[Congressional Record Volume 141, Number 2 (Thursday, January 5, 1995)]
[Extensions of Remarks]
[Pages E35-E36]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


      THE DERIVATIVES SAFETY AND SOUNDNESS SUPERVISION ACT OF 1995

                                 ______


                         HON. HENRY B. GONZALEZ

                                of texas

                    in the house of representatives

                       Wednesday, January 4, 1995
  Mr. GONZALEZ. Mr. Speaker, today I introduce the Derivatives Safety 
and Soundness Supervision Act of 1995. This legislation promotes 
regulatory oversight and coordination, and calls for greater disclosure 
of the derivatives activities of all types of financial institutions. 
In recognition of the global nature of the derivatives market, the 
legislation also requires the United States to take a lead role in 
promoting international cooperation on derivatives regulation.
  The legislation is nearly identical to H.R. 4503, which I introduced 
with Congressman, now Chairman Leach last year. At that time--May, 
1994--I said ``In order to protect taxpayers * * *, the Congress must 
ensure that the regulators fully understand the individual and systemic 
risks posed by derivatives and ensure that they are aggressively 
supervising and regulating financial institution derivatives 
activities.'' That legislation did not go anywhere, due in part to the 
Treasury Department and bank regulatory agencies claims that 
legislation was not necessary, and in part to the exigencies of a 
congressional election year schedule.
  Events of the past 8 months indicate that legislation is needed now 
more than ever. Bankrupt Orange County, CA, has lost at least $2 
billion, much of which is attributable to its derivatives holdings. And 
Orange County isn't the only municipality in trouble--losses caused by 
risky investments in towns, cities, and counties throughout the country 
are coming to light. BT Securities, the securities affiliate of Bankers 
Trust, one of the world's largest derivatives dealers, was found by the 
Securities and Exchange Commission and the Commodity Futures Trading 
Commission to have violated the reporting and antifraud provisions of 
the Federal securities laws in connection with derivatives it sold to 
its customer, Gibson Greetings, Inc. The SEC and CFTC orders require BT 
Securities to pay a $10 million civil penalty. Reports of financial 
losses at banks due to derivatives and other interest rate sensitive 
investments continue, and the bank regulators recently backed away from 
requiring true market value accounting which would reveal those losses. 
In light of these events, it would be irresponsible for the Congress to 
avoid legislation.
  The legislation covers all financial entities--depository 
institutions, their affiliates and holding companies, Government-
sponsored enterprises, Federal home loan banks, securities firms, and 
insurance companies. This broadened scope is necessary given the 
systemic risks that derivatives pose to our financial system generally 
and the need by customers and the marketplace for consistent and full 
disclosure. All regulators--bank regulators, SEC, CFTC, and Treasury 
must work together under the bill in adopting similar regulatory 
standards, reporting requirements, and
 disclosure. This regulatory coordination will provide increased 
customer protection as well as promote a stronger and safer derivatives 
marketplace. Of course, since banks are the biggest 
[[Page E36]] players in the derivatives market, it is fitting that the 
bank regulators take the lead, and the Banking Committee serve as the 
committee of primary jurisdiction, in the derivatives area.
  In responding to those who argue that legislation is not necessary, I 
remind them of the history of the Government securities market. When 
adopting the securities laws in the 1930's, Congress exempted 
Government securities from most regulation based on the financial 
sophistication and institutional nature of most customers, the low 
degree of risk posed by Government securities, and the perceived 
absence of market manipulation or fraud. Although bank dealers were 
generally subject to supervision and regulation by the bank regulators, 
and securities firms that dealt in nonexempt securities as well as 
Government securities were subject to supervision and regulation by the 
SEC, nonbank dealers who traded only in Government securities were not 
subject to any direct regulatory oversight. The failure of several of 
the unregulated Government securities dealers in the early 1980's--and 
the subsequent losses born by investors--prompted passage of the 
Government Securities Act. The Government Securities Act, rather than 
creating a separate agency to enforce the new regulations, relied on 
the existing regulatory structure when assigning oversight 
responsibility. This Act brought regulatory and oversight 
accountability to the Government securities market, clearly improving 
the market and protecting investors.
  There are many similarities between the pre-1986 Government 
securities market and today's derivatives markets. The Derivatives 
Safety and Soundness Supervision Act of 1995 seeks to replicate the 
success of the GSA by imposing regulatory accountability, and 
recognizes the uniquely global nature of the derivatives market by 
promoting international cooperation. I look forward to working with 
Chairman Leach and other members of the Banking Committee on this 
legislation in the 104th Congress.


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