[Congressional Record Volume 140, Number 38 (Tuesday, April 12, 1994)]
[House]
[Page H]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: April 12, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
       STRATEGY FOR IMPROVING INTERNATIONAL FINANCIAL REGULATION

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Texas [Mr. Gonzalez] is recognized for 60 minutes.
  Mr. GONZALEZ. Mr. Speaker, the world's financial system is growing 
ever larger and more complex. New communications technology, exotic 
financial instruments, the growing number of global corporations, and a 
worldwide recognition of the benefits of free markets have resulted in 
a much more integrated world financial system.
  Because of our standing as the world's largest economy, trader and 
capital market, the United States holds an influential position in the 
world financial system. Our influence is further enhanced by the fact 
that the dollar is the currency of choice in global trade and 
investment transactions. But our status in the world's financial system 
also raises questions about our ability to protect our currency and to 
maintain our financial leadership.
  The United States should lead the world's financial system in a 
direction that will promote stability and foster efficient growth. One 
way to help maintain our position is to champion efforts aimed at 
stabilizing the world financial system. As part of that effort I have 
developed a five part strategy for dealing with several pressing 
domestic and international financial issues that affect the stability 
of the United States and world financial system.
  Instead of waiting for catastrophe to strike, we should show American 
financial leadership and take a proactive stance in solving these 
problems. My five-part strategy for enhancing stability and efficiency 
calls for a combination of legislation, hearings, studies and a 
commission that will help to pinpoints the problem and develop 
solutions for congressional action.
  Part one of the strategy, which I am implementing today, involves the 
introduction of derivatives legislation. Over the past year there has 
been a great deal of regulatory action, here and abroad, on the issue 
of derivatives, but more needs to be done. The United States must 
improve domestic oversight, and at the same time, take a leadership 
role in getting the international community to deal with this problem. 
My derivatives legislation enhances domestic oversight of derivatives 
and it encourages greater international oversight. I will provide a 
more detailed explanation of the legislation later in this statement.
  Part two of the strategy involves a hearing on banking system 
exposure to hedge funds. I have already announced that the Banking 
Committee will hold a hearing on this issue on Wednesday, April 13. 
This issue strikes at the heart of our banking system's role in 
promoting excess speculation.
  Hedge funds receive billions in loans from banks and are a major 
purchaser of bank derivative products. Hedge funds are increasingly 
blamed for causing volatility in the financial markets and there is a 
growing chorus of legislators calling for expanded regulation of hedge 
funds.
  In order to protect the banking system, we must learn more about 
hedge funds. Like derivatives, there is a dearth of information on 
hedge funds, and for that reason, the Committee must consider whether 
legislation is needed to shed light on these issues.
  It is also important to explore the similarities between bank trading 
accounts and hedge funds. Currently, banks operate multi-billion dollar 
trading accounts that dwarf the financial resources of the hedge funds. 
We must learn how bank trading accounts affect the safety and soundness 
of individual banks and the stability of our financial system.
  Part three of the strategy calls for the establishment of a blue 
ribbon commission to provide the world's major financial centers with 
recommendations for improving regulatory coordination related to 
financial issues. As the world's largest economy and most open capital 
market, it is imperative that the United States be the world's leader 
in promoting sound financial regulation and the Commission is a good 
vehicle to exemplify our leadership role.
  Part four will encompass amending the Humphrey-Hawkins Act reporting 
requirements by requiring greater disclosure of United States 
international financial policies. The Secretary of the Treasury and the 
Federal Reserve Chairman will appear together before the House and 
Senate Banking Committees to report on both domestic monetary policy 
and international financial policy, and how each set of policies 
affects the other.
  The Humphrey-Hawkins Act was passed at a time when international 
financial issues were not a front-burner issue for our economy. The 
Congress and the public need and deserve more in-depth analysis of how 
international financial issues affect United States economic policy-
making and I will introduce legislation in the next several weeks to 
achieve that goal.
  Part five will consist of a series of studies on various 
international financial issues. One of the studies will examine the 
long-term prospects of the dollar. To maintain the preeminence of our 
currency, we must fully understand what factors affect its value. The 
United States now has the luxury of paying its debts in dollars. If our 
currency were to falter, the United States could be plunged into 
economic chaos. We could be forced to pay our overseas creditors in 
Japanese yen or German deutsche marks. In addition, the goods we 
purchase from abroad would have to be paid for with a foreign currency, 
not the dollar.
  At stake is our financial livelihood, yet academics and government 
officials alike have shown little interest in focusing on this issue. I 
will ask for a study of this issue and ask for recommendations that can 
be implemented to preserve our currency's standing.
  Another study will require the Federal Reserve to investigate and 
report to Congress on the international flow of the United States 
currency. Currently over half of our currency is exported to foreign 
lands and the Federal Reserve has little knowledge of where it ends up. 
We need to know why the massive exodus of dollars occurs and what 
implications it has for our financial future.
  The rest of this statement will focus on the derivatives legislation 
that I have introduced today. Over the next several weeks I will 
introduce legislation and send letters to implement the other measures 
I mentioned.


