II

104TH CONGRESS

1ST SESSION S. 557

To prohibit insured depository institutions and credit unions from engaging

in certain activities involving derivative financial instruments.

IN THE SENATE OF THE UNITED STATES

MARCH 15, 1995

Mr. DORGAN introduced the following bill; which was read twice and referred

to the Committee on Banking, Housing, and Urban Affairs

A BILL

To prohibit insured depository institutions and credit unions

from engaging in certain activities involving derivative

financial instruments.

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

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Derivatives Limita5 tions Act of 1995’’.

6 SEC. 2. INSURED DEPOSITORY INSTITUTIONS.

7 The Federal Deposit Insurance Act (12 U.S.C. 1811

8 et seq.) is amended by adding at the end the following

9 new section:
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1 ‘‘SEC. 45. DERIVATIVE INSTRUMENTS.

2 ‘‘(a) DERIVATIVES ACTIVITIES.—

3 ‘‘(1) GENERAL PROHIBITION.—Except as pro4 vided in paragraph (2), neither an insured deposi5 tory institution, nor any affiliate thereof, may pur6 chase, sell, or engage in any transaction involving a

7 derivative financial instrument for the account of

8 that institution or affiliate.

9 ‘‘(2) EXCEPTIONS.—

10 ‘‘(A) HEDGING TRANSACTIONS.—An in11 sured depository institution may purchase, sell,

12 or engage in hedging transactions to the extent

13 that such activities are approved by rule, regu14 lation, or order of the appropriate Federal

15 banking agency issued in accordance with para16 graph (3).

17 ‘‘(B) SEPARATELY CAPITALIZED AFFILI18 ATE.—A separately capitalized affiliate of an

19 insured depository institution that is not itself

20 an insured depository institution may purchase,

21 sell, or engage in a transaction involving a de22 rivative financial instrument if such affiliate

23 complies with all rules, regulations, or orders of

24 the appropriate Federal banking agency issued

25 in accordance with paragraph (3).
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1 ‘‘(C) DE MINIMIS INTERESTS.—An insured

2 depository institution may purchase, sell, or en3 gage in transactions involving de minimis inter4 ests in derivative financial instruments for the

5 account of that institution to the extent that

6 such activity is defined and approved by rule,

7 regulation, or order of the appropriate Federal

8 banking agency issued in accordance with para9 graph (3).

10 ‘‘(D) EXISTING INTERESTS.—During the

11 3-month period beginning on the date of enact12 ment of this section, nothing in this section

13 shall be construed—

14 ‘‘(i) as affecting an interest of an in15 sured depository institution in any deriva16 tive financial instrument that existed on

17 the date of enactment of this section; or

18 ‘‘(ii) as restricting the ability of the

19 institution to acquire reasonably related in20 terests in other derivative financial instru21 ments for the purpose of resolving or ter22 minating an interest of the institution in

23 any derivative financial instrument that ex24 isted on the date of enactment of this

25 section.
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1 ‘‘(3) ISSUANCE OF RULES, REGULATIONS, AND

2 ORDERS.—The appropriate Federal banking agency

3 shall issue appropriate rules, regulations, and orders

4 governing the exceptions provided for in paragraph

5 (2), including—

6 ‘‘(A) appropriate public notice require7 ments;

8 ‘‘(B) a requirement that any affiliate de9 scribed in paragraph (2)(B) shall clearly and

10 conspicuously notify the public that none of the

11 assets of the affiliate, nor the risk of loss asso12 ciated with the transaction involving a deriva13 tive financial instrument, are insured under

14 Federal law or otherwise guaranteed by the

15 Federal Government or the parent company of

16 the affiliate; and

17 ‘‘(C) any other requirements that the ap18 propriate Federal banking agency considers to

19 be appropriate.

