offsets a mutual debt owing to the debtor against a claim

against the debtor on or within 90 days before the date of the filing

of the petition, then the trustee may recover from such creditor the

amount so offset to the extent that any insufficiency on the date

of such setoff is less than the insufficiency on the later of—

(A) * * *

* * * * * * *

ø§ 555. Contractual right to liquidate a securities contract¿

§ 555. Contractual right to liquidate, terminate, or accelerate

a securities contract

The exercise of a contractual right of a stockbroker, financial institution, financial participant, or securities clearing agency to

cause the øliquidation¿ liquidation, termination, or acceleration of

a securities contract, as defined in section 741 of this title, because

of a condition of the kind specified in section 365(e)(1) of this title

shall not be stayed, avoided, or otherwise limited by operation of

any provision of this title or by order of a court or administrative

agency in any proceeding under this title unless such order is authorized under the provisions of the Securities Investor Protection

Act of 1970 or any statute administered by the Securities and Exchange Commission. As used in this section, the term ‘‘contractual

right’’ includes a right set forth in a rule or bylaw of a national securities exchange, a national securities association, or a securities

clearing agency, a right set forth in a bylaw of a clearing organization or contract market or in a resolution of the governing board

thereof, and a right, whether or not in writing, arising under common law, under law merchant, or by reason of normal business

practice.

ø§ 556. Contractual right to liquidate a commodities contract

or forward contract¿

§ 556. Contractual right to liquidate, terminate, or accelerate

a commodities contract or forward contract

The contractual right of a commodity broker, financial participant or forward contract merchant to cause the øliquidation¿ liquidation, termination, or acceleration of a commodity contract, as

defined in section 761 of this title, or forward contract because of

a condition of the kind specified in section 365(e)(1) of this title,

and the right to a variation or maintenance margin payment received from a trustee with respect to open commodity contracts or

forward contracts, shall not be stayed, avoided, or otherwise limited by operation of any provision of this title or by the order of

a court in any proceeding under this title. As used in this section,

the term ‘‘contractual right’’ includes a right set forth in a rule or

bylaw of a clearing organization or contract market or in a resolution of the governing board thereof and a right, whether or not eviVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00189 Fmt 6659 Sfmt 6602 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
190

denced in writing, arising under common law, under law merchant

or by reason of normal business practice.

* * * * * * *

ø§ 559. Contractual right to liquidate a repurchase agreement¿

§ 559. Contractual right to liquidate, terminate, or accelerate

a repurchase agreement

The exercise of a contractual right of a repo participant to cause

the øliquidation¿ liquidation, termination, or acceleration of a repurchase agreement because of a condition of the kind specified in

section 365(e)(1) of this title shall not be stayed, avoided, or otherwise limited by operation of any provision of this title or by order

of a court or administrative agency in any proceeding under this

title, unless, where the debtor is a stockbroker or securities clearing agency, such order is authorized under the provisions of the Securities Investor Protection Act of 1970 or any statute administered

by the Securities and Exchange Commission. In the event that a

repo participant liquidates one or more repurchase agreements

with a debtor and under the terms of one or more such agreements

has agreed to deliver assets subject to repurchase agreements to

the debtor, any excess of the market prices received on liquidation

of such assets (or if any such assets are not disposed of on the date

of liquidation of such repurchase agreements, at the prices available at the time of liquidation of such repurchase agreements from

a generally recognized source or the most recent closing bid

quotation from such a source) over the sum of the stated repurchase prices and all expenses in connection with the liquidation of

such repurchase agreements shall be deemed property of the estate, subject to the available rights of setoff. As used in this section, the term ‘‘contractual right’’ includes a right set forth in a

rule or bylaw, applicable to each party to the repurchase agreement, of a national securities exchange, a national securities association, or a securities clearing agency, and a right, whether or not

evidenced in writing, arising under common law, under law merchant or by reason of normal business practice.

ø§ 560. Contractual right to terminate a swap agreement¿

§ 560. Contractual right to liquidate, terminate, or accelerate

a swap agreement

The exercise of any contractual right of any swap participant to

cause the øtermination of a swap agreement¿ liquidation, termination, or acceleration of 1 or more swap agreements because of a

condition of the kind specified in section 365(e)(1) of this title or

to offset or net out any termination values or payment amounts

arising under or øin connection with any swap agreement¿ in connection with the termination, liquidation, or acceleration of 1 or

more swap agreements shall not be stayed, avoided, or otherwise

limited by operation of any provision of this title or by order of a

court or administrative agency in any proceeding under this title.

As used in this section, the term ‘‘contractual right’’ includes a

right, whether or not evidenced in writing, arising under common

law, under law merchant, or by reason of normal business practice.

191

§ 561. Contractual right to terminate, liquidate, accelerate,

or offset under a master netting agreement and

across contracts

(a) IN GENERAL.—Subject to subsection (b), the exercise of any

contractual right, because of a condition of the kind specified in section 365(e)(1), to cause the termination, liquidation, or acceleration

of or to offset or net termination values, payment amounts or other

transfer obligations arising under or in connection with 1 or more

(or the termination, liquidation, or acceleration of 1 or more)—

(1) securities contracts, as defined in section 741(7);

(2) commodity contracts, as defined in section 761(4);

(3) forward contracts;

(4) repurchase agreements;

(5) swap agreements; or

(6) master netting agreements,

shall not be stayed, avoided, or otherwise limited by operation of

any provision of this title or by any order of a court or administrative agency in any proceeding under this title.

(b) EXCEPTION.— (1) A party may exercise a contractual right described in subsection (a) to terminate, liquidate, or accelerate only to the extent that such party could exercise such a right under section

555, 556, 559, or 560 for each individual contract covered by

the master netting agreement in issue.

(2) If a debtor is a commodity broker subject to subchapter IV

of chapter 7—

(A) a party may not net or offset an obligation to the

debtor arising under, or in connection with, a commodity

contract against any claim arising under, or in connection

with, other instruments, contracts, or agreements listed in

subsection (a), except to the extent the party has positive net

equity in the commodity accounts at the debtor, as calculated under such subchapter; and

(B) another commodity broker may not net or offset an

obligation to the debtor arising under, or in connection

with, a commodity contract entered into or held on behalf

of a customer of the debtor against any claim arising

under, or in connection with, other instruments, contracts,

or agreements listed in subsection (a).

(c) RULE OF APPLICATION.—Subparagraphs (A) and (B) of subsection (b)(2) shall not be construed as prohibiting the offset of

claims and obligations arising pursuant to—

(1) a cross-margining arrangement that has been approved by

the Commodity Futures Trading Commission or that has been

submitted to such Commission pursuant to section 5a(a)(12) of

the Commodity Exchange Act and has been permitted to go into

effect; or

(2) another netting arrangement, between a clearing organization (as defined in section 761) and another entity, that has

been approved by the Commodity Futures Trading Commission.