                    need for derivatives legislation

  There are many risks associated with derivatives, but the major 
concerns of the Banking Committee are the systemic risk they pose, and 
the protection of the taxpayer-backed deposit insurance funds. The bank 
regulators have assured us that market participants are well managed 
and that the markets are well organized. But it is the role of the 
Congress to ensure that the regulators have not erred in their 
assessment.
  Although the bank, thrift and securities regulatory agencies have all 
begun to realize the risks of derivatives and have taken a number of 
steps to improve regulation and supervision of derivatives dealers and 
active end-users, these steps are often lacking in coordination and can 
be enhanced.
  I can think of at least five arguments why there is a need to enhance 
the actions of the regulators by passing a derivatives law. First, by 
passing a law on derivatives issues, the enforcement powers of the 
regulatory agencies are increased. Currently, the regulators must go 
through an arduous process to show that a banking practice or activity 
impairs the safety and soundness of an insured depository institution 
in order to bring about an enforcement action. My bill will make 
actions such as improper management or false disclosures related to 
derivatives a direct violation of the law. Greater enforcement powers 
mean that the regulators can act more swiftly to stop miscreants.
  A second benefit of legislation would be the standardization of 
regulation and supervision of bank derivative activities. Today, each 
regulator takes a different approach to supervising derivative 
activities. This creates an environment of regulator shopping that can 
only culminate in a race to the bottom of the regulatory barrel. 
Standardizing regulation and supervision will increase efficiency and 
improve the system.
  The third benefit would be greater reporting of derivative 
activities. The Banking Committee's jurisdiction is limited--we cannot 
require greater disclosure by securities firms, commodities traders, 
etc. However, as banks report additional information about their 
derivatives activities, other dealers and active end-users will be 
forced to follow because ratings agencies and other major users of 
financial information will demand matching disclosure. One goal of my 
bill is to make the banking industry the leader in providing greater 
disclosure and understanding of the effects of derivatives.
  We are still learning how derivatives affect the financial condition 
of individuals banks and the stability of our financial system. 
Industry trade groups are to be commended for their efforts to bring 
about a greater understanding of derivative activities, but we cannot 
rely solely on their suggestions. Another benefit of my legislation is 
that it keeps the regulators focused on the safety and soundness 
aspects of derivatives and it provides them with new tools so they can 
gain a better understanding of the workings of derivatives.
  Finally, my legislation enhances congressional oversight of 
derivatives activities. Derivatives are a complex financial issue and 
additional reporting will benefit both the Congress and the public.
  I will now focus more on the specifics of the legislation and explain 
the need for each major initiative within the bill. The legislation can 
be broken down into three major segments: 1) enhanced supervision and 
disclosure, 2) greater international regulatory cooperation, and 3) a 
study on speculation.


                  enhanced supervision and disclosure

  The first part of the legislation provides for greater disclosure of 
bank derivatives activities and gives bank regulators greater 
supervisory and enforcement tools to ensure that those activities are 
carried out in a safe and sound manner.
  Over the past several years there have been numerous industry, 
government and academic reports on derivatives. One universal 
recommendation of those studies is to improve public disclosure of 
derivative activities. Due to a lack of adequate disclosure, regulators 
and investors alike are nervous about individual firm and systemic 
risks associated with derivative products. Increased disclosure will 
result in a greater understanding of those risks.
  Many efforts are now underway to enhance disclosure. Derivative 
industry trade groups, the bank and securities regulators as well as 
the accounting standards setting body, FASB, are all engaged in efforts 
to require greater disclosure. The bank regulatory agencies recently 
issued a joint statement on disclosure which stated,

       The banking agencies believe that current Call Report 
     requirements for off-balance sheet (derivative) contracts 
     need to be improved to provide better information on the 
     nature and extent of these activities and the risk exposures 
     of individual banks and the banking system.

  A banking industry trade group, called the Group of Thirty, in their 
report, ``Derivatives: Practices and Principles'' echoes this 
sentiment:

       Financial statements of dealers and end-users should 
     contain sufficient information about their use of derivatives 
     to provide an understanding of the purposes for which 
     transactions are undertaken, the extent of the transactions, 
     the degree of risk involved, and how the transactions have 
     been accounted for.

  Unfortunately, given the splintered regulatory structure that exists 
in the United States and around the globe, these efforts to increase 
disclosure are not well coordinated. My bill will put the banking 
industry in a leadership position by requiring prudential disclosure.


                    confidential emergency reporting

  In addition to greater public disclosure, my bill requires the bank 
regulators to establish emergency reporting procedures to obtain 
information from banks that are derivative dealers and active end-users 
of derivatives. One of the most worrisome aspects of derivatives is the 
uncertainty about their effect on market stability. There is a fear 
among many policymakers that a catastrophic shock to the financial 
system could be caused, or at least aggravated, by derivatives.
  My emergency reporting provision is necessary because it provides the 
regulators with immediate access to information on bank derivatives 
activities during times of emergency or great turmoil. To illustrate, 
consider the fact that banks file their Call Reports on a quarterly 
basis. In the world of derivatives, 3 months can be an eternity, 
especially in an environment of market turmoil. The value of a 
derivatives book changes hourly, sometimes drastically, which could 
result in a rapid worsening of the financial condition of a bank 
derivatives dealer or active end-user.
  To properly gauge how rapid changes in a bank's derivatives book is 
affecting its financial situation, the regulators need to establish an 
authoritative means of obtaining the information necessary to make such 
determinations. While the bank regulators could ask for, and most 
likely receive the information, the legislation goes a step further by 
requiring the reporting mechanism to be established and functioning 
within 1 year.


                    increased qualitative disclosure

  In addition to requiring a greater amount of quantitative information 
on derivatives, my legislation also requires the bank regulators to 
encourage depository institutions to disclose qualitative information 
about their derivatives activities. These provisions will require 
depository institutions to provide a description of the nature of their 
derivative holdings, their overall operating and investment strategies, 
and the methods they use to value their derivatives holdings.
  Regarding the need to increase disclosure of qualitative information 
about derivatives, the Financial Accounting Standards Board recently 
stated:

       . . . one factor contributing to confusion and concern has 
     been inadequate explanation of the reasons companies have 
     entered into various types of financial instruments. A 
     narrative description of derivatives would be helpful.

