I

103D CONGRESS

2D SESSION H. R. 3748

To provide an enhanced framework for Federal financial institution regulation

of derivatives activities.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 26, 1994

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

Committees on Banking, Finance and Urban Affairs, Energy and Commerce, and Agriculture

A BILL

To provide an enhanced framework for Federal financial

institution regulation of derivatives activities.

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

3 SECTION 1. SHORT TITLE.

4 This Act shall be cited as the ‘‘Derivatives Super5 vision Act of 1994.’’

6 TITLE I—FEDERAL DERIVATIVES

7 COMMISSION

8 SEC. 101. DECLARATION OF PURPOSE.

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

10 Derivatives Commission which shall establish principles
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1 and standards for the supervision by Federal financial in2 stitution regulators of financial institutions engaged in de3 rivatives activities and make recommendations to promote

4 uniformity in the supervision of these financial institu5 tions. The Commission’s actions shall be designed to pro6 mote consistency in regulatory practices and to insure pro7 gressive and vigilant supervision.

8 SEC. 102. DEFINITIONS.

9 As used in this title—

10 (1) the term ‘‘Federal financial institutions reg11 ulatory agencies’’ means the Office of the Comptrol12 ler of the Currency, the Board of Governors of the

13 Federal Reserve System, the Federal Deposit Insur14 ance Corporation, the Office of Thrift Supervision,

15 the Securities and Exchange Commission, and the

16 Commodity Futures Trading Commission;

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

18 Derivatives Commission;

19 (3) the term ‘‘Federal banking agency’’ has the

20 same meaning as in section 3 of the Federal Deposit

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

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

23 institution described in section 402(9) of the Federal

24 Deposit Insurance Corporation Improvement Act of

25 1991, any Government sponsored enterprise, or any
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1 other institution (including any type of end user) as

2 determined by the Commission;

3 (5) the term ‘‘Government sponsored enter4 prise’’ has the same meaning as in section 1404(e)

5 of the Financial Institutions Reform, Recovery, and

6 Enforcement Act of 1989;

7 (6) the term ‘‘qualified financial contract’’ has

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

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

10 1821(e)(8)(D)), except that the Commission may de11 termine any similar agreement to be a qualified fi12 nancial contract for purposes of this title; and

13 (7) the term ‘‘derivatives activities’’ means ac14 tivities by a financial institution involving qualified

15 financial contracts or any similar agreements that

16 the Commission determines are qualified financial

17 contracts for purposes of this title.

18 SEC. 103. FEDERAL DERIVATIVES COMMISSION.

19 (a) ESTABLISHMENT; COMPOSITION.—There is es20 tablished the Federal Derivatives Commission which shall

21 consist of—

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

23 the Federal Reserve System,

24 (2) the Comptroller of the Currency,
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1 (3) the Chairperson of the Board of Directors

2 of the Federal Deposit Insurance Corporation,

3 (4) the Director of the Office of Thrift Super4 vision,

5 (5) the Chairman of the Securities and Ex6 change Commission,

7 (6) the Chairman of the Commodity Futures

8 Trading Commission, and

9 (7) the Secretary of Treasury.

10 (b) CHAIRMANSHIP.—The Chairman of the Commis11 sion shall be the Chairman of the Board of Governors of

12 the Federal Reserve System.

13 (c) DESIGNATION OF OFFICERS AND EMPLOYEES.—

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

15 designate other officers or employees of their respective

16 agencies to carry out their duties on the Commission.

17 (d) COMPENSATION AND EXPENSES.—Each member

18 of the Commission shall serve without additional com19 pensation but shall be entitled to reasonable expenses in20 curred in carrying out his official duties as such a mem21 ber.

22 SEC. 104. COSTS AND EXPENSES OF COMMISSION.

23 One-sixth of the costs and expenses of the Commis24 sion, including the salaries of its employees, shall be paid

25 by each of the Federal financial institutions regulatory
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1 agencies. Annual assessments for such share shall be lev2 ied by the Commission based upon its projected budget

3 for the year, and additional assessments may be made dur4 ing the year if necessary.

5 SEC. 105. FUNCTIONS OF COMMISSION.

6 (a) ESTABLISHMENT OF PRINCIPLES AND STAND7 ARDS.—

8 (1) The Commission shall establish principles

9 and standards related to capital, accounting, disclo10 sure, suitability, or other appropriate regulatory ac11 tions for the supervision of financial institutions en12 gaged in derivatives activities by the Federal finan13 cial institutions regulatory agencies.

14 (2) Each Federal financial institutions regu15 latory agency shall issue substantially similar regula16 tions governing derivatives activities for purposes of

17 implementing paragraph (1), unless it finds that im18 plementation of substantially similar regulations is

19 not necessary or appropriate in the public interest.

