article: 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 (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)).
summary: Financial Derivatives Supervisory Improvement Act of 1998 - Establishes the Working Group on Financial Derivatives to study and report to the Congress on: (1) the regulation of derivatives markets in which domestic and foreign depository institutions and registered brokers and dealers participate; and (2) any recommendations for modernizing and harmonizing statutes, regulations, and policies. Urges the Group to assign a high priority to continual negotiations to ensure that foreign markets and regulatory bodies establish and maintain regulations comparably prudent to those governing the U.S. markets. Prohibits the Commodity Futures Trading Commission, for a specified time period, without the Secretary of the Treasury's approval, from promulgating or proposing regulations, or issuing any interpretive or policy statements that regulate or restrict activity in certain hybrid instruments and swap agreements. Declares that any such hybrid instruments or swap agreements entered into before such period shall not be subject to the Commodity Exchange Act's restriction of futures contracts or exempted securities.