(d) DEFINITION.—As used in this section, the term ‘‘contractual

right’’ includes a right set forth in a rule or bylaw of a national securities exchange, a national securities association, or a securities

clearing agency, a right set forth in a bylaw of a clearing organization or contract market or in a resolution of the governing board

192

thereof, and a right, whether or not evidenced in writing, arising

under common law, under law merchant, or by reason of normal

business practice.

§ 562. Damage measure in connection with swap agreements,

securities contracts, forward contracts, commodity

contracts, repurchase agreements, or master netting agreements

If the trustee rejects a swap agreement, securities contract as defined in section 741, forward contract, commodity contract (as defined in section 761) repurchase agreement, or master netting agreement pursuant to section 365(a), or if a forward contract merchant,

stockbroker, financial institution, securities clearing agency, repo

participant, financial participant, master netting agreement participant, or swap participant liquidates, terminates, or accelerates such

contract or agreement, damages shall be measured as of the earlier

of—

(1) the date of such rejection; or

(2) the date of such liquidation, termination, or acceleration.

* * * * * * *

CHAPTER 7—LIQUIDATION

* * * * * * *

SUBCHAPTER III—STOCKBROKER LIQUIDATION

741. Definitions for this subchapter.

* * * * * * *

753. Stockbroker liquidation and forward contract merchants, commodity brokers,

stockbrokers, financial institutions, financial participants, securities

clearing agencies, swap participants, repo participants, and master netting agreement participants.

SUBCHAPTER IV—COMMODITY BROKER LIQUIDATION

* * * * * * *

767. Commodity broker liquidation and forward contract merchants, commodity brokers, stockbrokers, financial institutions, financial participants, securities clearing agencies, swap participants, repo participants, and master

netting agreement participants.

SUBCHAPTER V—CLEARING BANK LIQUIDATION

Sec.

781. Definitions.

782. Selection of trustee.

783. Additional powers of trustee.

784. Right to be heard.

* * * * * * *

SUBCHAPTER III—STOCKBROKER LIQUIDATION

§ 741. Definitions for this subchapter

In this subchapter—

(1) * * *

* * * * * * *

ø(7) ‘‘securities contract’’ means contract for the purchase,

sale, or loan of a security, including an option for the purchase

or sale of a security, certificate of deposit, or group or index of

securities (including any interest therein or based on the value

193

thereof), or any option entered into on a national securities exchange relating to foreign currencies, or the guarantee of any

settlement of cash or securities by or to a securities clearing

agency;¿

(7) ‘‘securities contract’’—

(A) means—

(i) a contract for the purchase, sale, or loan of a security, a certificate of deposit, a mortgage loan or any interest in a mortgage loan, a group or index of securities, certificates of deposit or mortgage loans or interests therein (including an interest therein or based on

the value thereof), or option on any of the foregoing, including an option to purchase or sell any such security,

certificate of deposit, loan, interest, group or index, or

option;

(ii) any option entered into on a national securities

exchange relating to foreign currencies;

(iii) the guarantee by or to any securities clearing

agency of a settlement of cash, securities, certificates of

deposit, mortgage loans or interests therein, group or

index of securities, or mortgage loans or interests therein (including any interest therein or based on the value

thereof), or option on any of the foregoing, including an

option to purchase or sell any such security, certificate

of deposit, loan, interest, group or index, or option;

(iv) any margin loan;

(v) any other agreement or transaction that is similar

to an agreement or transaction referred to in this paragraph;

(vi) any combination of the agreements or transactions referred to in this paragraph;

(vii) any option to enter into any agreement or transaction referred to in this paragraph;

(viii) a master agreement that provides for an agreement or transaction referred to in clause (i), (ii), (iii),

(iv), (v), (vi), or (vii), together with all supplements to

any such master agreement, without regard to whether

the master agreement provides for an agreement or

transaction that is not a securities contract under this

paragraph, except that such master agreement shall be

considered to be a securities contract under this paragraph only with respect to each agreement or transaction under such master agreement that is referred to

in clause (i), (ii), (iii), (iv), (v), (vi), or (vii); or

(ix) any security agreement or arrangement or other

credit enhancement related to any agreement or transaction referred to in this paragraph, but not to exceed

the actual value of such contract on the date of the filing of the petition; and

(B) does not include any purchase, sale, or repurchase obligation under a participation in a commercial mortgage

loan.

* * * * * * *

194

§ 753. Stockbroker liquidation and forward contract merchants, commodity brokers, stockbrokers, financial

institutions, financial participants, securities

clearing agencies, swap participants, repo participants, and master netting agreement participants

Notwithstanding any other provision of this title, the exercise of

rights by a forward contract merchant, commodity broker, stockbroker, financial institution, securities clearing agency, swap participant, repo participant, financial participant, or master netting

agreement participant under this title shall not affect the priority of

any unsecured claim it may have after the exercise of such rights.

SUBCHAPTER IV—COMMODITY BROKER LIQUIDATION

§ 761. Definitions for this subchapter

In this subchapter—

(1) * * *

* * * * * * *

(4) ‘‘commodity contract’’ means—

(A) * * *

* * * * * * *

(D) with respect to a clearing organization, contract for

the purchase or sale of a commodity for future delivery on,

or subject to the rules of, a contract market or board of

trade that is cleared by such clearing organization, or commodity option traded on, or subject to the rules of, a contract market or board of trade that is cleared by such

clearing organization; øor¿

* * * * * * *

(F) any other agreement or transaction that is similar to

an agreement or transaction referred to in this paragraph;

(G) any combination of the agreements or transactions referred to in this paragraph;

(H) any option to enter into an agreement or transaction

referred to in this paragraph;

(I) a master agreement that provides for an agreement or

transaction referred to in subparagraph (A), (B), (C), (D),

(E), (F), (G), or (H), together with all supplements to such

master agreement, without regard to whether the master

agreement provides for an agreement or transaction that is

not a commodity contract under this paragraph, except that

the master agreement shall be considered to be a commodity contract under this paragraph only with respect to

each agreement or transaction under the master agreement

that is referred to in subparagraph (A), (B), (C), (D), (E),

(F), (G), or (H); or

(J) any security agreement or arrangement or other credit

enhancement related to any agreement or transaction referred to in this paragraph, but not to exceed the actual

value of such contract on the date of the filing of the petition;

* * * * * * *

195

§ 767. Commodity broker liquidation and forward contract

merchants, commodity brokers, stockbrokers, financial institutions, financial participants, securities

clearing agencies, swap participants, repo participants, and master netting agreement participants

Notwithstanding any other provision of this title, the exercise of

rights by a forward contract merchant, commodity broker, stockbroker, financial institution, financial participant, securities clearing agency, swap participant, repo participant, or master netting

agreement participant under this title shall not affect the priority of

any unsecured claim it may have after the exercise of such rights.