  Many banks are finding out that stockholders are also demanding 
greater qualitative disclosure. A recent press article revealed that 
the stock price of BankOne in Ohio was hurt by the bank's inability to 
properly explain its derivatives strategy. Other banks, like Banker's 
Trust, have experienced similar problems. Increased qualitative 
disclosure will add to the public's understanding of derivatives and it 
will also foster greater disclosure on non-bank derivatives activities 
as investors demand similar disclosure from non-bank users and dealers 
of derivatives.


                         regulatory cooperation

  One of the most troublesome aspects of our current financial system 
is the fragmented bank regulatory structure. I have introduced 
legislation to consolidate the bank regulatory agencies, but its future 
is uncertain. In the meantime, the fragmented approach to regulating 
and supervising derivatives serves as a prime example of the problems 
with our current regulatory structure.
  The degree of cooperation among the regulators runs from hot to tepid 
to cold depending on the issue. With derivatives, each regulator has 
its own ideas and pursues them jealously. For example, the regulators 
couldn't even work together to complete the simple task of coordinating 
their responses to the Committee's questions before the derivatives 
hearing. The Federal Reserve refused to work with the OCC and other 
regulators.
  Other examples are more critical and show a clear need to mandate 
that the regulators develop uniform policies. For example, each has 
adopted a different approach to supervision. The regulator of national 
banks, the Office of the Comptroller of the Currency [OCC], has issued 
guidelines on how to conduct derivative activities in a safe and sound 
manner independently. The OCC is well ahead of the Federal Reserve, 
which regulates bank holding companies.
  Another important example of differences in approach is speculation. 
The Office of Thrift Supervision [OTS], which is part of the Treasury 
Department, has a policy of prohibiting speculation with derivatives, 
while the OCC, another Treasury Department agency, does not discourage 
speculation, and in fact, says it is impossible to measure.
  These examples show that the bank regulatory agencies, left to 
themselves, would not commit to a partnership to tackle the derivatives 
dilemma. They cooperate in some aspects, but certainly not all. My 
legislation would require the bank regulatory agencies to develop 
uniform definitions, reporting requirements, capital standards and 
supervisory policies with respect to the derivative activities of 
insured depository institutions.
  The National Credit Union Administration is not exempt from this 
mandate. It is time the Congress started to make sure that credit 
unions are not exempt from the safety and soundness requirements that 
apply to other insured depositories.
  Another initiative aimed at forcing greater regulatory cooperation 
requires the Secretary of the Treasury to include the Chairman of the 
Federal Deposit Insurance Corporation [FDIC] and the Comptroller of the 
Currency as principals on any interagency task force or working group 
dealing with issues related to dervative financial instruments. This 
section was included because these two agencies, which have major 
jurisdiction over derivative activities, were excluded as principals 
from the President's Working Group on Financial Markets.
  The President's Working Group is charged with developing plans, 
including legislative changes, to ensure proper regulation of 
derivatives. It is inexplicable that two of the major regulatory 
agencies with jurisdiction over derivatives would not be permitted to 
vote on changes in administration policy. Excluding the FDIC and OCC 
from voting on policy changes dealing with derivatives is a dangerous 
precedent that will not be tolerated in the future.


                  senior management/board of directors

  My legislation would also establish standards of conduct for boards 
of directors and senior management at banks that engage in derivatives 
activities. It is imperative that boards of directors and senior 
management understand the risks posed by derivatives and that they 
establish proper management controls to handle those risks.
  The GAO recently released a report that I requested on the role 
officers and directors play in the failure of depository institutions. 
The report revealed some worrisome statistics. The report states:

       GAO found . . . insider problems as one of the major causes 
     of failure in 26 percent of the banks (it investigated). In 
     both open and closed banks, GAO found a strong association 
     between these insider violations and the larger problems of 
     poor administration by bank management and inadequate 
     oversight by bank boards of directors.

  Another revealing finding states:

       GAO further found that bank examiners often failed to 
     adequately communicate to bank boards and management the 
     potential seriousness of problems and violations; as a 
     result, the problems went uncorrected and became more 
     serious.

  Given the magnitude of potential problems associated with derivatives 
activities at banks, it is essential that we do not overlook the role 
played by the boards of directors and the senior management. By 
codifying their responsibilities, senior management will pay greater 
attention to derivatives risks and the bank regulators will have a 
stronger means of securing that outcome.


                          Group of Ten [G-10]

  The second major segment of the derivatives bill deals with an 
increasingly important aspect of banking system safety and soundness 
issues--international regulatory cooperation. Two inevitable trends, 
the integration of capital markets and the growing cross-border 
activities of market participants, mandate the need for greater 
international regulatory cooperation.
  Today all markets are linked and firms conduct derivatives activities 
in many different markets around the globe. Yet each market has its own 
rules, making some firms to a myriad of different regulatory and 
supervisory regimes. The result is inefficiency and ultimately, greater 
risks to the stability of the world's financial system.
  My goal is to focus attention on greater regulatory coordination of 
derivative products. A recent CRS report on derivatives supports my 
position:

       Capital markets around the globe have become so 
     interdependent that there is a possible series of disruptive 
     events which has the formidable potential of rapid 
     transmittal, placing the entire financial structure at risk 
     of severe distribution or even failure. Authorities recognize 
     this interdependence, but in spite of the perceived danger of 
     systemic risk, central banks and other regulators have been 
     slow to move preventative measures beyond the talking stage. 
     Even a methodical and unambiguous international system for 
     coordinating regulatory efforts would be a mark of progress.

