[Congressional Record Volume 144, Number 78 (Tuesday, June 16, 1998)]
[Extensions of Remarks]
[Pages E1138-E1140]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




              INTRODUCTION OF BILL ON FINANCIAL DERIVATIVE

                                 ______
                                 

                          HON. JAMES A. LEACH

                                of iowa

                    in the house of representatives

                         Tuesday, June 16, 1998

  Mr. LEACH. Mr. Speaker, over the past several years, financial 
engineers in our great banks and securities houses have come up with 
scores of new products that have kept the United States far in the lead 
as the world's preeminent financial market place.
  None of these new-age products has been more successful than 
derivative financial instruments, which, as the name suggests, derive 
their value from the worth of an underlying product, such as a precious 
metal, the interest rate of a government bond or stock index. 
Derivatives enable banks, corporations, mutual funds, pension funds--
indeed, anyone with a substantial portfolio--to mitigate risks from 
volatility in interest rates, commodity prices and equity values. There 
is hardly anyone in America today who has physically touched, but who 
has not been indirectly touched by financial derivative instruments.
  Banks pioneered the over-the-counter derivatives markets and, though 
other important financial institutions have followed suit, banks still 
account for more than two thirds of the business in swaps and other O-
T-C instruments. That market today has a so-called notional value of 
several trillion dollars, and the American share of it has added to the 
health of our financial services sector.
  Our fragmented and antiquated financial laws and regulations, 
however, threaten American leadership in that sector of the industry. 
The fact that new financial products don't easily fit definitions that 
were written long before these products were invented has produced 
legal uncertainty in some critical areas like swap contracts and trades 
in hybrid instruments--uncertainty that some regulators may have 
exacerbated by a drive to enlarge bureaucratic turf. As a result, some 
of this home-grown financial business has moved out of our great 
financial centers--to place like London, where counterparties to a swap 
agreement can be certain that the sanctity of their contract is secure 
and not, as it might be here, vulnerable to the whims of a regulator 
insufficiently apprised that people don't like to do

[[Page E1139]]

business in markets where the sanctity of their contracts may be in 
doubt.
  Technology has transformed the financial services industry in the 
last few years, and the onrush of change continues. If the gaps and 
ambiguities in our statutes are not corrected, and corrected soon, our 
financial markets may lose even more business.
  There must be consistency, coordination and clarity in our 
regulations of derivative instruments. Our laws and regulations must be 
harmonized so that regulatory turf battles can be lessened and 
regulatory arbitrage eliminated.
  I have not been impressed with the activities of our current 
coordinating bodies, like the President's Working Group of Financial 
Markets, which are supposed to sort out conflicts among financial 
regulators and produce decisions balancing public and private 
interests. In Congressional testimony last week, Chairman Brooksley 
Born of the CFTC said the President's Working Group simply doesn't do 
much, and that it's up to each agency to act within its own statutory 
authority. But I'm not impressed either by the efforts of one agency 
unilaterally to gain control of over-the-counter markets.
  Effective regulation of derivatives markets has profound consequences 
on consumers and industry alike. The public needs fair and efficient 
markets, markets in which it can have complete confidence. Financial 
institutions need sensible regulation that will neither impair its 
ability to innovate nor burden it with onerous requirements. And both 
public and industry need regulations and regulators who can keep up 
with the pace of technological change without driving market 
participants to less prudential foreign markets.
  The bill I am introducing today would create a study group to bring 
the laws and regulations of over-the-counter markets up to date. The 
Working Group on Financial Derivatives will be chaired by the Secretary 
of the Treasury and include the principal banking and financial market 
overseers. They will be asked to devise changes that will clarify and, 
I hope, simplify and rationalize our current crazy quilt of regulations 
and regulators. They will have one year to make their recommendations 
to Congress.
  Mr. Speaker, it isn't only the United States which needs clarity in 
financial regulation. The financial business is a global business, and 
it can, and does, shift from one market to another almost on a moment's 
notice in response to regulatory pressure. If we are to end regulatory 
arbitrage--the practice in which business moves to the most lightly 
regulated markets, and regulators compete for business by offering the 
lightest regulations--we must approach this multinationally.
  My bill would ask the Administration to enter into negotiations with 
the objective of establishing comparable regulation in the world's 
principal financial centers. Markets here and abroad should be 
efficient, transparent, and fair to their customers. The safety and 
soundness of the world financial system depends on it.
  Below is the financial derivatives bill:

                                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 ``Financial Derivatives 
     Supervisory Improvement Act of 1998''.

     SEC. 2. FINDINGS.

       The Congress finds as follows:
       (1) There should be consistency, coordination, and clarity 
     in the regulation of derivative instruments used by financial 
     institutions.
       (2) Banks and their affiliates developed, and remain the 
     principal participants in, the derivatives markets.
       (3) Regulation of the derivatives markets directly affects 
     the liquidity, efficiency, capital position, and safety and 
     soundness of the banking industry and the safety and 
     soundness of the Federal deposit insurance fund.
       (4) Regulation of the derivatives markets has profound 
     consequences for the continued effectiveness of the bank 
     supervisory process, including the capital provisions of the 
     Federal banking agencies.
       (5) Statutes and regulations governing use of financial 
     derivatives by depository institutions in the United States, 
     including over-the-counter and exchange-traded derivatives, 
     should be brought up to date to reflect the rapid evolution 
     of the markets in recent years, framed so as to keep pace 
     with changes in the markets brought on by the onrush of 
     technological advances, and formulated in a manner that 
     enhances the legal certainty of derivatives transactions.
       (6) The Congress desires interagency cooperation to 
     harmonize, to the maximum extent possible, United States 
     rules and regulations related to the derivatives markets.
       (7) Regulatory arbitrage is a fact of commerce, with market 
     participants having the tendency to move to the weakest 
     regulator.
       (8) The stability of the international financial system and 
     the competitive position of United States financial 
     institutions are jeopardized if foreign markets are regulated 
     less prudently than United States markets.

     SEC. 3. ESTABLISHMENT OF WORKING GROUP ON FINANCIAL 
                   DERIVATIVES.

       (a) Establishment; Composition.--There is established the 
     Working Group on Financial Derivatives, which shall consist 
     of--
       (1) the Secretary of the Treasury;
       (2) the Chairman of the Board of Governors of the Federal 
     Reserve System;
       (3) the Chairman of the Securities and Exchange Commission;
       (4) the Chairman of the Commodity Futures Trading 
     Commission;
       (5) the Comptroller of the Currency;
       (6) the Director of the Office of Thrift Supervision;
       (7) the Chairperson of the Board of Directors of the 
     Federal Deposit Insurance Corporation; and
       (8) the President of the Federal Reserve Bank of New York.
       (b) Chairmanship.--The Chairman of the Working Group on 
     Financial Derivatives shall be the Secretary of the Treasury.
       (c) Designation of Officers and Employees.--The members of 
     the Working Group on Financial Derivatives may, from time to 
     time, designate other officers or employees of their 
     respective agencies to assist in carrying out the duties on 
     the Working Group on Financial Derivatives.
       (d) Establishment of Advisory Committees.--In the 
     development of recommendations related to derivative 
     products, the Working Group on Financial Derivatives shall 
     consult, to the widest extent possible, with market 
     participants, and may establish advisory committees 
     accordingly.
       (e) Sunset; Reports.--The Working Group on Financial 
     Derivatives shall cease to exist upon the enactment of 
     legislation authorizing appropriations for the Commodity 
     Futures Trading Commission for any fiscal year after fiscal 
     year 2000. The Secretary of the Treasury and the Chairman of 
     the Board of Governors of the Federal Reserve System shall 
     submit to the Congress every 6 months, during the 4-year 
     period beginning on the date of such cessation, a report on 
     the progress of the implementation of the recommendations of 
     the Working Group on Financial Derivatives.