SUBCHAPTER V—CLEARING BANK LIQUIDATION

§ 781. Definitions

For purposes of this subchapter, the following definitions shall

apply:

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

of the Federal Reserve System.

(2) DEPOSITORY INSTITUTION.—The term ‘‘depository institution’’ has the same meaning as in section 3 of the Federal Deposit Insurance Act, and includes any wholesale bank.

(3) CLEARING BANK.—The term ‘‘clearing bank’’ means an uninsured State member bank, or a corporation organized under

section 25A of the Federal Reserve Act, which operates, or operates as, a multilateral clearing organization pursuant to section

409 of the Federal Deposit Insurance Corporation Improvement

Act of 1991.

§ 782. Selection of trustee

(a) IN GENERAL.—

(1) APPOINTMENT.—Notwithstanding any other provision of

this title, the conservator or receiver who files the petition shall

be the trustee under this chapter, unless the Board designates

an alternative trustee.

(2) SUCCESSOR.—The Board may designate a successor trustee if required.

(b) AUTHORITY OF TRUSTEE.—Whenever the Board appoints or

designates a trustee, chapter 3 and sections 704 and 705 of this title

shall apply to the Board in the same way and to the same extent

that they apply to a United States trustee.

§ 783. Additional powers of trustee

(a) DISTRIBUTION OF PROPERTY NOT OF THE ESTATE.—The trustee

under this subchapter has power to distribute property not of the estate, including distributions to customers that are mandated by subchapters III and IV of this chapter.

(b) DISPOSITION OF INSTITUTION.—The trustee under this subchapter may, after notice and a hearing—

(1) sell the clearing bank to a depository institution or consortium of depository institutions (which consortium may agree on

the allocation of the clearing bank among the consortium);

(2) merge the clearing bank with a depository institution;

196

(3) transfer contracts to the same extent as could a receiver

for a depository institution under paragraphs (9) and (10) of

section 11(e) of the Federal Deposit Insurance Act;

(4) transfer assets or liabilities to a depository institution;

(5) transfer assets and liabilities to a bridge bank as provided

in paragraphs (1), (3)(A), (5), (6), of section 11(n) of the Federal

Deposit Insurance Act, paragraphs (9) through (13) of such section, and subparagraphs (A) through (H) and subparagraph (K)

of paragraph (4) of such section 11(n), except that—

(A) the bridge bank to which such assets or liabilities are

transferred shall be treated as a clearing bank for the purpose of this subsection; and

(B) any references in any such provision of law to the

Federal Deposit Insurance Corporation shall be construed

to be references to the appointing agency and that references to deposit insurance shall be omitted.

(c) CERTAIN TRANSFERS INCLUDED.—Any reference in this section

to transfers of liabilities includes a ratable transfer of liabilities

within a priority class.

§ 784. Right to be heard

The Board or a Federal reserve bank (in the case of a clearing

bank that is a member of that bank) may raise and may appear and

be heard on any issue in a case under this subchapter.

* * * * * * *

CHAPTER 9—ADJUSTMENT OF DEBTS OF A

MUNICIPALITY

* * * * * * *

§ 901. Applicability of other sections of this title

(a) Sections 301, 344, 347(b), 349, 350(b), 361, 362, 364(c), 364(d),

364(e), 364(f), 365, 366, 501, 502, 503, 504, 506, 507(a)(1), 509, 510,

524(a)(1), 524(a)(2), 544, 545, 546, 547, 548, 549(a), 549(c), 549(d),

550, 551, 552, 553, 555, 556, 557, 559, 560, 561, 562, 1102, 1103,

1109, 1111(b), 1122, 1123(a)(1), 1123(a)(2), 1123(a)(3), 1123(a)(4),

1123(a)(5), 1123(b), 1124, 1125, 1126(a), 1126(b), 1126(c), 1126(e),

1126(f), 1126(g), 1127(d), 1128, 1129(a)(2), 1129(a)(3), 1129(a)(6),

1129(a)(8), 1129(a)(10), 1129(b)(1), 1129(b)(2)(A), 1129(b)(2)(B),

1142(b), 1143, 1144, and 1145 of this title apply in a case under

this chapter.

* * * * * * *

FEDERAL DEPOSIT INSURANCE ACT

* * * * * * *

SEC. 11. (a) * * *

* * * * * * *

(e) PROVISIONS RELATING TO CONTRACTS ENTERED INTO BEFORE

APPOINTMENT OF CONSERVATOR OR RECEIVER.—

(1) * * *

* * * * * * *

197

(8) CERTAIN QUALIFIED FINANCIAL CONTRACTS.— (A) RIGHTS OF PARTIES TO CONTRACTS.—Subject to øparagraph (10)¿ paragraphs (9) and (10) of this subsection and

notwithstanding any other provision of this Act (other than

subsection (d)(9) of this section and section 13(e)), any

other Federal law, or the law of any State, no person shall

be stayed or prohibited from exercising—

(i) any right øto cause the termination or liquidation¿ such person has to cause the termination, liquidation, or acceleration of any qualified financial contract with an insured depository institution which

arises upon the appointment of the Corporation as receiver for such institution at any time after such appointment;

ø(ii) any right under any security arrangement relating to any contract or agreement described in clause

(i); or¿

(ii) any right under any security agreement or arrangement or other credit enhancement related to 1 or

more qualified financial contracts described in clause

(i);

* * * * * * *

(C) CERTAIN TRANSFERS NOT AVOIDABLE.— (i) IN GENERAL.—Notwithstanding paragraph ø(11)¿

(12), section 5242 of the Revised Statutes of the United

States (12 U.S.C. 91) or any other Federal or State law

relating to the avoidance of preferential or fraudulent

transfers, the Corporation, whether acting as such or

as conservator or receiver of an insured depository institution, may not avoid any transfer of money or

other property in connection with any qualified financial contract with an insured depository institution.

* * * * * * *

(D) CERTAIN CONTRACTS AND AGREEMENTS DEFINED.—

For purposes of this subsection—

(i) QUALIFIED FINANCIAL CONTRACT.—The term

‘‘qualified financial contract’’ means any securities contract, commodity contract, forward contract, repurchase agreement, swap agreement, and any similar

agreement that the Corporation determines by regulation, resolution or order to be a qualified financial contract for purposes of this paragraph.

