II

103D CONGRESS

2D SESSION S. 2123

To prohibit insured depository institutions and credit unions from engaging

in certain activities involving derivative financial instruments.

IN THE SENATE OF THE UNITED STATES

MAY 17 (legislative day, MAY 16), 1994

Mr. DORGAN (for himself and Ms. MIKULSKI) 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 1994’’.

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. 44. 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 which 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 which

24 existed 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 subparagraph (B) of paragraph (2)

10 shall clearly and conspicuously notify the public

11 that none of the assets of the affiliate, nor the

12 risk of loss associated with the transaction in13 volving a derivative financial instrument, are in14 sured under Federal law or otherwise guaran15 teed by the Federal Government or the parent

16 company of the affiliate; and

17 ‘‘(C) any other requirements that the ap18 propriate Federal banking agency considers ap19 propriate.

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 which is held or to be held by the in17 stitution; 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 defined in section 207(c)(8)(D));

6 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 it—

19 ‘‘(A) is not an insured depository institu20 tion or a subsidiary of an insured depository in21 stitution; and

22 ‘‘(B) is separately capitalized from any af23 filiated insured depository institution.

24 ‘‘(2) APPLICABILITY OF SECTION 44 OF THE

25 FEDERAL DEPOSIT INSURANCE ACT.—Section 44 of
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1 the Federal Deposit Insurance Act shall apply with

2 respect to bank holding companies and the Board in

3 the same manner that those such subsections apply

4 to an insured depository institution (as defined in

5 section 3 of that Act) and shall be enforceable by

6 the Board with respect to bank holding companies

7 under this Act.

8 ‘‘(3) DERIVATIVE FINANCIAL INSTRUMENT.—

9 For purposes of this subsection, the term ‘derivative

10 financial instrument’ means—

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

12 derived from the value of stocks, bonds, other

13 loan instruments, other assets, interest or cur14 rency exchange rates, or indexes, including

15 qualified financial contracts (as defined in sec16 tion 207(c)(8)(D)); and

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

18 determines, by regulation or order, to be a de19 rivative financial instrument for purposes of

20 this subsection.’’.

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