20 (3) Any financial institution not subject to su21 pervision by a Federal banking agency or the Com22 modity Futures Trading Commission shall be super23 vised by the Securities and Exchange Commission to

24 the extent of their derivatives activities, except as

25 otherwise provided by the Commission.
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1 (b) RECOMMENDATIONS REGARDING SUPERVISORY

2 ACTIONS.—

3 (1) In establishing principles and standards

4 under subsection (a), the Commission shall consider

5 and may make recommendations for comparable reg6 ulatory action by the Federal financial institutions

7 regulatory agencies in other matters related to fi8 nancial institutions engaged in derivatives activities,

9 such as, but not limited to, the need to establish

10 principles and standards for:

11 (A) Strong capital requirements (with par12 ticular attention to a leverage ratio where ap13 propriate) to guard generally against risks at fi14 nancial institutions, including added risks that

15 may be posed by derivatives activities;

16 (B) Discouraging active trading in deriva17 tives markets by financial institutions, particu18 larly those with access to federally insured de19 posits, unless management can demonstrate

20 that the institution has both adequate capital

21 and technical capabilities;

22 (C) Joint regulatory examinations by the

23 Federal banking agencies of insured depository

24 institutions that are derivatives dealers and any

25 affiliates;
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1 (D) Board of director responsibility with

2 respect to the oversight of derivatives activities,

3 including specific written policies approved by

4 the board of directors to be in place for dealers

5 and end users of derivatives setting prudential

6 standards for management of the risks involved

7 in derivatives activities and establishing a

8 framework for internal controls;

9 (E) Guidelines for the prudent use of col10 lateral by counterparties to derivatives trans11 actions;

12 (F) The appropriate parameters, models

13 and simulations of purposes of evaluating a fi14 nancial institution’s credit and market risk

15 posed by derivatives activities;

16 (G) Guidelines as to appropriate credit risk

17 reserves in connection with derivatives activi18 ties;

19 (H) Increased standardization of docu20 mentation and the use of standard documents

21 by all market participants;

22 (I) Minimum prudential practices for mu23 nicipalities and pension funds that may use de24 rivatives;
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1 (J) Enhanced disclosures to mutual fund

2 customers of the risks that may be posed to

3 mutual funds that are end users of derivatives

4 products;

5 (K) Guidelines related to legal risk, includ6 ing, but not limited to, foreign legal risk. Such

7 guidelines may address the steps a financial in8 stitution should take to obtain adequate assur9 ances of legal enforceability of derivatives con10 tracts, including the assurances of legal enforce11 ability of netting provisions that should be ob12 tained before an institution relies on such net13 ting provisions; and

14 (L) Regulations to protect against systemic

15 risk.

16 (2) When a recommendation of the Commission

17 is found unacceptable by one or more of the applica18 ble Federal financial institutions regulatory agencies,

19 the agency or agencies shall submit to the Commis20 sion, within a time period specified by the Commis21 sion, a written statement of the reasons the rec22 ommendation is unacceptable and such statement

23 shall be published in the Federal Register.

24 (c) DEVELOPMENT OF UNIFORM REPORTING SYS25 TEM.—The Commission shall develop uniform reporting
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1 systems for financial institutions engaged in derivatives

2 activities. The authority to develop uniform reporting sys3 tems shall not restrict or amend the requirements of sec4 tion 781(i) of title 15 of the United States Code.

5 (d) TRAINING FOR EXAMINERS AND ASSISTANT EX6 AMINERS.—The Commission shall sponsor training pro7 grams concerning derivatives activities for examiners and

8 assistant examiners employed by the Federal financial in9 stitutions regulatory agencies. Such training programs

10 shall be open to enrollment by employees of State financial

11 institutions supervisory agencies and employees of the

12 Federal Housing Finance Board and the Department of

13 Housing and Urban Development’s Office of Federal

14 Housing Enterprise Oversight under conditions specified

15 by the Commission.

16 (e) EFFECT ON FEDERAL REGULATORY AGENCY RE17 SEARCH AND DEVELOPMENT OF NEW FINANCIAL INSTI18 TUTIONS SUPERVISORY METHODS.—Nothing in this title

19 shall be construed to limit or discourage Federal financial

20 institution regulatory agency research and development of

21 new financial institutions supervisory methods and tools

22 related to derivatives activities, nor to preclude the field

23 testing of any innovation devised by any Federal financial

24 institution regulatory agency.
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1 (f) ANNUAL REPORT.—Not later than April 1 of each

2 year, the Commission shall prepare a report covering its

3 activities during the preceding calendar year.