ø(ii) SECURITIES CONTRACT.—The term ‘‘securities

contract’’—

ø(I) has the meaning given to such term in section 741 of title 11, United States Code, except

that the term ‘‘security’’ (as used in such section)

shall be deemed to include any mortgage loan, any

mortgage-related security (as defined in section

3(a)(41) of the Securities Exchange Act of 1934),

and any interest in any mortgage loan or mortgage-related security; and

ø(II) does not include any participation in a

commercial mortgage loan unless the Corporation

198

determines by regulation, resolution, or order to

include any such participation within the meaning

of such term.

ø(iii) COMMODITY CONTRACT.—The term ‘‘commodity

contract’’ has the meaning given to such term in section 761 of title 11, United States Code.

ø(iv) FORWARD CONTRACT.—The term ‘‘forward contract’’ has the meaning given to such term in section

101 of title 11, United States Code.

ø(v) REPURCHASE AGREEMENT.—The term ‘‘repurchase agreement’’—

ø(I) has the meaning given to such term in section 101 of title 11, the United States Code, except

that the items (as described in such section) which

may be subject to any such agreement shall be

deemed to include mortgage-related securities (as

such term is defined in section 3(a)(41) of the Securities Exchange Act of 1934), any mortgage

loan, and any interest in any mortgage loan; and

ø(II) does not include any participation in a

commercial mortgage loan unless the Corporation

determines by regulation, resolution, or order to

include any such participation within the meaning

of such term.

ø(vi) SWAP AGREEMENT.—The term ‘‘swap

agreement’’—

ø(I) means any agreement, including the terms

and conditions incorporated by reference in any

such agreement, which is a rate swap agreement,

basis swap, commodity swap, forward rate agreement, interest rate future, interest rate option

purchased, forward foreign exchange agreement,

rate cap agreement, rate floor agreement, rate collar agreement, currency swap agreement, crosscurrency rate swap agreement, currency future, or

currency option purchased or any other similar

agreement, and

ø(II) includes any combination of such agreements and any option to enter into any such

agreement.

ø(vii) TREATMENT OF MASTER AGREEMENT AS 1 SWAP

AGREEMENT.—Any master agreement for any agreements described in clause (vi)(I) together with all supplements to such master agreement shall be treated as

1 swap agreement.

ø(viii) TRANSFER.—The term ‘‘transfer’’ has the

meaning given to such term in section 101 of title 11,

United States Code.¿

(ii) SECURITIES CONTRACT.—The term ‘‘securities

contract’’—

(I) means a contract for the purchase, sale, or

loan of a security, a certificate of deposit, a mortgage loan, or any interest in a mortgage loan, a

group or index of securities, certificates of deposit,

or mortgage loans or interests therein (including

199

any interest therein or based on the value thereof)

or any option on any of the foregoing, including

any option to purchase or sell any such security,

certificate of deposit, loan, interest, group or index,

or option;

(II) does not include any purchase, sale, or repurchase obligation under a participation in a

commercial mortgage loan unless the Corporation

determines by regulation, resolution, or order to include any such agreement within the meaning of

such term;

(III) means any option entered into on a national

securities exchange relating to foreign currencies;

(IV) means the guarantee by or to any securities

clearing agency of any settlement of cash, securities, certificates of deposit, mortgage loans or interests therein, group or index of securities, certificates of deposit, or mortgage loans or interests

therein (including any interest therein or based on

the value thereof) or option on any of the foregoing,

including any option to purchase or sell any such

security, certificate of deposit, loan, interest, group

or index, or option;

(V) means any margin loan;

(VI) means any other agreement or transaction

that is similar to any agreement or transaction referred to in this clause;

(VII) means any combination of the agreements

or transactions referred to in this clause;

(VIII) means any option to enter into any agreement or transaction referred to in this clause;

(IX) means a master agreement that provides for

an agreement or transaction referred to in subclause (I), (III), (IV), (V), (VI), (VII), or (VIII), together with all supplements to any such master

agreement, without regard to whether the master

agreement provides for an agreement or transaction that is not a securities contract under this

clause, except that the master agreement shall be

considered to be a securities contract under this

clause only with respect to each agreement or

transaction under the master agreement that is referred to in subclause (I), (III), (IV), (V), (VI), (VII),

or (VIII); and

(X) means any security agreement or arrangement or other credit enhancement related to any

agreement or transaction referred to in this clause.

(iii) COMMODITY CONTRACT.—The term ‘‘commodity

contract’’ means—

(I) with respect to a futures commission merchant, a contract for the purchase or sale of a commodity for future delivery on, or subject to the

rules of, a contract market or board of trade;

(II) with respect to a foreign futures commission

merchant, a foreign future;

200

(III) with respect to a leverage transaction merchant, a leverage transaction;

(IV) with respect to a clearing organization, a

contract for the purchase or sale of a commodity

for future delivery on, or subject to the rules of, a

contract market or board of trade that is cleared

by such clearing organization, or commodity option traded on, or subject to the rules of, a contract

market or board of trade that is cleared by such

clearing organization;

(V) with respect to a commodity options dealer,

a commodity option;

(VI) any other agreement or transaction that is

similar to any agreement or transaction referred to

in this clause;

(VII) any combination of the agreements or

transactions referred to in this clause;

(VIII) any option to enter into any agreement or

transaction referred to in this clause;

(IX) a master agreement that provides for an

agreement or transaction referred to in subclause

(I), (II), (III), (IV), (V), (VI), (VII), or (VIII), together with all supplements to any such master

agreement, without regard to whether the master

agreement provides for an agreement or transaction that is not a commodity contract under this

clause, except that the master agreement shall be

considered to be a commodity contract under this

clause only with respect to each agreement or

transaction under the master agreement that is referred to in subclause (I), (II), (III), (IV), (V), (VI),

(VII), or (VIII); or

(X) any security agreement or arrangement or

other credit enhancement related to any agreement

or transaction referred to in this clause.