  While efforts to enhance international cooperation of derivatives 
activities exist, these efforts are fragmented and inefficient. The 
recently released Appendix III of the Group of 30 report on derivatives 
entitled, ``Survey of Industry Practice'' shows that there are still 
wide disparities in the management of derivatives activities among 
international banks and other derivatives dealers. This fact clearly 
points to need to establish a mechanism to standardize industry 
practices and industry oversight so as to protect the world's financial 
system.
  I address this issue in my derivatives bill by directing the 
Secretary of the Treasury to convene a meeting of the Group of Ten [G-
10] ministers and governors to develop a plan for a study to examine 
the adequacy of the international regulation and supervision of 
derivative products.
  In 1993, the G-10 undertook a similar initiative to the one I am 
proposing when it conducted a study and issued a report to the G-10 
finance ministers and central bank governors on the turbulence in the 
foreign exchange markets. The illiminating study was called, 
``International Capital Movements and Foreign Exchange Markets,'' and 
like I am suggesting for the derivatives effort, the report was 
conducted by the G-10 with the help of the IMF, OECD and the BIS.
  There are several goals of the G-10 initiative. First, the United 
States must take a leadership role in fostering a greater understanding 
of how derivative activities impact the stability of the world's 
financial system. Being the world's financial and trade leader, the 
United States has the most to lose in the event of a capital market 
meltdown.
  Next, the United States should lead the way in examining the adequacy 
of international regulations and supervision of derivative activities 
and developing new, more inclusive mechanisms to promote coordination.
  I also believe the G-10 should study the possibility of establishing 
a single body to oversee global derivatives activity. Establishing a 
single body to coordinate derivatives oversight does not mean that the 
United States would have to lower its standards to those of other 
countries. The United States should strive to have its approach adopted 
on the merits--if United States regulatory ideas are superior we must 
see that they prevail. The vast majority of foreign regulators support 
greater disclosure and other regulations so there is a large common 
ground for approaches to regulating and supervising derivatives.
  We need to preserve the best aspects of our regulatory regime, and 
where necessary, we should not be afraid to adopt useful regulatory and 
supervisory initiatives of other nations. At a minimum, we need to have 
a better handle on how derivatives are regulated internationally, the 
systemic risks, and the means to improve our regulatory regimes to 
foster stability.


      study on speculation, derivatives tax & margin requirements

  Another concern I have about bank derivatives activities is their use 
for excess speculation. When properly used derivatives products serve 
many useful purposes by diversifying risks and increasing the 
efficiency of our financial markets and the profitability of banks. But 
the Congress did not create banks to act like casinos where taxpayer-
backed resources are gambled as derivative products in the financial 
markets.
  I am not the only legislator who has concerns about this issue. The 
European Parliament recently issued a decree in which it expressed 
grave concerns about the role speculation plays in the foreign exchange 
markets. The Parliament asked the European union to study the issue of 
how to deal with speculators, including the feasibility of imposing a 
tax on speculative transactions.
  Given the vague and inadequate answers I received on the topic of 
speculation during the Committee's October 1993 hearing on derivatives, 
I believe the bank regulators have not adequately addressed this issue. 
The regulators may even be promoting speculation by failing to address 
the issue of excess speculation taking place at banks.
  I am calling for a full study of the magnitude of speculation at the 
banks and asking for recommendations to curb excess speculation. One 
way to curb excess speculation would be to impose a tax or fee on 
derivatives transactions. Along these lines, I will ask the GAO to 
study the feasibility of imposing a tax or fee on derivative products 
used for speculative purposes.
  In October 1993 the GAO issued a report entitled, ``Futures Markets: 
A Futures Transaction Fee is Administratively Feasible.'' This report 
and a preliminary version of the report both discussed the issue of 
imposing a transactions fee on futures contracts. I am asking the GAO 
to expand this work by evaluating the feasibility of imposing such a 
fee on all derivatives transactions conducted for speculative purposes.
  I am also asking the GAO to study the OTC derivatives market and to 
evaluate the feasibility of imposing margin requirements on those 
products. Since a great deal of bank derivative transactions occur off 
organized exchanges, margin requirements are not required. Before 
gauging the feasibility of curbing speculation in the OTC market, the 
GAO will have to tell us more about how the OTC market functions and 
how it is regulated.


                              conclusions

  There are a plethora of pressing international financial issues 
facing the Banking Committee. I have developed a five-part strategy to 
deal with these issues, and I have begun implementing my strategy today 
with the introduction of the derivatives bill. Tomorrow, the second 
part of the strategy will be implemented as the Committee hosts a 
hearing on the banking system-hedge fund relationship. Over the next 
several weeks I will introduce additional legislation and request 
several studies to implement the remainder of the strategy, and from 
time to time, I will take the floor to update my colleagues on the 
progress of the Committee.

                                H.R. --

       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 may be cited as the ``Derivatives Safety and 
     Soundness Act of 1994''.

     SEC. 2. DISCLOSURE OF AMOUNTS, NATURE, AND TERMS OF 
                   DERIVATIVE FINANCIAL INSTRUMENTS IN DEPOSITORY 
                   INSTITUTION CALL REPORTS.

