I
106TH CONGRESS
2D SESSION
H. R. 4203
To establish a comprehensive regulatory framework over the clearing of over-
the-counter derivative instruments that will operate under the supervision
of the Federal banking agencies, to clarify the lawfulness of the use
of multilateral clearing systems for over-the-counter derivative instrument
transactions, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
APRIL 6, 2000
Mr. LEACH (for himself, Mr. LAFALCE, Mr. BAKER, and Mr. KANJORSKI) in-
troduced the following bill; which was referred to the Committee on
Banking and Financial Services, and in addition to the Committees on
Commerce, Agriculture, and the Judiciary, for a period to be subse-
quently determined by the Speaker, in each case for consideration of such
provisions as fall within the jurisdiction of the committee concerned
A BILL
To establish a comprehensive regulatory framework over the
clearing of over-the-counter derivative instruments that
will operate under the supervision of the Federal banking
agencies, to clarify the lawfulness of the use of multilat-
eral clearing systems for over-the-counter derivative in-
strument transactions, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Over-the-Counter De-
rivatives Systemic Risk Reduction Act of 2000’’.
SEC. 2. FINDINGS AND PURPOSES.
The Congress finds as follows:
(1) Banks and other financial institutions regu-
lated under Federal banking laws—
(A) are dominant participants in the mar-
ket for over-the-counter derivative instruments;
and
(B) use such instruments in their capital
market activities for, among other purposes,
controlling financial risks and facilitating in-
vestment strategies.
(2) Multilateral clearing systems can reduce
risks to the financial system posed by certain cat-
egories of over-the-counter derivative instruments by
mutualizing the credit risk of each transaction.
(3) A multilateral clearing system may—
(A) mitigate losses that the parties to
transactions involving over-the-counter deriva-
tive 
instruments 
would 
suffer 
if 
their
counterparties fail to settle obligations in con-
nection with such transactions; and
(B) make such transactions more economi-
cally efficient by facilitating the offset and net-
ting of obligations arising under contracts
cleared through the system.
(4) Although it is evident that the establish-
ment of multilateral clearing systems in the United
States for transactions involving over-the-counter de-
rivative instruments would enhance the competitive-
ness of United States financial institutions, efforts
to establish such systems have been hindered by con-
cerns that the use of such a system may render the
underlying transactions illegal under existing Fed-
eral law.
(5) In November 1999, 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, and the
Chairman of the Commodity Futures Trading Com-
mission all agreed to foster the development of mul-
tilateral clearing systems for over-the-counter deriva-
tive instruments transactions.
(6) Federal supervision of multilateral clearing
systems for over-the-counter derivative instruments
markets will foster the effectiveness and integrity of
the operations, the risk management of such sys-
tems, and the stability of the financial markets and
the safety and soundness of the banking system.
(7) Questions about the enforceability of over-
the-counter derivatives contracts under Federal and
State law could have a negative impact on the sta-
bility of the financial institutions that are parties to
them and could threaten the safety and soundness of
the financial system.
(8) Interpretations of Federal law suggesting
that the use of certain electronic technologies in the
trading of over-the-counter derivative instruments
might raise questions about their lawfulness have
hampered the development of more efficient trading
systems and, therefore, more effective risk manage-
ment for financial institutions.
SEC. 3. MULTILATERAL CLEARING ORGANIZATIONS.
(a) IN GENERAL.—Subtitle A of title IV of the Fed-
eral 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 401, 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
ORGANIZA-
TION.—The term ‘multilateral clearing organization’
means a system utilized by more than 2 participants
in which the bilateral credit exposures of partici-
pants arising from the transactions cleared are effec-
tively eliminated and replaced by a system of guar-
antees, insurance, or mutualized risk of loss.
‘‘(2) OVER-THE-COUNTER DERIVATIVE INSTRU-
MENT.—The term ‘over-the-counter derivative in-
strument’ means—
‘‘(A) any agreement, including the terms
and conditions incorporated by reference in any
such agreement, 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, for-
ward, 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 agree-
ment; a credit spread or credit swap, option, or
forward agreement; a commodity index or com-
modity swap, option, or forward agreement; and
a weather swap, weather derivative, or weather
option;
‘‘(B) any agreement or transaction similar
to any other agreement or transaction referred
to in this clause that is presently, or in the fu-
ture 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 rates, currencies, com-
modities, equity securities or other equity in-
struments, debt securities or other debt instru-
ments, or economic or other indices or measures
of economic or other risk or value; and
‘‘(C) any option to enter into any, or any
combination of, agreements or transactions re-
ferred to in this subparagraph.
‘‘(3) OTHER DEFINITIONS.—The terms ‘bank’
and ‘affiliate’ have the meanings given the terms in
section 2 of the Bank Holding Company Act of
1956.