(iv) FORWARD CONTRACT.—The term ‘‘forward contract’’ means—

(I) a contract (other than a commodity contract)

for the purchase, sale, or transfer of a commodity

or any similar good, article, service, right, or interest which is presently or in the future becomes the

subject of dealing in the forward contract trade, or

product or byproduct thereof, with a maturity date

more than 2 days after the date the contract is entered into, including a repurchase transaction, reverse repurchase transaction, consignment, lease,

swap, hedge transaction, deposit, loan, option, allocated transaction, unallocated transaction, or

any other similar agreement;

(II) any combination of agreements or transactions referred to in subclauses (I) and (III);

(III) any option to enter into any agreement or

transaction referred to in subclause (I) or (II);

(IV) a master agreement that provides for an

agreement or transaction referred to in subclause

201

(I), (II), or (III), together with all supplements to

any such master agreement, without regard to

whether the master agreement provides for an

agreement or transaction that is not a forward

contract under this clause, except that the master

agreement shall be considered to be a forward contract under this clause only with respect to each

agreement or transaction under the master agreement that is referred to in subclause (I), (II), or

(III); or

(V) any security agreement or arrangement or

other credit enhancement related to any agreement

or transaction referred to in subclause (I), (II),

(III), or (IV).

(v) REPURCHASE AGREEMENT.—The term ‘‘repurchase

agreement’’ (which definition also applies to the term

‘‘reverse repurchase agreement’’)—

(I) means an agreement, including related terms,

which provides for the transfer of 1 or more certificates of deposit, mortgage-related securities (as

such term is defined in the Securities Exchange

Act of 1934), mortgage loans, interests in mortgage-related securities or mortgage loans, eligible

bankers’ acceptances, qualified foreign government

securities or securities that are direct obligations

of, or that are fully guaranteed by, the United

States or any agency of the United States against

the transfer of funds by the transferee of such certificates of deposit, eligible bankers’ acceptances,

securities, loans, or interests with a simultaneous

agreement by such transferee to transfer to the

transferor thereof certificates of deposit, eligible

bankers’ acceptances, securities, loans, or interests

as described above, at a date certain not later than

1 year after such transfers or on demand, against

the transfer of funds, or any other similar agreement;

(II) does not include any repurchase obligation

under a participation in a commercial mortgage

loan unless the Corporation determines by regulation, resolution, or order to include any such participation within the meaning of such term;

(III) means any combination of agreements or

transactions referred to in subclauses (I) and (IV);

(IV) means any option to enter into any agreement or transaction referred to in subclause (I) or

(III);

(V) means a master agreement that provides for

an agreement or transaction referred to in subclause (I), (III), or (IV), together with all supplements to any such master agreement, without regard to whether the master agreement provides for

an agreement or transaction that is not a repurchase agreement under this clause, except that the

master agreement shall be considered to be a reVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00201 Fmt 6659 Sfmt 6603 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
202

purchase agreement under this subclause only

with respect to each agreement or transaction

under the master agreement that is referred to in

subclause (I), (III), or (IV); and

(VI) means any security agreement or arrangement or other credit enhancement related to any

agreement or transaction referred to in subclause

(I), (III), (IV), or (V).

For purposes of this clause, the term ‘‘qualified foreign

government security’’ means a security that is a direct

obligation of, or that is fully guaranteed by, the central

government of a member of the Organization for Economic Cooperation and Development (as determined by

regulation or order adopted by the appropriate Federal

banking authority).

(vi) SWAP AGREEMENT.—The term ‘‘swap agreement’’

means—

(I) any agreement, including the terms and conditions incorporated by reference in any such

agreement, which is an interest rate swap, option,

future, or forward agreement, including a rate

floor, rate cap, rate collar, cross-currency rate

swap, and basis swap; a spot, same day-tomorrow,

tomorrow-next, forward, or other foreign exchange

or precious metals agreement; a currency swap, option, future, or forward agreement; an equity index

or equity swap, option, future, or forward agreement; a debt index or debt swap, option, future, or

forward agreement; a credit spread or credit swap,

option, future, or forward agreement; a commodity

index or commodity swap, option, future, or forward agreement; or a weather swap, weather derivative, or a weather option;

(II) any agreement or transaction similar to any

other agreement or transaction referred to in this

clause that is presently, or in the future becomes,

regularly entered into in the swap market (including terms and conditions incorporated by reference

in such agreement) and that is a forward, swap,

future, or option on 1 or more rates, currencies,

commodities, equity securities or other equity instruments, debt securities or other debt instruments, or economic indices or measures of economic risk or value;

(III) any combination of agreements or transactions referred to in this clause;

(IV) any option to enter into any agreement or

transaction referred to in this clause;

(V) a master agreement that provides for an

agreement or transaction referred to in subclause

(I), (II), (III), or (IV), together with all supplements

to any such master agreement, without regard to

whether the master agreement contains an agreement or transaction that is not a swap agreement

under this clause, except that the master agreeVerDate 11-MAY-2000 05:14 Sep 10, 2000 Jkt 066506 PO 00000 Frm 00202 Fmt 6659 Sfmt 6603 E:\HR\OC\HR711P2.XXX pfrm04 PsN: HR711P2
203

ment shall be considered to be a swap agreement

under this clause only with respect to each agreement or transaction under the master agreement

that is referred to in subclause (I), (II), (III), or

(IV); and

(VI) any security agreement or arrangement or

other credit enhancement related to any agreements or transactions referred to in subparagraph

(I), (II), (III), (IV), or (V).

Such term is applicable for purposes of this title only

and shall not be construed or applied so as to challenge or affect the characterization, definition, or treatment of any swap agreement under any other statute,

regulation, or rule, including the Securities Act of

1933, the Securities Exchange Act of 1934, the Public

Utility Holding Company Act of 1935, the Trust Indenture Act of 1939, the Investment Company Act of 1940,

the Investment Advisers Act of 1940, the Securities Investor Protection Act of 1970, the Commodity Exchange

Act, and the regulations promulgated by the Securities

and Exchange Commission or the Commodity Futures

Trading Commission.

(vii) TREATMENT OF MASTER AGREEMENT AS 1 AGREEMENT.—Any master agreement for any contract or

agreement described in any preceding clause of this

subparagraph (or any master agreement for such master agreement or agreements), together with all supplements to such master agreement, shall be treated as a

single agreement and a single qualified financial contract. If a master agreement contains provisions relating to agreements or transactions that are not themselves qualified financial contracts, the master agreement shall be deemed to be a qualified financial contract only with respect to those transactions that are

themselves qualified financial contracts.

(viii) TRANSFER.—The term ‘‘transfer’’ means every

mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with

property or with an interest in property, including retention of title as a security interest and foreclosure of

the depository institutions’s equity of redemption.