     SEC. 4. STUDY AND RECOMMENDATIONS ON REGULATION OF 
                   DERIVATIVES MARKETS.

       (a) Study.--The Working Group on Financial Derivatives 
     established under section 2--
       (1) shall conduct a study on the regulation of the 
     derivatives markets, including over-the-counter derivatives 
     and exchange-traded derivatives, in which depository 
     institutions, brokers or dealers registered under the 
     Securities and Exchange Act of 1934, foreign banks, or 
     affiliates of a depository institution or a foreign bank, 
     participate; and
       (2) shall develop recommendations for modernizing and 
     harmonizing statutes, regulations, and policies--
       (A) to reflect changes in the markets described in 
     paragraph (1);
       (B) to improve their operations;
       (C) to enhance legal certainty for all types of instruments 
     related to such markets, including hybrid instruments and 
     swap agreements; and
       (D) to promote the harmonization of regulation of such 
     markets worldwide.
       (b) Reports.--
       (1) Interim report.--Not later than 6 months after the date 
     of the enactment of this Act, the Working Group on Financial 
     Derivatives established under section 2 shall submit an 
     interim report to the Congress describing the working group's 
     progress.
       (2) Final report.--Not later than 1 year after the date of 
     the enactment of this Act, the Working Group on Financial 
     Derivatives established under section 2 shall submit a final 
     report to the Congress describing the study conducted under 
     subsection (a)(1) and containing the recommendations 
     developed under subsection (a)(2).
       (3) Separate views.--The reports under paragraph (1) and 
     (2) may include separately stated views of any member of the 
     working group.

     SEC. 5. PROTECTION OF INTERNATIONAL BANKING SYSTEM.

       To protect customers, stabilize the international financial 
     system, and underpin the safety and soundness of banking 
     institutions in the United States and the banking system 
     around the world, the Government of the United States and the 
     Working Group on Financial Derivatives should make a high 
     priority continual negotiations to ensure that foreign 
     markets and regulatory bodies establish and maintain 
     regulations comparably prudent to those applicable in United 
     States markets.

     SEC. 6. RESTRICTIONS RELATING TO HYBRID INSTRUMENTS AND SWAP 
                   AGREEMENTS.

       Notwithstanding any other provision of law--
       (1) during the period beginning on the date of the 
     enactment of this Act and ending upon the enactment of 
     legislation authorizing appropriations for the Commodity 
     Futures Trading Commission for any fiscal year after fiscal 
     year 2000, the Commodity Futures Trading Commission may not, 
     without the approval of the Secretary of the Treasury, 
     propose or promulgate any rule, regulation, or order, or 
     issue any interpretive or policy statement, that restricts or 
     regulates activity in a hybrid instrument or swap agreement--
       (A) that is eligible for exemption under part 34 or 35 of 
     title 17, Code of Federal Regulations (as in effect on 
     January 1, 1998); and
       (B) to which a depository institution, a broker or dealer 
     registered under the Securities and Exchange Act of 1934, a 
     foreign bank, or an affiliate of a depository institution or 
     a foreign bank, is a party; and

[[Page E1140]]

       (2) a hybrid instrument or swap agreement described in 
     paragraph (1) that is entered into before the period 
     described in such paragraph shall not be subject to section 
     2(a)(1)(B)(v) of the Commodity Exchange Act (7 U.S.C. 
     2a(a)(1)(B)(v)).

     SEC. 7. DEFINITIONS.

       For purposes of this Act:
       (1) The term ``depository institution'' has the meaning 
     given such term in section 19(b)(1)(A) of the Federal Reserve 
     Act (12 U.S.C. 461(b)(1)(A)).
       (2) The term ``foreign bank'' has the meaning given such 
     term in section 1(b)(7) of the International Banking Act of 
     1978 (12 U.S.C. 3101(b)(7)).

     

                          ____________________