       (a) Insured Depository Institutions.--The Federal Deposit 
     Insurance Act (12 U.S.C. 1811 et seq.) is amended by adding 
     at the end the following new section:

     ``SEC. 44. DISCLOSURE REQUIREMENTS FOR DERIVATIVE FINANCIAL 
                   INSTRUMENTS.

       ``(a) Information Required to Be Included in Call 
     Reports.--Any report of condition made by any insured 
     depository institution in accordance with section 7(a) with 
     respect to any period beginning after December 31, 1994 shall 
     include the following information:
       ``(1) Quantitative information with respect to all 
     derivative financial instruments.--
       ``(A) Gross notional and fair value.--The gross notional 
     value and the gross fair value of any holding, position, or 
     other interest of the institution in any derivative financial 
     instrument.
       ``(B) Revenue, gains and losses.--All revenue, gains, and 
     losses of the institution attributable to any holding, 
     position, or other interest of the institution in any 
     derivative financial instrument.
       ``(C) Exposure under bilateral netting contract.--The net 
     current credit exposure of the institution under legally 
     enforceable bilateral arrangements with respect to any 
     holding, position, or other interest of the institution in 
     any derivative financial instrument.
       ``(2) Terms to maturity.--Information on the remaining term 
     to maturity of any holding, position, or other interest of 
     the institution in any derivative financial instrument.
       ``(3) Quantitative information with respect to derivative 
     financial instruments held for trading purposes.--
       ``(A) Average fair value balances.--The average maximum and 
     minimum fair value balances of the insured depository 
     institution during the period covered by the report with 
     respect to any holding, position, or other interest of the 
     institution in any derivative financial instrument which is 
     acquired or taken by the institution for trading purposes.
       ``(B) Revenue, gains and losses.--All revenue, gains, and 
     losses of the institution attributable to trading account 
     operations involving any holding, position, or other interest 
     of the institution in any derivative financial instrument.
       ``(b) Requirements Applicable to Reporting Under Subsection 
     (a).--
       ``(1) Separate reporting for exchange and otc trading.--To 
     the maximum extent possible, information reported pursuant to 
     paragraphs (1) and (2) of subsection (a) with respect to 
     transactions which are conducted on an exchange, and the 
     holdings, positions, or other interests in derivative 
     financial instruments which are the subjects of such 
     transactions, shall be provided separately from information 
     relating to transactions which are conducted over the 
     counter, and the holdings, positions, or other interests in 
     derivative financial instruments which are the subjects of 
     such transactions.
       ``(2) Exemption by agency prohibited.--A Federal banking 
     agency may not--
       ``(A) exempt any insured depository institution from the 
     requirements of subsection (a); or
       ``(B) allow any exception to any such requirement with 
     respect to any insured depository institution,