(E) CERTAIN PROTECTIONS IN EVENT OF APPOINTMENT OF

CONSERVATOR.—Notwithstanding any other provision of

this Act (øother than paragraph (12) of this subsection,

subsection (d)(9)¿ other than subsections (d)(9) and (e)(10)

of this section, and section 13(e) of this Act), any other

Federal law, or the law of any State, no person shall be

stayed or prohibited from exercising—

(i) any right such person has to cause the termination, liquidation, or acceleration of any qualified financial contract with a depository institution in a conservatorship based upon a default under such financial contract which is enforceable under applicable

noninsolvency law;

204

ø(ii) any right under any security arrangement relating to such qualified financial contracts; or¿

(ii) any right under any security agreement or arrangement or other credit enhancement related to 1 or

more qualified financial contracts described in clause

(i);

* * * * * * *

(F) CLARIFICATION.—No provision of law shall be construed as limiting the right or power of the Corporation, or

authorizing any court or agency to limit or delay, in any

manner, the right or power of the Corporation to transfer

any qualified financial contract in accordance with paragraphs (9) and (10) of this subsection or to disaffirm or repudiate any such contract in accordance with paragraph

(1).

(G) WALKAWAY CLAUSES NOT EFFECTIVE.— (i) IN GENERAL.—Notwithstanding the provisions of

subparagraphs (A) and (E), and sections 403 and 404

of the Federal Deposit Insurance Corporation Improvement Act of 1991, no walkaway clause shall be enforceable in a qualified financial contract of an insured depository institution in default.

(ii) WALKAWAY CLAUSE DEFINED.—For purposes of

this subparagraph, the term ‘‘walkaway clause’’ means

a provision in a qualified financial contract that, after

calculation of a value of a party’s position or an

amount due to or from 1 of the parties in accordance

with its terms upon termination, liquidation, or acceleration of the qualified financial contract, either does

not create a payment obligation of a party or extinguishes a payment obligation of a party in whole or in

part solely because of such party’s status as a nondefaulting party.

(H) RECORDKEEPING REQUIREMENTS.—The Corporation,

in consultation with the appropriate Federal banking agencies, may prescribe regulations requiring more detailed recordkeeping with respect to qualified financial contracts (including market valuations) by insured depository institutions.

ø(9) TRANSFER OF QUALIFIED FINANCIAL CONTRACTS.—In

making any transfer of assets or liabilities of a depository institution in default which includes any qualified financial contract, the conservator or receiver for such depository institution

shall either—

ø(A) transfer to 1 depository institution (other than a depository institution in default)—

ø(i) all qualified financial contracts between—

ø(I) any person or any affiliate of such person;

and

ø(II) the depository institution in default;

ø(ii) all claims of such person or any affiliate of such

person against such depository institution under any

such contract (other than any claim which, under the

terms of any such contract, is subordinated to the

205

claims of general unsecured creditors of such institution);

ø(iii) all claims of such depository institution against

such person or any affiliate of such person under any

such contract; and

ø(iv) all property securing any claim described in

clause (ii) or (iii) under any such contract; or

ø(B) transfer none of the financial contracts, claims, or

property referred to in subparagraph (A) (with respect to

such person and any affiliate of such person).¿

(9) TRANSFER OF QUALIFIED FINANCIAL CONTRACTS.— (A) IN GENERAL.—In making any transfer of assets or liabilities of a depository institution in default which includes any qualified financial contract, the conservator or

receiver for such depository institution shall either—

(i) transfer to 1 financial institution, other than a financial institution for which a conservator, receiver,

trustee in bankruptcy, or other legal custodian has

been appointed or which is otherwise the subject of a

bankruptcy or insolvency proceeding—

(I) all qualified financial contracts between any

person or any affiliate of such person and the depository institution in default;

(II) all claims of such person or any affiliate of

such person against such depository institution

under any such contract (other than any claim

which, under the terms of any such contract, is

subordinated to the claims of general unsecured

creditors of such institution);

(III) all claims of such depository institution

against such person or any affiliate of such person

under any such contract; and

(IV) all property securing or any other credit enhancement for any contract described in subclause

(I) or any claim described in subclause (II) or (III)

under any such contract; or

(ii) transfer none of the qualified financial contracts,

claims, property or other credit enhancement referred

to in clause (i) (with respect to such person and any affiliate of such person).

(B) TRANSFER TO FOREIGN BANK, FOREIGN FINANCIAL INSTITUTION, OR BRANCH OR AGENCY OF A FOREIGN BANK OR

FINANCIAL INSTITUTION.—In transferring any qualified financial contracts and related claims and property pursuant to subparagraph (A)(i), the conservator or receiver for

such depository institution shall not make such transfer to

a foreign bank, financial institution organized under the

laws of a foreign country, or a branch or agency of a foreign bank or financial institution unless, under the law applicable to such bank, financial institution, branch or agency, to the qualified financial contracts, and to any netting

contract, any security agreement or arrangement or other

credit enhancement related to 1 or more qualified financial

contracts, the contractual rights of the parties to such

qualified financial contracts, netting contracts, security

206

agreements or arrangements, or other credit enhancements

are enforceable substantially to the same extent as permitted under this section.

(C) TRANSFER OF CONTRACTS SUBJECT TO THE RULES OF

A CLEARING ORGANIZATION.—In the event that a conservator

or receiver transfers any qualified financial contract and

related claims, property and credit enhancements pursuant

to subparagraph (A)(i) and such contract is subject to the

rules of a clearing organization, the clearing organization

shall not be required to accept the transferee as a member

by virtue of the transfer.

(D) DEFINITION.—For purposes of this section, the term

‘‘financial institution’’ means a broker or dealer, a depository institution, a futures commission merchant, or any

other institution as determined by the Corporation by regulation to be a financial institution.

(10) NOTIFICATION OF TRANSFER.— (A) IN GENERAL.—If—

(i) the conservator or receiver for an insured depository institution in default makes any transfer of the

assets and liabilities of such institution; and

(ii) the transfer includes any qualified financial contract,

øthe conservator or receiver shall use such conservator’s or

receiver’s best efforts to notify any person who is a party

to any such contract of such transfer by 12:00, noon (local

time) on the business day following such transfer¿ the conservator or receiver shall notify any person who is a party

to any such contract of such transfer by 5:00 p.m. (eastern

time) on the business day following the date of the appointment of the receiver, in the case of a receivership, or the

business day following such transfer, in the case of a conservatorship. (B) CERTAIN RIGHTS NOT ENFORCEABLE.—

(i) RECEIVERSHIP.—A person who is a party to a

qualified financial contract with an insured depository

institution may not exercise any right such person has

to terminate, liquidate, or net such contract under

paragraph (8)(A) or section 403 or 404 of the Federal

Deposit Insurance Corporation Improvement Act of

1991 solely by reason of or incidental to the appointment of a receiver for the depository institution (or the

insolvency or financial condition of the depository institution for which the receiver has been appointed)—

(I) until 5:00 p.m. (eastern time) on the business

day following the date of the appointment of the

receiver; or

(II) after the person has received notice that the

contract has been transferred pursuant to paragraph (9)(A).