‘‘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 ac-
tivities that constitute such a multilateral clearing organi-
zation unless the person is a bank, or a corporation char-
tered 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 Ex-
change Act; or
‘‘(3) is supervised by a foreign financial regu-
lator that an appropriate Federal financial regu-
latory agency has determined satisfies appropriate
standards.
‘‘(c) RULES OF CONSTRUCTION.—
‘‘(1) OVER-THE-COUNTER DERIVATIVE INSTRU-
MENTS.—The fact that an over-the-counter deriva-
tive instrument is cleared or settled through a multi-
lateral clearing organization shall not be construed
to mean, or used to support a conclusion, that such
transaction is subject to the Commodity Exchange
Act.
‘‘(2) CFTC JURISDICTION.—No provision of
this chapter shall be construed as altering, limiting,
or otherwise affecting the applicability of the Com-
modity Exchange Act to, or the jurisdiction of the
Commodity Futures Trading Commission over—
‘‘(A) trading in or clearing of transactions
in, or based on, nonfinancial commodities with
finite supplies; and
‘‘(B) clearing by organizations that clear
exchange-traded contracts for the purchase or
sale of a commodity for future delivery, com-
modity options, and options on contracts for the
purchase or sale of a commodity for future de-
livery under the Commodity Exchange Act.
‘‘(3) SEC JURISDICTION.—No provision of this
chapter shall be construed as altering, limiting, or
otherwise affecting the jurisdiction of the Securities
and Exchange Commission over clearance and settle-
ment by a clearing agency registered under the Se-
curities Exchange Act of 1934.
‘‘(4) NO EFFECT ON APPLICABILITY OF SECU-
RITIES EXCHANGE ACT OF 1934 TO CLEARING OF SE-
CURITIES.—No provision of this chapter shall be
construed as altering, limiting, or otherwise affecting
the applicability of the Securities Exchange Act of
1934 to the clearing of securities, including the ap-
plicability of section 17A(d) of such Act to the clear-
ing through a multilateral clearing organization
under this chapter of over-the-counter derivative in-
struments that are securities within the meaning of
the Federal securities laws.
‘‘(5) FEDERAL RESERVE BOARD AND OCC JU-
RISDICTION.—A multilateral clearing organization
under the jurisdiction of the Board of Governors of
the Federal Reserve System or the Comptroller of
the Currency in accordance with subsection (a) shall
not be subject to the jurisdiction of any other Fed-
eral department or agency as a result of clearing
any over-the-counter derivative instrument.’’.
(b) ENFORCEMENT POWERS OF THE BOARD OF GOV-
ERNORS 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, sub-
sections (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 sec-
tion 3 of the Federal Deposit Insurance Act) in the
same manner and to the same extent as such provi-
sions 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. 4. LEGAL CERTAINTY.
No over-the-counter derivative instrument (as defined
in section 408(2) of the Federal Deposit Insurance Cor-
poration Improvement Act of 1991) to which a financial
institution (as defined in or under section 402(9) of such
Act or in or under section 509(3)(A) of the Gramm-Leach-
Bliley Act) is a party shall be held void, subject to rescis-
sion, or unenforceable based solely on the regulatory sta-
tus of, or regulatory jurisdiction over, such agreement,
contract, or transaction under Federal or State law.
SEC. 5. ELECTRONIC TRADING.
(a) RULES OF CONSTRUCTION.—
(1) OVER-THE-COUNTER
DERIVATIVE
INSTRU-
MENTS.—The fact that an over-the-counter deriva-
tive instrument is the subject of communication on,
or is entered into or traded through or by means of,
a financial electronic trading system shall not be
construed to mean, or used to support a conclusion,
that such transaction is subject to the Commodity
Exchange Act.
(2) CFTC JURISDICTION.—No provision of this
section shall be construed as altering, limiting, or
otherwise affecting the applicability of the Com-
modity Exchange Act to, or the jurisdiction of the
Commodity Futures Trading Commission over, trad-
ing in transactions in, or based on, nonfinancial
commodities with finite supplies.
(b) DEFINITIONS.—For purposes of this section, the
following definitions shall apply:
(1) ELIGIBLE
CONTRACT
PARTICIPANT.—The
term ‘‘eligible contract participant’’ means any of
the following persons acting for its own account:
(A) Any depository institution (as defined
in section 3 of the Federal Deposit Insurance
Act), foreign bank (as defined in section 1(b) of
the International Banking Act of 1978), Fed-
eral or State credit union (as defined in section
101 of the Federal Credit Union Act), corpora-
tion organized under section 25A of the Federal
Reserve Act, corporation operating under sec-
tion 25 of such Act, trust company, or affiliate
of any such person.
(B) An insurance company (as defined in
section 2(q) of the Bank Holding Company Act
of 1956).