     unless the agency determines that such exemption or exception 
     is in the public interest and submits a written notice of 
     such determination and a detailed description of the reasons 
     for the determination to the Committee on Banking, Finance 
     and Urban Affairs of the House of Representatives and the 
     Committee on Banking, Housing, and Urban Affairs of the 
     Senate at least 30 days before the effective date of the 
     exemption or exception.
       ``(c) Qualitative Reporting Requirements.--The Federal 
     banking agencies shall take such action as may be appropriate 
     to encourage insured depository institutions to publicly 
     report the following information with such frequency as the 
     agencies determine to be appropriate:
       ``(1) Nature of derivative financial instruments.--A 
     description of--
       ``(A) the purposes for which any holding, position, or 
     other interest of the institution in any derivative financial 
     instrument has been acquired or taken by the institution 
     during the period since the prior report, including the 
     specific objectives of the institution;
       ``(B) the overall operating and investment strategies of 
     the institution which provide the context for acquiring or 
     taking any such holding, position, or other interest in 
     any derivative financial instrument; and
       ``(C) the manner in which the institution acquires or takes 
     a holding, position, or other interest in a derivative 
     financial instrument in furtherance of the purposes and 
     objectives for such activities.
       ``(2) Accounting policies and methodology for determining 
     fair value and other amounts.--A description of the 
     accounting policy and principles and the methodologies used 
     by the institution to determine--
       ``(A) the fair value of the various types of holdings, 
     positions, and other interests of the institution in 
     derivative financial instruments; and
       ``(B) any other amount required to be reported under 
     subsection (a) with respect to any such holding, position, or 
     other interest.
       ``(d) Confidential Emergency Management Reporting.--
       ``(1) In general.--Before the end of the 1-year period 
     beginning on the date of the enactment of the Derivatives 
     Safety and Soundness Act of 1994, the Federal banking 
     agencies shall develop the means to obtain, on a nightly 
     basis, all necessary information from any insured depository 
     institution, or any affiliate of any such institution, which 
     is a dealer in derivative financial instruments or is an 
     active end-user relating to any activity of such institution 
     or affiliate which involves derivative financial instruments 
     or any holding, position, or other interest in a derivative 
     financial instrument if the agency determines that the agency 
     needs such information as a result of adverse market 
     conditions or other emergency situation (as defined by the 
     agency).
       ``(2) Accessibility of information.--Each insured 
     depository institution referred to in paragraph (1) shall--
       ``(A) obtain such information and make and keep such 
     records as the appropriate Federal banking agency may require 
     by regulation for purposes of such paragraph; and
       ``(B) promptly provide to the agency any information 
     requested by the agency pursuant to such paragraph.
       ``(3) Confidentiality of information provided.--No 
     information provided to or obtained by a Federal banking 
     agency pursuant to paragraph (1) with respect to any insured 
     depository institution or any affiliate of any such 
     institution may be provided to any person or entity other 
     than another Federal regulatory agency with jurisdiction over 
     the insured depository institution or affiliate without the 
     prior written approval of the agency.
       ``(e) Administrative Provisions.--
       ``(1) Enhanced regulatory cooperation.--The Federal banking 
     agencies and the National Credit Union Administration Board 
     shall jointly develop uniform definitions, reporting 
     requirements, capital standards, and examination guidelines 
     and procedures with respect to activities of insured 
     depository institutions and insured credit unions which 
     involve derivative financial instruments or to any holding, 
     position, or other interest of any such institution or credit 
     union in any such instrument.
       ``(2) Standardized methodologies for estimating fair 
     values.--The Federal banking agencies and the National Credit 
     Union Administration Board shall jointly take such action as 
     may be appropriate to encourage insured depository 
     institutions and insured credit unions to develop standard 
     methodologies and assumptions which may be used in estimating 
     the fair value of any holding, position, or other interest of 
     any such institution in any derivative financial instrument 
     for use in preparing reports of condition.
       ``(3) Accounting standards.--The Federal banking agencies 
     and the National Credit Union Administration Board, in 
     consultation with the Financial Accounting Standards Board, 
     shall develop and implement accounting standards for 
     derivative financial instruments which are uniformly 
     applicable to insured depository institutions and insured 
     credit unions.
       ``(4) Inclusion of fdic and occ as principals in 
     interagency task force.--The Secretary of the Treasury shall 
     include the Chairperson of the Federal Deposit Insurance 
     Corporation and the Comptroller of the Currency as principals 
     on any interagency task force or working group dealing with 
     issues relating to derivative financial institutions.
       ``(f) Requirements Relating to Directors and Senior 
     Executive Officers.--
       ``(1) Effective management oversight.--No insured 
     depository institution may engage in activities involving 
     derivative financial instruments without a management plan 
     which ensures that such activities are--
       ``(A) conducted with appropriate direct oversight of the 
     directors and the senior executive officers (as defined 
     pursuant to section 32(f) of the institution;
       ``(B) conducted in a safe and sound manner; and
       ``(C) consistent with the overall risk management 
     philosophy and the business strategy of the management of the 
     institution.
       ``(2) Requirement for directors.--No insured depository 
     institution may act as a dealer in derivative financial 
     instruments or as an active end-user unless a sufficient 
     number of the directors of such institution are familiar with 
     the risks associated with each holding, position, or other 
     interest of the institution in any derivative financial 
     instrument and the total current credit exposure of the 
     institution with respect to the holdings, positions, and 
     other interests of the institution in derivative financial 
     instruments and activities of the institution relating to 
     such holdings, positions, and other interests.
       ``(3) Enforcement.--In the case of the failure of any 
     insured depository institution to comply with the 
     requirements of this subsection, the appropriate Federal 
     banking agency shall, in addition to such other 
     enforcement action the agency may determine to be 
     appropriate--
       ``(A) treat the failure as an unsafe or unsound practice in 
     conducting the business of the institution;
       ``(B) issue a notice under section 8(e) to the chairperson 
     of the board of directors of the institution, and any other 
     director of the institution the agency determines to be 
     appropriate, of the agency's intention to remove the 
     chairperson or other director from office; and
       ``(C) assess a civil penalty under section 8(i)(2) on any 
     appropriate institution-affiliated party.
       ``(g) Definitions.--For purposes of this section, the 
     following definitions shall apply:
       ``(1) Active end-user.--
       ``(A) In general.--The term `active end-user' means any 
     insured depository institution or any affiliate of any 
     insured depository institution which buys or sells high 
     volumes of derivative financial instruments, or conducts 
     transactions in a wide variety of derivative financial 
     instruments, in order to manage the exposure of the 
     institution or affiliate to individual or multiple market 
     factors.
       ``(B) Other terms.--The terms ``high volumes'' and ``wide 
     variety of transactions'', as used in subparagraph (A), shall 
     have the meanings prescribed for such terms by the 
     appropriate Federal banking agency by regulation.
       ``(2) Derivative financial instrument.--The term 
     `derivative financial instrument' means--
       ``(A) an instrument the value of which is derived from the 
     value of other assets, interest or currency exchange rates, 
     or indexes, including qualified financial contracts (as 
     defined in section 11(e)(8)); and
       ``(B) any other instrument which an appropriate Federal 
     banking agency determines, by regulation or order, to be a 
     derivative financial instrument for purposes of this 
     section.''.
       (b) Insured Credit Unions.--Section 202(a) of the Federal 
     Credit Union Act (12 U.S.C. 1782(a)) is amended by adding at 
     the end the following new paragraph:
       ``(8) Derivative financial instruments.--
       ``(A) In general.--The reports of condition made by insured 
     credit unions under this section shall include all the 
     information with respect to derivative financial instruments 
     which are required, under section 44 of the Federal Deposit 
     Insurance Act, to be included in reports of condition made by 
     insured depository institutions (as defined in section 3 of 
     such Act).
       ``(B) Applicability of section 44 of the federal deposit 
     insurance act.--Section 44 of the Federal Deposit Insurance 
     Act shall apply with respect to insured credit unions and the 
     Board in the same manner such section applies to insured 
     depository institutions and Federal banking agencies (as such 
     terms are defined in section 3 of such Act) and shall be 
     enforceable by the Board with respect to insured credit 
     unions under this Act.''

     SEC. 3. STUDY OF INTERNATIONAL REGULATION AND SUPERVISION OF 
                   DERIVATIVE FINANCIAL INSTRUMENTS.