4 SEC. 106. STATE LIAISON.

5 To encourage the application of uniform examination

6 principles and standards by State and Federal supervisory

7 agencies, the Commission shall establish a liaison commit8 tee composed of five representatives of State agencies

9 which supervise financial institutions which shall meet at

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

11 liaison committee shall receive a reasonable allowance for

12 necessary expenses incurred in attending meetings.

13 SEC. 107. ADMINISTRATION.

14 (a) AUTHORITY OF CHAIRMAN OF COMMISSION.—

15 The Chairman of the Commission is authorized to carry

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

17 administration of the Commission, including the appoint18 ment and supervision of employees and the distribution

19 of business among members, employees, and administra20 tive units.

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

22 OF FEDERAL FINANCIAL INSTITUTIONS REGULATORY

23 AGENCIES.—In addition to any other authority conferred

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

25 this title, the Commission may utilize, with their consent
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1 and to the extent practical, the personnel, services, and

2 facilities of the Federal financial institutions regulatory

3 agencies, with or without reimbursement therefor.

4 (c) COMPENSATION, AUTHORITY, AND DUTIES OF

5 OFFICERS AND EMPLOYEES; EXPERTS AND CONSULT6 ANTS.—In addition, the Commission may—

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

8 to the competitive service, classification, and General

9 Schedule pay rates, appoint and fix the compensa10 tion of such officers and employees as are necessary

11 to carry out the provisions of this title, and to pre12 scribe the authority and duties of such officers and

13 employees; and

14 (2) obtain the services of such experts and con15 sultants as are necessary to carry out the provisions

16 of this title.

17 SEC. 108. RISK MANAGEMENT TRAINING.

18 The Commission shall develop training seminars in

19 risk management techniques related to derivatives activi20 ties for employees of the Federal financial institution reg21 ulatory agencies and the employees of financial institu22 tions.

23 SEC. 109. INTERNATIONAL NEGOTIATIONS.

24 The Chairman of the Board of Governors of the Fed25 eral Reserve System, in consultation with the members of
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1 the Commission, shall encourage governments, central

2 banks, and regulatory authorities of other industrialized

3 countries to work toward maintaining and, where appro4 priate, adopting comparable supervisory standards and

5 regulations, particularly capital standards, for financial

6 institutions engaged in derivatives activities.

7 SEC. 110. CREDIT UNIONS.

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

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

10 purposes of derivatives activities by the National Credit

11 Union Administration under standards no less stringent

12 than standards under which Federal depository institu13 tions (as defined in section 3(c) of the Federal Deposit

14 Insurance Act) are supervised by the Federal banking

15 agencies.

16 TITLE II—SUPERVISORY IMPROVEMENTS

17 SEC. 201. UNSAFE OR UNSOUND BANKING PRACTICES.

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

19 party engaged in derivatives activities to have adequate

20 technical expertise may be deemed by the appropriate Fed21 eral banking agency to constitute an unsafe or unsound

22 banking practice within the meaning of section 8 of the

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

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

25 in addition to and not in derogation of the authority of
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1 any appropriate Federal banking agency under section 8

2 of the Federal Deposit Insurance Act to determine unsafe

3 or unsound banking practices.

4 SEC. 202. INTERNAL CONTROLS.

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

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

7 ‘‘internal controls’’ and inserting ‘‘internal controls (in8 cluding internal controls for derivatives activities’’.

9 SEC. 203. FOREIGN BANK SUPERVISION.

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

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

12 ‘‘country’’ by inserting ‘‘, including, in the case of a for13 eign bank engaged in derivatives activities, comprehensive

14 supervision and regulation for derivatives activities (as

15 that term is defined in the Derivatives Supervision Act

16 of 1994). In making any determination under this para17 graph, the Board shall consider whether the home country

18 maintains comprehensive supervision and regulation of de19 rivatives activities, including capital and disclosure stand20 ards, not less stringent than United States standards.’’.

21 TITLE III—FINANCIAL INSTITUTION

22 INSOLVENCY REFORMS

23 SEC. 301. CONFORMING DEFINITIONS.

24 (a) Section 11(e)(8)(D)(vi) of the Federal Deposit In25 surance Act (12 U.S.C. 1821(e)(8)(D)(vi)) is amended—
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1 (1) by striking ‘‘purchased’’ each time it ap2 pears; and

3 (2) after ‘‘currency option’’ inserting ‘‘, equity

4 derivative, equity or equity index swap, equity or eq5 uity index option, bond option, spot foreign exchange

6 transaction’’.