(ii) CONSERVATORSHIP.—A person who is a party to

a qualified financial contract with an insured depository institution may not exercise any right such person

has to terminate, liquidate, or net such contract under

paragraph (8)(E) or section 403 or 404 of the Federal

207

Deposit Insurance Corporation Improvement Act of

1991, solely by reason of or incidental to the appointment of a conservator for the depository institution (or

the insolvency or financial condition of the depository

institution for which the conservator has been appointed).

(iii) NOTICE.—For purposes of this subsection, the

Corporation as receiver or conservator of an insured

depository institution shall be deemed to have notified

a person who is a party to a qualified financial contract with such depository institution if the Corporation has taken steps reasonably calculated to provide

notice to such person by the time specified in subparagraph (A) of this subsection.

(C) TREATMENT OF BRIDGE BANKS.—The following institutions shall not be considered a financial institution for

which a conservator, receiver, trustee in bankruptcy, or

other legal custodian has been appointed or which is otherwise the subject of a bankruptcy or insolvency proceeding

for purposes of paragraph (9)—

(i) a bridge bank; or

(ii) a depository institution organized by the Corporation, for which a conservator is appointed either—

(I) immediately upon the organization of the institution; or

(II) at the time of a purchase and assumption

transaction between such institution and the Corporation as receiver for a depository institution in

default.

ø(B)¿ (D) BUSINESS DAY DEFINED.—For purposes of this

paragraph, the term ‘‘business day’’ means any day other

than any Saturday, Sunday, or any day on which either

the New York Stock Exchange or the Federal Reserve

Bank of New York is closed.

(11) DISAFFIRMANCE OR REPUDIATION OF QUALIFIED FINANCIAL CONTRACTS.—In exercising the rights of disaffirmance or

repudiation of a conservator or receiver with respect to any

qualified financial contract to which an insured depository institution is a party, the conservator or receiver for such institution shall either—

(A) disaffirm or repudiate all qualified financial contracts between—

(i) any person or any affiliate of such person; and

(ii) the depository institution in default; or

(B) disaffirm or repudiate none of the qualified financial

contracts referred to in subparagraph (A) (with respect to

such person or any affiliate of such person).

ø(11)¿ (12) CERTAIN SECURITY INTERESTS NOT AVOIDABLE.—

No provision of this subsection shall be construed as permitting the avoidance of any legally enforceable or perfected security interest in any of the assets of any depository institution

except where such an interest is taken in contemplation of the

institution’s insolvency or with the intent to hinder, delay, or

defraud the institution or the creditors of such institution.

ø(12)¿ (13) AUTHORITY TO ENFORCE CONTRACTS.—

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(A) IN GENERAL.—The conservator or receiver may enforce any contract, other than a director’s or officer’s liability insurance contract or a depository institution bond, entered into by the depository institution notwithstanding

any provision of the contract providing for termination, default, acceleration, or exercise of rights upon, or solely by

reason of, insolvency or the appointment or the exercise of

rights or powers of a conservator or receiver.

* * * * * * *

ø(13)¿ (14) EXCEPTION FOR FEDERAL RESERVE AND FEDERAL

HOME LOAN BANKS.—No provision of this subsection shall apply

with respect to—

(A) any extension of credit from any Federal home loan

bank or Federal Reserve bank to any insured depository

institution; or

* * * * * * *

ø(14)¿ (15) SELLING CREDIT CARD ACCOUNTS RECEIVABLE.—

(A) NOTIFICATION REQUIRED.—An undercapitalized insured depository institution (as defined in section 38) shall

notify the Corporation in writing before entering into an

agreement to sell credit card accounts receivable.

* * * * * * *

ø(15)¿ (16) CERTAIN CREDIT CARD CUSTOMER LISTS PROTECTED.—

(A) IN GENERAL.—If any insured depository institution

sells credit card accounts receivable under an agreement

negotiated at arm’s length that provides for the sale of the

institution’s credit card customer list, the Corporation

shall prohibit any party to a transaction with respect to

the institution under this section or section 13 from using

the list, except as permitted under the agreement.

* * * * * * *

SEC. 13. (a) * * *

* * * * * * *

(e) AGREEMENTS AGAINST INTERESTS OF CORPORATION.—

(1) * * *

* * * * * * *

ø(2) PUBLIC DEPOSITS.—An agreement to provide for the lawful collateralization of deposits of a Federal, State, or local governmental entity or of any depositor referred to in section

11(a)(2) shall not be deemed to be invalid pursuant to paragraph (1)(B) solely because such agreement was not executed

contemporaneously with the acquisition of the collateral or

with any changes in the collateral made in accordance with

such agreement.¿

(2) EXEMPTIONS FROM CONTEMPORANEOUS EXECUTION REQUIREMENT.—An agreement to provide for the lawful

collateralization of—

(A) deposits of, or other credit extension by, a Federal,

State, or local governmental entity, or of any depositor referred to in section 11(a)(2), including an agreement to provide collateral in lieu of a surety bond;

209

(B) bankruptcy estate funds pursuant to section 345(b)(2)

of title 11, United States Code;

(C) extensions of credit, including any overdraft, from a

Federal reserve bank or Federal home loan bank; or

(D) 1 or more qualified financial contracts, as defined in

section 11(e)(8)(D),

shall not be deemed invalid pursuant to paragraph (1)(B) solely

because such agreement was not executed contemporaneously

with the acquisition of the collateral or because of pledges, delivery, or substitution of the collateral made in accordance with

such agreement.

* * * * * * *

SEC. 49. RETAIL SWAP CUSTOMER PROTECTIONS.

(a) REGULATIONS AUTHORIZED.—The Board of Governors of the

Federal Reserve System and the Secretary of the Treasury may, in

consultation with appropriate Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, jointly prescribe customer protection regulations

that apply to sales practices relating to swap agreements (as defined

in section 206(b) of the Gramm-Leach-Bliley Act) between financial

institutions and retail customers.

(b) SALES PRACTICE REGULATIONS.—The regulations prescribed

under subsection (a) may address—

(1) the information that financial institutions shall obtain

from retail customers in order to determine whether swap

agreements recommended by the financial institution to retail

customers are appropriate in light of the retail customer’s net

worth, ability and willingness to incur losses, risk management

needs, financial goals, investment experience and history, and

other indicia of appropriateness;

(2) information that financial institutions shall provide to retail customers to help the retail customers understand the economic characteristics and risks of swap agreements recommended by financial institutions;

(3) measures to protect retail customers against fraudulent,

deceptive, and manipulative acts and practices;

(4) the extent to which access of retail customers to particular

classes of swap agreements should be restricted; and

(5) such other matters as the Secretary of the Treasury and

the Board of Governors of the Federal Reserve System determine are necessary or appropriate for the protection of retail

customers of swap agreements.