       (a) In General.--Before the end of the 30-day period 
     beginning on the date of the enactment of this Act, the 
     Secretary of the Treasury shall request a meeting with the 
     appropriate representatives of the other major industrialized 
     countries to plan a study to examine the adequacy of the 
     international regulation and supervision of derivative 
     financial instruments (as defined in section 44(f)(2) of the 
     Federal Deposit Insurance Act).
       (b) Goals of Study.--The goals of the study as proposed by 
     the Secretary of the Treasury shall be as follows:
       (1) To foster a greater understanding of the manner in 
     which derivative financial instruments affect the stability 
     of the world's financial systems and markets.
       (2) To examine the adequacy of international regulation and 
     supervision of derivative financial activities.
       (3) To make recommendations for improving the international 
     regulation and supervision of derivative financial 
     activities.
       (4) To foster greater cooperation between all regulatory 
     agencies with jurisdiction over derivative financial 
     activities.
       (5) To make recommendations for action by the financial 
     regulators in the respective countries that would facilitate 
     the safe and sound conduct of entities involved in derivative 
     financial activities.
       (6) To evaluate the feasibility of establishing a single 
     governing body to regulate international derivative financial 
     activities.
       (c) Issues to Study.--The Secretary of the Treasury shall 
     propose that the study include the following factors:
       (1) Identification of the manner in which derivative 
     financial instruments affect the stability of the world's 
     financial systems and markets.
       (2) Identification of the various regulatory entities and 
     mechanisms that are used to regulate and supervise derivative 
     financial activities around the world.
       (3) Analysis of the adequacy of the cooperation between the 
     various regulatory entities and mechanisms referred to in 
     paragraph (2).
       (4) Identification of problems that inhibit the safe and 
     sound conduct of world-wide derivative financial activities.
       (5) Analysis of the extent to which derivative financial 
     activities in countries other than the major industrialized 
     countries affect the safety and soundness of the world's 
     financial systems and markets.
       (6) Identification of uniform accounting and public 
     reporting standards for derivative financial instruments.
       (7) Evaluation of the feasibility of establishing a single 
     governing body to regulate international derivative financial 
     activities.
       (d) Utilization of Information and Resources.--The 
     Secretary of the Treasury shall propose that, in conducting 
     the study under this section, the major industrialized 
     countries should--
       (1) gather information from a wide variety of sources 
     including government agencies, central banks, market 
     participants, and the consumers of the derivative financial 
     instruments; and
       (2) to the extent feasible, obtain and use information from 
     the International Monetary Fund, the Bank for International 
     Settlements, and other multilateral organizations.

     SEC. 4. GAO STUDY OF SPECULATION, TRANSACTION TAXES, AND 
                   MARGIN REQUIREMENTS WITH RESPECT TO DERIVATIVE 
                   FINANCIAL INSTRUMENTS.

       (a) Study Required.--
       (1) In general.--The Comptroller General of the United 
     States shall conduct a study of the speculative uses of 
     derivative financial instruments (as defined in section 44 of 
     the Federal Deposit Insurance Act) and the feasibility of 
     imposing taxes and margin requirements on speculative 
     transactions involving derivative financial instruments.
       (2) Report.--The Comptroller General shall submit a report 
     on the study conducted pursuant to paragraph (1) to the 
     Congress before the end of the 18-month period beginning on 
     the date of the enactment of this Act.
       (b) Issues Involving Speculative Transactions Involving 
     Derivative Financial Instruments.--In conducting the study 
     under subsection (a)(1), the Comptroller General shall--
       (1) define the term ``speculation'' as such term is used in 
     connection with derivative financial instruments;
       (2) determine the extent to which depository institutions, 
     including credit unions, use holdings, positions, and other 
     interests in derivative financial instruments to engage in 
     speculation for the institution's own trading account; and
       (3) determine the extent to which depository institutions, 
     including credit unions, sell holdings, positions, or other 
     interests in derivative financial instruments to--
       (A) speculators such as hedge funds; or
       (B) consumers of such financial instruments who are engaged 
     in the use of such holdings, positions, or other interests in 
     derivative financial instruments for purposes other than 
     hedging against risks.
       (c) Issues Involving Transaction Taxes and Fees.--In 
     conducting the study under subsection (a)(1), the Comptroller 
     General shall--
       (1) determine the extent to which any holding, position, or 
     other interest in a derivative financial instrument is 
     subject to Federal or State transaction tax or fee, the 
     entity imposing the tax or fee, the purpose of the tax or 
     fee, and the amount of annual revenue derived from the tax or 
     fee;
       (2) evaluate the feasibility of imposing a tax or fee on 
     the acquisition or taking of a holding, position, or other 
     interest in a derivative financial instrument for speculative 
     purposes and estimate the annual revenue which would result 
     from such a tax or fee; and
       (3) evaluate the competitive impact of the imposition of a 
     tax or fee described in paragraph (2).
       (d) Issues Involving Margin Requirements.--In conducting 
     the study under subsection (a)(1), the Comptroller General 
     shall--
       (1) determine which holdings, position, or other interests 
     in a derivative financial instrument are subject to margin 
     requirements and the amount and purpose of the margin 
     requirement;
       (2) determine the extent to which the transactions of 
     insured depository institutions which involve a holding, 
     position, or other interest in a derivative financial 
     instrument are conducted over the counter and evaluate the 
     feasibility of imposing margin requirements on such 
     transactions;
       (3) evaluate the feasibility of imposing margin 
     requirements on any holding, position, or other interest in a 
     derivative financial instrument which was acquired or taken 
     for speculative purposes; and
       (4) evaluate the competitive impact of imposing margin 
     requirements on any holding, position, or other interest in a 
     derivative financial instrument which was acquired or taken 
     for speculative purposes.
       (e) Access to Information.--The head of any department or 
     agency of the Federal Government and any insured depository 
     institution shall provide, upon the request of the 
     Comptroller General, such information to the General 
     Accounting Office as the Comptroller General may determine to 
     be appropriate for purposes of carrying out the study 
     required under this section.

