[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3748 Introduced in House (IH)]

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.

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

SECTION 1. SHORT TITLE.

    This Act shall be cited as the ``Derivatives Supervision Act of 
1994.''

                TITLE I--FEDERAL DERIVATIVES COMMISSION

SEC. 101. DECLARATION OF PURPOSE.

    It is the purpose of this title to establish a Federal Derivatives 
Commission which shall establish principles and standards for the 
supervision by Federal financial institution regulators of financial 
institutions engaged in derivatives activities and make recommendations 
to promote uniformity in the supervision of these financial 
institutions. The Commission's actions shall be designed to promote 
consistency in regulatory practices and to insure progressive and 
vigilant supervision.

SEC. 102. DEFINITIONS.

    As used in this title--
            (1) the term ``Federal financial institutions regulatory 
        agencies'' means the Office of the Comptroller of the Currency, 
        the Board of Governors of the Federal Reserve System, the 
        Federal Deposit Insurance Corporation, the Office of Thrift 
        Supervision, the Securities and Exchange Commission, and the 
        Commodity Futures Trading Commission;
            (2) the term ``Commission'' means the Federal Derivatives 
        Commission;
            (3) the term ``Federal banking agency'' has the same 
        meaning as in section 3 of the Federal Deposit Insurance Act 
        (12 U.S.C. 1813);
            (4) the term ``financial institution'' means any 
        institution described in section 402(9) of the Federal Deposit 
        Insurance Corporation Improvement Act of 1991, any Government 
        sponsored enterprise, or any other institution (including any 
        type of end user) as determined by the Commission;
            (5) the term ``Government sponsored enterprise'' has the 
        same meaning as in section 1404(e) of the Financial 
        Institutions Reform, Recovery, and Enforcement Act of 1989;
            (6) the term ``qualified financial contract'' has the same 
        meaning as in section 11(e)(8)(D) of the Federal Deposit 
        Insurance Act (12 U.S.C. 1821(e)(8)(D)), except that the 
        Commission may determine any similar agreement to be a 
        qualified financial contract for purposes of this title; and
            (7) the term ``derivatives activities'' means activities by 
        a financial institution involving qualified financial contracts 
        or any similar agreements that the Commission determines are 
        qualified financial contracts for purposes of this title.

SEC. 103. FEDERAL DERIVATIVES COMMISSION.

    (a) Establishment; Composition.--There is established 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 Supervision,
            (5) the Chairman of the Securities and Exchange Commission,
            (6) the Chairman of the Commodity Futures Trading 
        Commission, and
            (7) the Secretary of Treasury.
    (b) Chairmanship.--The Chairman of the Commission 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 compensation but shall be entitled to 
reasonable expenses incurred in carrying out his official duties as 
such a member.

SEC. 104. COSTS AND EXPENSES OF COMMISSION.

    One-sixth of the costs and expenses of the Commission, including 
the salaries of its employees, shall be paid by each of the Federal 
financial institutions 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. 105. FUNCTIONS OF COMMISSION.