(c) DEFINITIONS.—

(1) FINANCIAL INSTITUTION.—The term ‘‘financial institution’’

means a person described in subclause (I), (II), (III), (IV), (V),

or (VI) of section 2(c)(2)(B)(ii) of the Commodity Exchange Act.

(2) RETAIL CUSTOMER.—The term ‘‘retail customer’’ means a

person other than an eligible contract participant (as defined in

section 1a(11) of the Commodity Exchange Act).

(d) ENFORCEMENT.—The regulations prescribed under subsection

(a) shall be enforced as follows:

(1) Subject to section 45 of the Federal Deposit Insurance Act,

under section 8 of the Federal Deposit Insurance Act, in the

case of—

210

(A) any national bank, Federal branch or Federal agency

of a foreign bank, or any subsidiary of a national bank

(other than any broker, dealer, investment company or investment adviser) by the Comptroller of the Currency;

(B) any member bank (other than a national bank),

branch or agency of a foreign bank (other than a Federal

branch, Federal agency, or insured State branch of a foreign bank), commercial lending company owned or controlled by a foreign bank, organization operating under section 25 or 25A of the Federal Reserve Act, any subsidiary

of any such entity (other than any broker, dealer, investment company or investment adviser) and any bank holding company and any nonbank affiliate of any such company (other than any broker, dealer, investment company or

investment adviser) by the Board of Governors of the Federal Reserve System;

(C) any insured State nonmember bank, insured State

branch of a foreign bank, or any subsidiary of any such entity (other than any broker, dealer, investment company, or

investment adviser) by the Board of Directors of the Federal

Deposit Insurance Corporation; and

(D) any savings association the deposits of which are insured by the Corporation, any savings and loan holding

company, or any subsidiary of any such savings association

or holding company (other than any broker, dealer, investment company or investment adviser) by the Director of the

Office of Thrift Supervision.

(2) Under the Federal Credit Union Act, by the National

Credit Union Administration Board with respect to any federally insured credit union, and any subsidiaries of such an entity.

(3) Under the Securities Exchange Act of 1934, by the Securities and Exchange Commission with respect to any registered

broker or dealer, or any associated person thereof that is not

otherwise regulated.

(4) Under the Commodity Exchange Act, by the Commodity

Futures Trading Commission, with respect to any registered futures commission merchant, or any affiliated person of any such

futures commission merchant that is not otherwise regulated.

(5) Under State insurance law, in the case of any person engaged in providing insurance, or any affiliate of any such person that is not otherwise regulated, by the applicable State insurance authority of the State in which the person is domiciled.

* * * * * * *

SECTION 5 OF THE SECURITIES INVESTOR PROTECTION

ACT OF 1970

SEC. 5. PROTECTION OF CUSTOMERS.

(a) * * *

* * * * * * *

(b) COURT ACTION.—

211

(1) * * *

* * * * * * *

(2) JURISDICTION AND POWERS OF COURT.—

(A) * * *

* * * * * * *

(C) EXCEPTION FROM STAY.—

(i) Notwithstanding section 362 of title 11, United

States Code, neither the filing of an application under

subsection (a)(3) nor any order or decree obtained by

the Securities Investor Protection Corporation from the

court shall operate as a stay of any contractual rights

of a creditor to liquidate, terminate, or accelerate a securities contract, commodity contract, forward contract,

repurchase agreement, swap agreement, or master netting agreement, each as defined in title 11, United

States Code, to offset or net termination values, payment amounts, or other transfer obligations arising

under or in connection with 1 or more of such contracts

or agreements, or to foreclose on any cash collateral

pledged by the debtor whether or not with respect to 1

or more of such contracts or agreements.

(ii) Notwithstanding clause (i), such application,

order, or decree may operate as a stay of the foreclosure

on or disposition of securities collateral pledged by the

debtor, whether or not with respect to 1 or more of such

contracts or agreements, securities sold by the debtor

under a repurchase agreement or securities lent under

a securities lending agreement.

(iii) As used in this section, the term ‘‘contractual

right’’ includes a right set forth in a rule or bylaw of

a national securities exchange, a national securities association, or a securities clearing agency, a right set

forth in a bylaw of a clearing organization or contract

market or in a resolution of the governing board thereof, and a right, whether or not in writing, arising

under common law, under law merchant, or by reason

of normal business practice.

* * * * * * *

(212)

ADDITIONAL VIEWS

When combined, Sections 107 and 133 of H.R. 4541, as reported

by the Committee on Banking and Financial Services, have the effect of preventing parties who are not otherwise ‘‘eligible contract

participants’’ from engaging in swaps agreements unless and until

the Department of the Treasury and the Federal Reserve Board

jointly promulgate rules to protect such now ineligible parties in

such participation. This means most retail customers, including

many small businesses, will be ineligible absent such rules. No

mandates, time constraints, or other limitations have been placed

upon the Treasury or the Federal Reserve in formulating such

rules, including rules of classification of such customers and rules

of participatory exclusion. Although the Department of the Treasury and the Federal Reserve are required to report to the Congress

if they have not completed such rules within one year of enactment

of H.R. 4541, this reporting requirement does not limit the discretion of these two entities in any manner.

The rationale for the treatment in Sections 107 and 133 is that

swaps can be complex instruments requiring a variety of protections for financially unsophisticated consumers, such as plain disclosures; ‘‘know your customer’’ benchmarks for permitted purchases and sales; and warnings as to potential liability. Moreover,

swaps come in a great variety of tailored obligations, some of which

might, indeed, be so complex as to be inappropriate for all but the

most seasoned of investors. It is this very variety which has suggested the delegation of authority to the Department of the Treasury and the Federal Reserve Board to design protections for consumer and small business swaps, since all possible combinations of

terms to comprise a swap cannot be addressed by the innately

more general capacities of legislation.

In voting for this broad grant to the Department of the Treasury

and the Federal Reserve Board, this Member realizes that the

swaps market can be a valuable development for the evolving financial world, but cautions that without meaningful consumer protections, this market could fall into disrepute and be the subject of

concerted criticism, possibly resulting in crippling legislation. There

is already a history involving large corporations in which litigation

and regulatory fines were imposed even though the investors were

highly experienced. Every effort should be made to assure that any

consumer protection rules to be promulgated would prevent repeated incidents for consumers, especially since it is likely the alleged wrongs would be for widely marketed consumer products

which are open to class actions.

JOHN J. LAFALCE.

Æ