(C) An investment company subject to reg-
ulation under the Investment Company Act of
1940 or a foreign person performing a similar
role or function subject as such to foreign regu-
lation (regardless of whether the investors in
such investment company or foreign person are
themselves eligible contract participants).
(D) A commodity pool which has total as-
sets exceeding $5,000,000 and which is formed
and operated by a person subject to regulation
under the Commodity Exchange Act or a for-
eign person performing a similar role or func-
tion subject as such to foreign regulation (re-
gardless of whether the investors in such com-
modity pool are themselves eligible contract
participants).
(E) A corporation, partnership, proprietor-
ship, organization, trust, or other entity—
(i) which 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 any other agreement by
any entity referred to in clause (i) of this
subparagraph or subparagraph (A), (B),
(C), or (D); or
(iii) which has a net worth of
$1,000,000 and enters into an agreement,
contract, or transaction in connection with
the conduct of its business or to manage
the risk associated with an asset or liabil-
ity owned or incurred or reasonably likely
to be owned or incurred by such person in
the conduct of its business.
(F) A broker or dealer subject to regula-
tion under the Securities Exchange Act of 1934
or a foreign person performing a similar role or
function subject as such to foreign regulation,
except that if such broker or dealer is a natural
person or proprietorship, the broker or dealer
shall not be deemed an eligible contract partici-
pant unless the broker or dealer also meets the
requirements of subparagraph (E) or owns and
invests on a discretionary basis not less than
$25,000,000 in investments.
(G) A futures commission merchant, floor
broker, or floor trader subject to regulation
under the Commodity Exchange Act or a for-
eign person performing a similar role or func-
tion subject as such to foreign regulation, ex-
cept that if such futures commission merchant,
floor broker, or floor trader is a natural person
or proprietorship, the futures commission mer-
chant, floor broker, or floor trader shall not be
deemed an eligible contract participant, unless
the futures commission merchant, floor broker,
or floor trader also meets the requirements of
subparagraph (E) or owns and invests on a dis-
cretionary basis not less than $25,000,000 in
investments.
(2) FINANCIAL
ELECTRONIC
TRADING
SYS-
TEM.—The term ‘‘financial electronic trading sys-
tem’’ means any person or group of persons, includ-
ing any exchange that has been designated as a con-
tract market by the Commodity Futures Trading
Commission, that constitutes, maintains, or provides
an electronic facility or system, including a computer
system or network, in which—
(A) each participant is a financial institu-
tion (as defined in or under section 402(9) of
the Federal Deposit Insurance Corporation Im-
provement Act of 1991 or in or under section
509(3)(A) of the Gramm-Leach-Bliley Act) that
is an eligible contract participant;
(B) participants have the ability to com-
municate information or to execute or trade
agreements, contracts, or transactions that are
open to participants in such facility or system;
and
(C) no participant may act as an agent for
another person in using the system.
(3) OVER-THE-COUNTER
DERIVATIVE
INSTRU-
MENT.—The term ‘over-the-counter derivative in-
strument’ has the same meaning as in section
408(2) of the Federal Deposit Insurance Corpora-
tion Improvement Act of 1991.
SEC. 6. CLEARING BANKS.
(a) IN GENERAL.—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 con-
trol of a State bank which operates, or operates as,
a multilateral clearing organization pursuant to sec-
tion 409 of the Federal Deposit Insurance Corpora-
tion 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
a State bank referred to in paragraph (1) shall exer-
cise 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 State bank for
which the conservator or receiver has been appointed, as
the Comptroller of the Currency has with respect to a con-
servator or receiver for a national bank and the national
bank for which the conservator or receiver has been ap-
pointed.
‘‘(c) BANKRUPTCY PROCEEDINGS.—The Comptroller
of the Currency (in the case of a national bank which oper-
ates, or operates as, a multilateral clearing organization
pursuant to section 409 of the Federal Deposit Insurance
Corporation Improvement Act of 1991) or the Board (in
the case of a State 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 insol-
vency law.’’.
(b) 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 amend-
ed by striking ‘; or’ and inserting the following: ‘, ex-
cept that a bank or a corporation organized under
section 25A of the Federal Reserve Act which oper-
ates, or operates as, a multilateral clearing organiza-
tion 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 Comptroller of the Currency (in the case of
a national bank) or the Board of Governors of the
Federal Reserve System (in the case of a State bank
or such a corporation); 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 a bank or a corporation organized
under section 25A of the Federal Reserve Act which oper-
ates, 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 person that is a commercial
or savings bank, industrial savings bank, sav-
ings and loan association, trust company, a
bank or a corporation organized under section
25A of the Federal Reserve Act and, when any
such person is acting as agent or custodian for
a customer in connection with a securities con-
tract, as defined in section 741 of this title,
such customer; and