 Section-by-Section Summary of H.R. XXXX: The ``Derivatives Safety and 
                        Soundness Act of 1994''


                         section 1. short title

       This Act may be cited as the ``Derivatives Safety and 
     Soundness Act of 1994.''


   section 2. disclosure of amounts, nature, and terms of derivative 
      financial instruments in depository institution call reports

       The Federal Deposit Insurance Act (12 U.S.C. 1811) details 
     the information that insured depository institutions must 
     submit in their quarterly call reports to the federal banking 
     agencies. Section 2(a) amends this Act by adding a new 
     Section 44 that describes qualitative and quantitative 
     information on derivatives contracts to be included in the 
     call reports and the responsibilities of the boards of 
     directors of insured depository institutions.


     section 44. disclosure requirements for derivative financial 
                              instruments

       Section 44(a) lists the derivative contract information to 
     be included in the call reports submitted after December 31, 
     1994.
       Section 44(a)(1) lists the quantitative information 
     covering all derivative contracts to be included in the call 
     reports. This includes aggregate and disaggregate information 
     of gross notional and fair value, revenue gains and losses, 
     and net credit exposures under bilateral netting contracts.
       Section 44(a)(2) requires reporting on remaining terms to 
     maturity on any derivative contract.
       Section 44(a)(3) requires reporting on the information 
     covering derivative contracts held in trading accounts to be 
     included in the call reports. This section requires revenue 
     and maximum and minimum gains and losses, and maximum and 
     minimum fair value balances.
       Section 44(b) separates the above reporting between 
     exchange and over-the-counter traded derivatives to the 
     maximum extent possible. A federal banking agency may exempt 
     institutions from the above requirements if it is in the 
     public interest. Exemption requires a written, detailed 
     notice submitted to the House and Senate Banking Committees 
     30 days before the effective date of the exemption.
       Section 44(c) requires the federal banking agencies to 
     encourage insured depository institutions to explain their 
     derivative investment strategies, how they fit into the 
     overall institution risk plans and how the institution 
     acquires the derivative contracts. Institutions are also 
     encouraged to describe the accounting methods they use to 
     value their derivatives contracts.
       Section 44(d) requires the federal banking agencies, within 
     one year of enactment, to set up a system where they can 
     obtain nightly information on an institutions derivatives 
     exposure. This section requires insured depository 
     institutions to provide the above information and insures 
     that this information will be available to federal regulatory 
     agencies but will be treated in a confidential manner.
       Section 44(e) requires federal banking and credit union 
     agencies to develop uniform definitions, reporting 
     requirements, capital standards and reporting guidelines for 
     derivative products and to coordinate with accounting 
     standards boards to develop accounting standards for 
     derivative products. This section requires the same agencies 
     to encourage insured depository institutions to develop 
     standard methods of valuing derivatives. This section also 
     mandates the inclusion of the FDIC and the OCC at interagency 
     derivative task force meetings.
       Section 44(f) requires insured depository institutions that 
     are dealers or end-users of derivatives to have a management 
     plan which ensures that derivatives activities are conducted 
     with oversight of the chairperson and boards of directors, 
     are conducted in a safe and sound manner and are consistent 
     with the institutions risk management policy. A sufficient 
     number of directors must be familiar with risk resulting from 
     the institution's derivative contracts. Failure to provide 
     such a plan would not be consistent with operating in a safe 
     and sound manner and allows the federal banking agencies to 
     issue a notice to remove the chairperson or director and 
     assess a civil penalty.
       Section 44(g) contains the definitions of the following 
     terms: active end-user, and derivative financial instrument.
       Section (2)(b) amends Section 202(a) of the Federal Credit 
     Union Act by extending the above reporting requirements to 
     credit unions.


    section 3. study of international regulation and supervision of 
                     derivative financial products

       Section 3 requires the Secretary of the Treasury, within 
     thirty days from enactment, to plan a study to examine 
     international regulation and supervision of derivative 
     financial instruments. The goal of the study is to improve 
     international derivative reporting and regulation while 
     minimizing the disruptions that derivatives can cause to the 
     global financial system and markets. The Secretary shall 
     identify the manner that derivatives effect the stability of 
     international financial systems and markets and study the 
     feasibility of establishing a single international body to 
     regulate derivative activities.


section 4. general accounting office study of speculation, transaction 
  taxes, and margin requirements with respect to derivative contracts

       Section 4 requires the GAO to study the speculative uses of 
     derivatives and the feasibility of taxes and margin 
     requirements to curb speculation. The GAO will define 
     speculation and determine if and how much dispository 
     institutions are speculating with derivative contracts. The 
     GAO will also determine the extent to which derivative 
     contracts are currently subject to transaction taxes and how 
     establishing such a tax would effect speculation. This study 
     will estimate the annual revenue resulting from such a tax.
       The GAO will determine which derivative contracts are 
     subject to margin requirements. The study would also evaluate 
     the feasibility of extending margin requirements to all 
     derivative contracts and how this would effect speculation of 
     derivative contracts.

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