    (a) Establishment of Principles and Standards.--
            (1) The Commission shall establish principles and standards 
        related to capital, accounting, disclosure, suitability, or 
        other appropriate regulatory actions for the supervision of 
        financial institutions engaged in derivatives activities by the 
        Federal financial institutions regulatory agencies.
            (2) Each Federal financial institutions regulatory agency 
        shall issue substantially similar regulations 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) Any financial institution not subject to supervision by 
        a Federal banking agency or the Commodity Futures Trading 
        Commission shall be supervised by the Securities and Exchange 
        Commission to the extent of their derivatives activities, 
        except as otherwise provided by the Commission.
    (b) Recommendations Regarding Supervisory Actions.--
            (1) In establishing principles and standards under 
        subsection (a), the Commission shall consider and may make 
        recommendations for comparable regulatory action by the Federal 
        financial institutions regulatory agencies in other matters 
        related to financial institutions engaged in derivatives 
        activities, such as, but not limited to, the need to establish 
        principles and standards for:
                    (A) Strong capital requirements (with particular 
                attention to a leverage ratio where appropriate) to 
                guard generally against risks at financial 
                institutions, including added risks that may be posed 
                by derivatives activities;
                    (B) Discouraging active trading in derivatives 
                markets by financial institutions, particularly those 
                with access to federally insured deposits, unless 
                management can demonstrate that the institution has 
                both adequate capital and technical capabilities;
                    (C) Joint regulatory examinations by the Federal 
                banking agencies of insured depository institutions 
                that are derivatives dealers and any affiliates;
                    (D) Board of director responsibility with respect 
                to the oversight of derivatives activities, including 
                specific written policies approved by the board of 
                directors to be in place for dealers and end users of 
                derivatives setting prudential standards for management 
                of the risks involved in derivatives activities and 
                establishing a framework for internal controls;
                    (E) Guidelines for the prudent use of collateral by 
                counterparties to derivatives transactions;
                    (F) The appropriate parameters, models and 
                simulations of purposes of evaluating a financial 
                institution's credit and market risk posed by 
                derivatives activities;
                    (G) Guidelines as to appropriate credit risk 
                reserves in connection with derivatives activities;
                    (H) Increased standardization of documentation and 
                the use of standard documents by all market 
                participants;
                    (I) Minimum prudential practices for municipalities 
                and pension funds that may use derivatives;
                    (J) Enhanced disclosures to mutual fund customers 
                of the risks that may be posed to mutual funds that are 
                end users of derivatives products;
                    (K) Guidelines related to legal risk, including, 
                but not limited to, foreign legal risk. Such guidelines 
                may address the steps a financial institution should 
                take to obtain adequate assurances of legal 
                enforceability of derivatives contracts, including the 
                assurances of legal enforceability of netting 
                provisions that should be obtained before an 
                institution relies on such netting provisions; and
                    (L) Regulations to protect against systemic risk.
            (2) When a recommendation of the Commission is found 
        unacceptable by one or more of the applicable Federal financial 
        institutions regulatory agencies, the agency or agencies shall 
        submit to the Commission, within a time period specified by the 
        Commission, a written statement of the reasons the 
        recommendation is unacceptable and such statement shall be 
        published in the Federal Register.
    (c) Development of Uniform Reporting System.--The Commission shall 
develop uniform reporting systems for financial institutions engaged in 
derivatives activities. The authority to develop uniform reporting 
systems shall not restrict or amend the requirements of section 781(i) 
of title 15 of the United States Code.
    (d) Training for Examiners and Assistant Examiners.--The Commission 
shall sponsor training programs concerning derivatives activities for 
examiners and assistant examiners employed by the Federal financial 
institutions regulatory agencies. Such training programs shall be open 
to enrollment by employees of State financial institutions supervisory 
agencies and employees of the Federal Housing Finance Board and the 
Department of Housing and Urban Development's Office of Federal Housing 
Enterprise Oversight under conditions specified by the Commission.
    (e) Effect on Federal Regulatory Agency Research and Development of 
New Financial Institutions Supervisory Methods.--Nothing in this title 
shall be construed to limit or discourage Federal financial institution 
regulatory agency research and development of new financial 
institutions supervisory methods and tools related to derivatives 
activities, nor to preclude the field testing of any innovation devised 
by any Federal financial institution regulatory agency.
    (f) Annual Report.--Not later than April 1 of each year, the 
Commission shall prepare a report covering its activities during the 
preceding calendar year.

SEC. 106. STATE LIAISON.

    To encourage the application of uniform examination principles and 
standards by State and Federal supervisory agencies, the Commission 
shall establish a liaison committee composed of five representatives of 
State agencies which supervise financial institutions which shall meet 
at least twice a year with the Commission. Members of the liaison 
committee shall receive a reasonable allowance for necessary expenses 
incurred in attending meetings.

SEC. 107. ADMINISTRATION.

