The House Banking subcommittee on financial institutions tentatively plans to vote this month on the Derivatives Safety and Soundness Act of 1994, a bill sponsored by House Banking Committee Chairman Henry B. Gonzalez, D-Tex., and Rep. Jim Leach, R-Iowa. Excerpts from a narrative explanation prepared by the House Banking Committee follow.
Title I -- Enhanced Supervision of Derivative Activities. The appropriate federal regulatory agencies are required to jointly establish principles and standards related to capital, accounting, disclosure, suitability, or other appropriate regulatory action for the supervision of financial institutions engaged in derivatioves activities.
In addition, the appropriate federal regulatory agencies must issue substantially similar definitions, reporting requirements, capital standards, and examination guidelines for derivative products.
The bill amends the Federal Deposit Insurance Act by 6adding a new section that describes qualitative and quantitative information on derivatives contracts that the appropriate federal banking agencies must consider and may require for inclusion in the call reports. The disclosures also apply to credit unions.
Among the quantitative items that should be considered for inclusion in the call reports are gross notional value, revenue gains and losses, and net credit exposures under bilateral netting contracts.
Call reports should also include information covering derivative contracts held in trading accounts.
Title II -- Supervisory Improvements. This section requires financial institutions that are dealers or end users of derivatives to have a written management plan which ensures that derivatives activities are conducted with oversight of the chairperson and boards of directors and that they are conducted in a safe and sound manner and are consistent with the institution's risk management policy.
A sufficient number of directors must be familiar with risks resulting from the institution's derivatives contracts.
Failure to comply with the provisions of this section may be considered as operating in an unsafe and unsound manner.
The federal banking agencies, within one year of enactment, are required to set up a system where they can obtain information on an institution's derivatives activity. The information will be treated as confidential.
Standards for safety and soundness prescribed by the appropriate federal regulatory agency, in accordance with Section 132 of the Federal Deposit Insurance Corp. Improvement Act, should include internal controls for derivatives activities.
The International Banking Act of 1978 is amended to require that when evaluating the adequacy of supervision of a foreign bank engaged in derivatives activities by its home country, the Federal Reserve determine whether such a country has comprehensive supervision and regulation for derivatives activities.
Title III -- Financial Institution Insolvency Reforms. The bill clarifies that insolvency proceedings should not delay or limit the FDIC's rights to repudiate or terminate qualified financial contracts involving an insolvent party or counterparty.
This section also requires that the FDIC, in consultation with other regulatory agencies, prescribe regulations requiring expanded record keeping for qualified financial contracts by insured depository institutions that are undercapitalized.
Title IV -- International Regulatory Cooperation.
The bill calls for a study of derivatives regulation by other countries and urges U.S. regulators to lobby for standards similar to U.S. rules in other countries.
Title V -- General Accounting Office Study. The GAO is required to study the speculative uses of derivatives by financial institutions and the feasibility of margin and collateral requirements to curb speculation.