February 28, 1994
TO: INVESTMENT ISSUES COMMITTEE NO. 4-94
SEC RULES COMMITTEE NO. 23-94
RE: CONGRESSMAN LEACH INTRODUCES DERIVATIVES LEGISLATION
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Congressman James Leach (R-IA) recently introduced H.R. 3748, the
"Derivatives Supervision Act of 1994." The bill calls for the formation of a
Federal Derivatives Commission ("Commission"), to establish principles and
standards with respect to capital, accounting, disclosure, suitability, or other
areas deemed appropriate for the supervision of "financial institutions" engaged
in derivatives activities. (Financial institutions are defined in the bill to
include, among other things, any type of end-user of derivatives, as determined
by the Commission.) A copy of the bill is attached.
The bill specifies that the Commission would be chaired by the Chairman of
the Board of Governors of the Federal Reserve System, and in addition would
consist of the Comptroller of the Currency, the Chairman of the Board of the
FDIC, the Director of the Office of Thrift Supervision, the Chairman of the CFTC,
the Chairman of the SEC and the Secretary of the Treasury. Under the bill, each
appropriate regulatory agency would be required to adopt "substantially similar"
regulations to implement the principles and standards established by the
Commission, absent a finding that such adoption is not necessary or appropriate
in the public interest.
The bill would direct the Commission to consider the need to make
recommendations for comparable regulatory action on several related matters
including, among others, enhanced risk disclosures to investors in mutual funds
that invest in derivatives. Other functions of the Commission would include, for
example, the following: (1) encouraging foreign governments, central banks and
regulatory authorities to work toward maintaining or adopting comparable
supervisory standards and regulations for financial institutions engaged in
derivatives activities; (2) developing uniform systems for reporting derivatives
activities; (3) sponsoring training programs on derivatives for certain
regulatory agency employees; and (4) developing seminars on risk management
techniques related to derivatives activities for employees of both regulatory
agencies and financial institutions.
H.R. 3748 is the first legislative proposal concerning derivatives to
emerge since the recent heightened focus by Congress, regulatory agencies and the
press on potential risks associated with derivatives activities. A few weeks
before the bill was introduced, Treasury Secretary Lloyd Bentsen had called for
the interagency Working Group on Financial Markets (which was formed to study the
1987 stock market crash) to coordinate federal regulatory policy on the over-the-
counter derivatives markets. Congressman Leach's bill seeks more formalized
coordination of such regulation. No action on the bill is anticipated in the
near future. We will keep you informed of any further developments.
Frances M. Stadler
Associate Counsel
Attachment