    (a) Authority of Chairman of Commission.--The Chairman of the 
Commission is authorized to carry out and to delegate the authority to 
carry out the internal administration of the Commission, including the 
appointment and supervision of employees and the distribution of 
business among members, employees, and administrative units.
    (b) Use of Personnel, Services, and Facilities of Federal Financial 
institutions Regulatory Agencies.--In addition to any other authority 
conferred upon it by this title, in carrying out its functions under 
this title, the Commission may utilize, with their consent and to the 
extent practical, the personnel, services, and facilities of the 
Federal financial institutions regulatory agencies, with or without 
reimbursement therefor.
    (c) Compensation, Authority, and Duties of Officers and Employees; 
Experts and Consultants.--In addition, the Commission may--
            (1) subject to the provisions of title 5 relating to the 
        competitive service, classification, and General Schedule pay 
        rates, appoint and fix the compensation of such officers and 
        employees as are necessary to carry out the provisions of this 
        title, and to prescribe the authority and duties of such 
        officers and employees; and
            (2) obtain the services of such experts and consultants as 
        are necessary to carry out the provisions of this title.

SEC. 108. RISK MANAGEMENT TRAINING.

    The Commission shall develop training seminars in risk management 
techniques related to derivatives activities for employees of the 
Federal financial institution regulatory agencies and the employees of 
financial institutions.

SEC. 109. INTERNATIONAL NEGOTIATIONS.

    The Chairman of the Board of Governors of the Federal Reserve 
System, in consultation with the members of the Commission, shall 
encourage governments, central banks, and regulatory authorities of 
other industrialized countries to work toward maintaining and, where 
appropriate, adopting comparable supervisory standards and regulations, 
particularly capital standards, for financial institutions engaged in 
derivatives activities.

SEC. 110. CREDIT UNIONS.

    Insured credit unions (as defined in section 101(7) of the Federal 
Credit Union Act) shall be supervised for purposes of derivatives 
activities by the National Credit Union Administration under standards 
no less stringent than standards under which Federal depository 
institutions (as defined in section 3(c) of the Federal Deposit 
Insurance Act) are supervised by the Federal banking agencies.

                   TITLE II--SUPERVISORY IMPROVEMENTS

SEC. 201. UNSAFE OR UNSOUND BANKING PRACTICES.

    (a) In General.--Failure of an institution-affiliated party engaged 
in derivatives activities to have adequate technical expertise may be 
deemed by the appropriate Federal banking agency to constitute an 
unsafe or unsound banking practice within the meaning of section 8 of 
the Federal Deposit Insurance Act (12 U.S.C. 1818).
    (b) Rule of Construction.--This section shall be in addition to and 
not in derogation of the authority of any appropriate Federal banking 
agency under section 8 of the Federal Deposit Insurance Act to 
determine unsafe or unsound banking practices.

SEC. 202. INTERNAL CONTROLS.

    Section 39(a)(1)(A) of the Federal Deposit Insurance Act (12 U.S.C. 
1831p-1(a)(1)(A)) is amended by striking ``internal controls'' and 
inserting ``internal controls (including internal controls for 
derivatives activities''.

SEC. 203. FOREIGN BANK SUPERVISION.

    Section 7(d)(2)(A) of the International Banking Act of 1978 (12 
U.S.C. 3105(d)(2)(A)) is amended after ``country'' by inserting ``, 
including, in the case of a foreign bank engaged in derivatives 
activities, comprehensive supervision and regulation for derivatives 
activities (as that term is defined in the Derivatives Supervision Act 
of 1994). In making any determination under this paragraph, the Board 
shall consider whether the home country maintains comprehensive 
supervision and regulation of derivatives activities, including capital 
and disclosure standards, not less stringent than United States 
standards.''.

          TITLE III--FINANCIAL INSTITUTION INSOLVENCY REFORMS

SEC. 301. CONFORMING DEFINITIONS.

    (a) Section 11(e)(8)(D)(vi) of the Federal Deposit Insurance Act 
(12 U.S.C. 1821(e)(8)(D)(vi)) is amended--
            (1) by striking ``purchased'' each time it appears; and
            (2) after ``currency option'' inserting ``, equity 
        derivative, equity or equity index swap, equity or equity index 
        option, bond option, spot foreign exchange transaction''.
    (b) Section 101(55) of the Bankruptcy Code (11 U.S.C. 101(55)) is 
amended--
            (1) in paragraph (A), by inserting ``any qualified 
        financial contract within the meaning of section 
        1821(e)(8)(D)(i) of title 12, United States Code,'' after 
        ``currency option,''; and
            (2) in paragraph (C) by inserting ``and transactions 
        documented thereunder.'' after ``supplemental''.