7 (b) Section 101(55) of the Bankruptcy Code (11

8 U.S.C. 101(55)) is amended—

9 (1) in paragraph (A), by inserting ‘‘any quali10 fied financial contract within the meaning of section

11 1821(e)(8)(D)(i) of title 12, United States Code,’’

12 after ‘‘currency option,’’; and

13 (2) in paragraph (C) by inserting ‘‘and trans14 actions documented thereunder.’’ after ‘‘supple15 mental’’.

16 SEC. 302. FAILED AND FAILING INSTITUTIONS.

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

18 Act (12 U.S.C. 1821(e)(8)) is amended by adding the fol19 lowing new subparagraphs:

20 ‘‘(F) PREEMPTION.—Notwithstanding any

21 other provision of law, no automatic stay, in22 junction, avoidance, moratorium, or other re23 straint, whether issued or granted by a bank24 ruptcy court or any other judicial body, any ad25 ministrative body, or whether created by statute
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1 or otherwise, shall limit or delay the ability of

2 the Corporation, in any capacity, to exercise its

3 authority, rights or powers in accordance with

4 section 11(e)(8) of this Act. This provision shall

5 not limit any other right, power or authority of

6 the Corporation in any capacity.

7 ‘‘(G) UNDERCAPITALIZED INSURED DE8 POSITORY INSTITUTIONS.—The Corporation, in

9 consultation with the appropriate Federal bank10 ing agencies, shall prescribe regulations requir11 ing expanded recordkeeping for qualified finan12 cial contracts (including market valuations) by

13 insured depository institutions that are

14 undercapitalized as defined in section 38 of the

15 Federal Deposit Insurance Act (12 U.S.C.

16 1831o).’’.

17 SEC. 303. QUALIFIED FINANCIAL CONTRACT TRANSFERS.

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

19 Act, (12 U.S.C. 1821(e)(10)), is amended by adding the

20 following new subparagraphs:

21 ‘‘(C) EFFECT OF NOTICE.—If a person

22 who is a party to a qualified financial contract

23 is notified by the Corporation as receiver of a

24 depository institution by the close of business

25 (Eastern Standard Time) on the business day
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1 following its appointment as receiver that the

2 Corporation has transferred all qualified finan3 cial contracts between the depository institution

4 and such person or its affiliates pursuant to

5 subparagraph (9)(A), then the provisions of

6 subparagraph (8)(A) shall not apply. For pur7 poses of this subparagraph, the Corporation as

8 receiver shall be deemed to have notified a per9 son if it has taken steps reasonably calculated

10 to provide notice to such person.

11 ‘‘(D) NOTICE EXTENSION.—The Corpora12 tion may extend the notice period described in

13 paragraph (C) for a reasonable period not to

14 exceed 5 days, if the Corporation determines

15 that such an extension may maximize the net

16 present value return from the sale or disposi17 tion of such qualified financial contracts.

18 ‘‘(E) TREATMENT OF BRIDGE BANKS.—

19 Neither a bridge bank nor an institution orga20 nized by the Corporation and immediately

21 placed into conservatorship or placed into

22 conservatorship at the time of a purchase and

23 assumption transaction with the receiver of a

24 failed depository institution for which the Cor25 poration has been appointed receiver shall be
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1 considered a depository institution in default

2 for purposes of this paragraph, paragraph 8

3 and paragraph 9 of this section.’’.

4 SEC. 304. CLARIFYING AMENDMENTS.

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

7 read as follows: ‘‘(vii) Notwithstanding any other provision

8 of law, any master agreements for contracts or agreements

9 described in clause (ii), (iii), (iv), or (vi), together with

10 all supplements to such master agreement shall be treated

11 as 1 swap agreement for purposes of this Act and title

12 11 of the United States Code.’’.

13 SEC. 305. TECHNICAL AMENDMENTS.

14 (a) Section 11(e)(8)(D) of the Federal Deposit Insur15 ance Act (12 U.S.C. 1821(e)(8)(D)) is amended—

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

17 after ‘‘swap agreement,’’.

18 (2) in clause (iv) by striking ‘‘(24)’’ and insert19 ing ‘‘(25)’’;

20 (3) in clause (v) by striking ‘‘101(41)’’ and in21 serting ‘‘101(47)’’.

22 (b) Section 11(e)(8)(E)(i) of the Federal Deposit In23 surance Act (12 U.S.C. 1821(e)(8)(E)(i)) is amended by

24 striking ‘‘;’’ and inserting ‘‘, other than a default based

25 solely upon the appointment of a conservator;’’.
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1 TITLE IV—MISCELLANEOUS

2 SEC. 401. SAVINGS PROVISION.

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

4 not in derogation of any existing authority of a Federal

5 financial institution regulatory agency to supervise or reg6 ulate derivatives activities provided under any other appli7 cable law.

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