20 ‘‘(b) DEFINITIONS.—For purposes of this section—

21 ‘‘(1) the term ‘derivative financial instrument’

22 means—

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

24 derived from the value of stocks, bonds, other

25 loan instruments, other assets, interest or cur-
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1 rency exchange rates, or indexes, including

2 qualified financial contracts (as defined in sec3 tion 11(e)(8)); and

4 ‘‘(B) any other instrument that an appro5 priate Federal banking agency determines, by

6 regulation or order, to be a derivative financial

7 instrument for purposes of this section; and

8 ‘‘(2) the term ‘hedging transaction’ means any

9 transaction involving a derivative financial instru10 ment if—

11 ‘‘(A) such transaction is entered into in

12 the normal course of the institution’s business

13 primarily—

14 ‘‘(i) to reduce risk of price change or

15 currency fluctuations with respect to prop16 erty that is held or to be held by the insti17 tution; or

18 ‘‘(ii) to reduce risk of interest rate or

19 price changes or currency fluctuations with

20 respect to loans or other investments made

21 or to be made, or obligations incurred or to

22 be incurred, by the institution; and

23 ‘‘(B) before the close of the day on which

24 such transaction was entered into (or such ear25 lier time as the appropriate Federal banking
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1 agency may prescribe by regulation), the insti2 tution clearly identifies such transaction as a

3 hedging transaction.’’.

4 SEC. 3. INSURED CREDIT UNIONS.

5 Title II of the Federal Credit Union Act (12 U.S.C.

6 1781 et seq.) is amended by adding at the end the follow7 ing new section:

8 ‘‘SEC. 215. DERIVATIVE INSTRUMENTS.

9 ‘‘(a) DERIVATIVE ACTIVITIES.—Except as provided

10 in subsection (b), neither an insured credit union, nor any

11 affiliate thereof, may purchase, sell, or engage in any

12 transaction involving a derivative financial instrument.

13 ‘‘(b) APPLICABILITY OF SECTION 44 OF THE FED14 ERAL DEPOSIT INSURANCE ACT.—Section 44 of the Fed15 eral Deposit Insurance Act shall apply with respect to in16 sured credit unions and affiliates thereof and to the Board

17 in the same manner that such section applies to insured

18 depository institutions and affiliates thereof (as those

19 terms are defined in section 3 of that Act) and shall be

20 enforceable by the Board with respect to insured credit

21 unions and affiliates under this Act.

22 ‘‘(c) DERIVATIVE FINANCIAL INSTRUMENT.—For

23 purposes of this section, the term ‘derivative financial in24 strument’ means—
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1 ‘‘(1) an instrument the value of which is de2 rived from the value of stocks, bonds, other loan in3 struments, other assets, interest or currency ex4 change rates, or indexes, including qualified finan5 cial contracts (as such term is defined in section

6 207(c)(8)(D)); and

7 ‘‘(2) any other instrument that the Board de8 termines, by regulation or order, to be a derivative

9 financial instrument for purposes of this section.’’.

10 SEC. 4. BANK HOLDING COMPANIES.

11 Section 3 of the Bank Holding Company Act of 1956

12 (12 U.S.C. 1842) is amended by adding at the end the

13 following new subsection:

14 ‘‘(h) DERIVATIVES ACTIVITIES.—

15 ‘‘(1) IN GENERAL.—A subsidiary of a bank

16 holding company may purchase, sell, or engage in

17 any transaction involving a derivative financial in18 strument for the account of that subsidiary if that

19 subsidiary—

20 ‘‘(A) is not an insured depository institu21 tion or a subsidiary of an insured depository in22 stitution; and

23 ‘‘(B) is separately capitalized from any af24 filiated insured depository institution.
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1 ‘‘(2) APPLICABILITY OF SECTION 44 OF THE

2 FEDERAL DEPOSIT INSURANCE ACT.—Section 44 of

3 the Federal Deposit Insurance Act shall apply with

4 respect to bank holding companies and the Board in

5 the same manner that those subsections apply to an

6 insured depository institution (as such term is de7 fined in section 3 of that Act) and shall be enforce8 able by the Board with respect to bank holding com9 panies under this Act.

10 ‘‘(3) DERIVATIVE FINANCIAL INSTRUMENT.—

11 For purposes of this subsection, the term ‘derivative

12 financial instrument’ means—

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

14 derived from the value of stocks, bonds, other

15 loan instruments, other assets, interest or cur16 rency exchange rates, or indexes, including

17 qualified financial contracts (as such term is

18 defined in section 207(c)(8)(D)); and

19 ‘‘(B) any other instrument that the Board

20 determines, by regulation or order, to be a de21 rivative financial instrument for purposes of

22 this subsection.’’.

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