SEC. 302. FAILED AND FAILING INSTITUTIONS.

    Section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 
1821(e)(8)) is amended by adding the following new subparagraphs:
                    ``(F) Preemption.--Notwithstanding any other 
                provision of law, no automatic stay, injunction, 
                avoidance, moratorium, or other restraint, whether 
                issued or granted by a bankruptcy court or any other 
                judicial body, any administrative body, or whether 
                created by statute or otherwise, shall limit or delay 
                the ability of the Corporation, in any capacity, to 
                exercise its authority, rights or powers in accordance 
                with section 11(e)(8) of this Act. This provision shall 
                not limit any other right, power or authority of the 
                Corporation in any capacity.
                    ``(G) Undercapitalized insured depository 
                institutions.--The Corporation, in consultation with 
                the appropriate Federal banking agencies, shall 
                prescribe regulations requiring expanded recordkeeping 
                for qualified financial contracts (including market 
                valuations) by insured depository institutions that are 
                undercapitalized as defined in section 38 of the 
                Federal Deposit Insurance Act (12 U.S.C. 1831o).''.

SEC. 303. QUALIFIED FINANCIAL CONTRACT TRANSFERS.

    Section 11(e)(10) of the Federal Deposit Insurance Act, (12 U.S.C. 
1821(e)(10)), is amended by adding the following new subparagraphs:
                    ``(C) Effect of notice.--If a person who is a party 
                to a qualified financial contract is notified by the 
                Corporation as receiver of a depository institution by 
                the close of business (Eastern Standard Time) on the 
                business day following its appointment as receiver that 
                the Corporation has transferred all qualified financial 
                contracts between the depository institution and such 
                person or its affiliates pursuant to subparagraph 
                (9)(A), then the provisions of subparagraph (8)(A) 
                shall not apply. For purposes of this subparagraph, the 
                Corporation as receiver shall be deemed to have 
                notified a person if it has taken steps reasonably 
                calculated to provide notice to such person.
                    ``(D) Notice extension.--The Corporation may extend 
                the notice period described in paragraph (C) for a 
                reasonable period not to exceed 5 days, if the 
                Corporation determines that such an extension may 
                maximize the net present value return from the sale or 
                disposition of such qualified financial contracts.
                    ``(E) Treatment of bridge banks.--Neither a bridge 
                bank nor an institution organized by the Corporation 
                and immediately placed into conservatorship or placed 
                into conservatorship at the time of a purchase and 
                assumption transaction with the receiver of a failed 
                depository institution for which the Corporation has 
                been appointed receiver shall be considered a 
                depository institution in default for purposes of this 
                paragraph, paragraph 8 and paragraph 9 of this 
                section.''.

SEC. 304. CLARIFYING AMENDMENTS.

    Section 11(e)(8)(D)(vii) of the Federal Deposit Insurance Act (12 
U.S.C. 1821(e)(8)(D)(vii)) is amended to read as follows: ``(vii) 
Notwithstanding any other provision of law, any master agreements for 
contracts or agreements described in clause (ii), (iii), (iv), or (vi), 
together with all supplements to such master agreement shall be treated 
as 1 swap agreement for purposes of this Act and title 11 of the United 
States Code.''.

SEC. 305. TECHNICAL AMENDMENTS.

    (a) Section 11(e)(8)(D) of the Federal Deposit Insurance Act (12 
U.S.C. 1821(e)(8)(D)) is amended--
            (1) in clause (i) by inserting ``spot contract,'' after 
        ``swap agreement,''.
            (2) in clause (iv) by striking ``(24)'' and inserting 
        ``(25)'';
            (3) in clause (v) by striking ``101(41)'' and inserting 
        ``101(47)''.
    (b) Section 11(e)(8)(E)(i) of the Federal Deposit Insurance Act (12 
U.S.C. 1821(e)(8)(E)(i)) is amended by striking ``;'' and inserting ``, 
other than a default based solely upon the appointment of a 
conservator;''.

                        TITLE IV--MISCELLANEOUS

SEC. 401. SAVINGS PROVISION.

    The provisions of this Act shall be in addition to and not in 
derogation of any existing authority of a Federal financial institution 
regulatory agency to supervise or regulate derivatives activities 
provided under any other applicable law.

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