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forward contract, swap agreement or any other simi-
lar agreement or instrument which the Commission
determines to be a derivative financial instrument
for purposes of this title; and
(9) the term ‘‘derivatives activities’’ means ac-
tivities by a financial institution involving derivative
financial instruments.
SEC. 103. FEDERAL DERIVATIVES COMMISSION.
(a) ESTABLISHMENT; COMPOSITION.—There is es-
tablished the Federal Derivatives Commission which shall
consist of—
(1) the Chairman of the Board of Governors of
the Federal Reserve System,
(2) the Comptroller of the Currency,
(3) the Chairperson of the Board of Directors
of the Federal Deposit Insurance Corporation,
(4) the Director of the Office of Thrift Super-
vision,
(5) the Chairman of the Securities and Ex-
change Commission,
(6) the Chairman of the Commodity Futures
Trading Commission, and
(7) the Secretary of Treasury.
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(b) CHAIRMANSHIP.—The chairman of the Commis-
sion shall be the Chairman of the Board of Governors of
the Federal Reserve System.
(c) DESIGNATION OF OFFICERS AND EMPLOYEES.—
The members of the Commission may, from time to time,
designate other officers or employees of their respective
agencies to carry out their duties on the Commission.
(d) COMPENSATION AND EXPENSES.—Each member
of the Commission shall serve without additional com-
pensation but shall be entitled to reasonable expenses
incurred in carrying out his official duties as such a
member.
(e) COSTS AND EXPENSES OF COMMISSION.—One-
sixth of the costs and expenses of the Commission, includ-
ing the salaries of its employees, shall be paid by each
of the Federal financial institution regulatory agencies.
Annual assessments for such share shall be levied by the
Commission based upon its projected budget for the year,
and additional assessments may be made during the year
if necessary.
SEC. 104. FUNCTIONS OF COMMISSION.
(a) ESTABLISHMENT OF PRINCIPLES AND STAND-
ARDS.—
(1) The Commission shall establish principles
and standards to improve risk management and the
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prudent use of derivative financial instruments by fi-
nancial institutions. Such actions by the Commission
shall include principles and standards related to—
(A) capital or limits on leverage as appro-
priate;
(B) accounting (consistent with section 37
of the Federal Deposit Insurance Act);
(C) disclosure;
(D) sales practices or appropriateness; and
(E) such other regulatory actions for the
supervision of financial institutions engaged in
derivatives activities deemed appropriate by the
Commission.
(2) Each Federal financial institution regu-
latory agency shall issue substantially similar regula-
tions or guidelines governing derivatives activities for
purposes of implementing paragraph (1), unless it
finds that implementation of substantially similar
regulations is not necessary or appropriate in the
public interest.
(3) For purposes of implementing paragraph
(1), the Commission may establish differing stand-
ards for different classes of financial institutions, in-
cluding, but not limited to, dealers, end-users, or
municipalities as appropriate.
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(4) Any financial institution not subject to su-
pervision by a Federal banking agency or the Com-
modity Futures Trading Commission shall be super-
vised by the Securities and Exchange Commission to
the extent of their derivatives activities, except as
otherwise provided by the Commission. The Securi-
ties and Exchange Commission shall have the au-
thority to enforce the provisions of this title against
any financial institution covered by this paragraph
to the extent that such provisions govern the con-
duct or activities of the financial institution as if
they were provisions of the Securities Exchange Act
of 1934.
(b) RECOMMENDATIONS REGARDING SUPERVISORY
ACTIONS.—
(1) In establishing principles and standards
under subsection (a), the Commission shall consider
and may make recommendations for comparable reg-
ulatory action by the Federal financial institution
regulatory agencies in other matters related to fi-
nancial institutions engaged in derivatives activities,
including the need to establish principles and stand-
ards for the following:
(A) Strong capital requirements (with par-
ticular attention to a leverage ratio where ap-
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propriate) to guard generally against risks at fi-
nancial institutions, including added risks that
may be posed by derivative activities.
(B) Comprehensive risk management sys-
tems that—
(i) are commensurate in scope, size,
and complexity to the levels of activities
and risks assumed by financial institutions;
(ii) include limits and controls with
respect 
to 
levels 
or 
risk 
regarding
counterparty credit, concentration, and
other relevant market factors;
(iii) ensure that market factors affect-
ing risk exposures are adequately meas-
ured, monitored, controlled and disclosed;
and
(iv) adequately control potential losses
and undue risks arising from risk control
system deficiencies.
(C) To the extent practicable, joint regu-
latory examinations by the Federal banking
agencies of insured depository institutions that
are derivatives dealers and any affiliates.
(D) Effective senior management super-
vision and oversight by the board of directors of
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a financial institution to ensure that derivatives
activities are conducted in a safe and sound
manner and are consistent with the board of di-
rector’s overall risk management philosophy
and the institution’s business strategy.
(E) The prudent use of collateral by
counterparties to derivatives transactions.
(F) Appropriate parameters, models and
simulations for purposes of evaluating a finan-
cial institution’s exposure to derivatives activi-
ties and relevant economic scenarios and fur-
ther specifics regarding stress test.
(G) Appropriate credit risk reserves in con-
nection with derivatives activities.
(H) Protection against legal risk, including
foreign legal risk.
(I) Minimum prudential practices for mu-
nicipalities and pension funds that may use de-
rivatives.
(J) Enhanced disclosures to mutual fund
customers of the risks that may be posed to
mutual funds that are end-users of derivative
products.
(K) Assurances that, consistent with safe
and sound banking practices, a financial insti-