Last night House Banking Committee Chairman Jim Leach gave a speech in
Washington complimenting CFTC Chairman Rainer for moving to deregulate futures
exchanges but expressing concern about references to swaps (OTC derivatives) 
in
the Staff Draft "New Regulatory Framework."

A copy of the speech appears below, (or use this website link:
http://www.house.gov:80/banking/3600pr.htm ). Chairman Leach appears to have 
had
some contact with banking regulators as he prepared it.

House Commerce Committee staff has also weighed in with the CFTC on the issue.

I hope one of you can give me a call about new info (since my discussion
yesterday with Mark Haedicke):

   what remedies the Banking and Commerce committees will be seeking from the
   CFTC, and
   the extent to which ISDA and others are in sync with these events.  In
   particular, my reading of the only ISDA position paper I have seen is that 
it
   leaves to the tender mercies of the CFTC swaps with retail participants
   negotiated on the Internet.

Thanks
Mark
(212)-648-6605
______________________________________________
For Immediate Release:


ontact: David Runkel or
 Monday, March 6, 2000


rookly McLaughlin at 226-0471


                                                   Excerpts of Remarks
                                                  Of Rep. James A. Leach
                               Chairman, House Banking and Financial Services
Committee
                         Before Institute of International Bankers Annual
Washington Conference
                                           Four Seasons Hotel, Washington D.C.

Good afternoon.

The fundamental challenge for the House Banking Committee at the close of the
previous century and the start of this
one has been to reform and rationalize the legal and regulatory structure of 
our
 financial sector to keep pace with
monumental changes that have transformed the marketplace. In the face of
revolutionary new kinds of institutions,
businesses, and financial instruments, it became self-evident that the
legislative framework required modernization to
ensure the integrity, innovativeness, and competitiveness of U.S. finance and
re-bolster the stability of the
international financial system.

Our most important accomplishment in this endeavor has been the passage of the
financial modernization act, which
obliterated obsolete barriers between various families of financial sector
institutions and thereby increased access of
consumers to a wider panoply of competitively-priced financial products. This
was no easy task, but, at the end of the
day, the will to improve the laws transcended parochial rivalries between and
within various branches of government
and various parties of the private sector.

A similar legislative challenge in our reform efforts centers on swaps and
related over-the-counter financial derivatives
transactions. In the passage of the financial modernization act, the House
Banking Committee successfully fought to
ensure that all credit swaps and the vast majority of equity swaps are treated
under U.S. law as "identified banking
products" and thus can continue to be carried out within banks subject to bank
regulation. With modernization
legislation signed into law, however, we must direct our efforts to resolving
the serious legal anomalies that continue to
plague the financial derivatives markets, in which so many of the banks
represented here participate so vigorously.

Questions about the legal status of derivatives transactions under U.S. law 
must
 seem arcane and somewhat bizarre to
foreign institutions that transact swaps business in this country. Although 
the
discussions can get quickly mired in
obscure minutiae, we must recognize from the outset that what is potentially 
at
stake is neither obscure nor minute.
Outdated statutes that raise questions about the enforceability of contracts
with banks and bar risk-reducing practices
pose a palpable threat to the safety and soundness of the financial system.
Indeed, U.S. banking regulators warn that
uncertainties and unintended consequences of federal laws could potentially 
turn
 financial disruptions in the global
system into financial disasters.

What I would like to do today is first outline briefly how far we have come
toward consensus about the need to clarify
the treatment of financial derivatives under U.S. law. I would then like to
conclude by discussing, from a Banking
Committee perspective, certain concerns with a regulatory proposal on
derivatives issued by the Commodity Futures
Trading Commission a few days ago.

Since the development of swaps and many related kinds of over-the-counter
derivative transactions in the U.S. in the
early 1980s, banks have overwhelmingly become the dominant participants in the
derivatives markets, with securities
firms and their affiliates running a distant second. As most people gathered
here know from personal experience, banks
are counter-parties to the vast majority of over-the-counter derivatives
transactions. By the same token,
over-the-counter derivatives have become essential to banks? risk management
strategies, their proprietary trading
activities, and the services they provide their institutional customers.
According to the Comptroller of the Currency,
the notional amount of banks? over-the-counter derivatives transactions 
reached
a record $35.7 trillion in the most
recent quarter, and $9.9 billion of bank revenues for the past four quarters
came from over-the-counter derivatives
trading.

For these reasons, the House Banking Committee has had a vigorous and 
sustained
interest in derivatives issues for
well over a decade. In 1993, when I was Ranking Minority Member on the
Committee, the Minority issued a lengthy
report that remains the most comprehensive analysis of over-the-counter
derivatives ever produced in Congress.

The legal issues surrounding bank derivatives activities stem from events that
took place, ironically, when the financial
markets for swaps and related derivatives hardly existed. In the early 1970s
Congress passed legislation creating the
CFTC and tasking it with administering a regime to regulate the trading on
exchanges of commodity contracts for
future delivery, which, at the time, were almost exclusively agricultural in
nature. Perhaps because it then seemed
obvious, Congress did not at the time define the statutory term "contract for
the purchase or sale of a commodity for
future delivery" and has not done so since. Since swaps and other
over-the-counter financial derivatives exploded onto
the banking scene in the 1980s, the absence of a definition of a futures
contract has allowed some members of the
futures community in both the CFTC and the private sector to argue or imply on
various occasions that the new
financial instruments should somehow be treated like exchanged-traded futures
under the commodities laws.

The de facto reality is that swaps have never been regulated as futures under
the Commodity Exchange Act or "CEA" as
the law is known. Efforts by the CFTC to extend its regulatory reach beyond 
its
statutory authority over
exchange-traded futures contracts have failed amidst resistance from the 
courts,
 other federal financial regulators,
Congress, and the banking and securities industries. The mere possibility that
over-the-counter derivatives might be
futures, however, has - as many of you are aware - created serious problems.
Particularly vexing from a bank regulation
perspective have been questions about whether some swap contracts are illegal 
or
 unenforceable because they are not
traded on futures exchanges.

Piecemeal attempts by the CFTC to deal with the unintended damage inflicted by
the CEA on over-the-counter
derivatives through administrative action, though often well meaning, have
failed to solve the underlying problems and
have in many instances just created new layers of confusion and uncertainty
about when new and ever more
convoluted exemptions apply. Past CFTC actions have impeded standardization of
contracts, electronic information
sharing between banks about swaps deals, and reduction of systemic risk 
through
multilateral netting and clearing
systems. What has been needed is not short-term administrative fixes, but 
rather
 the passage of new law that explicitly
clarifies that swaps and related derivatives are tools of the financial trade,
not commodity futures, and resolves issues
of when the CEA applies.

The problems came to a head a year and a half ago when the CFTC issued a
"concept release" asking for comment on
whether swaps and other over-the-counter derivatives should be treated as
futures. The CFTC?s concept release had the
effect of firmly inserting the CFTC into the heart of the regulation of
financial products. It implicitly called into
question the lawfulness of billions of dollars worth of securities-linked 
swaps
and other over-the-counter derivatives
that do not fit neatly into the rag-tag collection of exceptions and 
carve-outs
found in the CEA and the CFTC?s
regulations. The release drew sharp rebukes from Secretary of the Treasury, 
the

Chairman of the Federal Reserve Board,
and the Chairman of the Securities and Exchange Commission. Faced with a
possible menace to the safety and
soundness of the banking system, our Committee held hearings and we, along 
with
others in Congress, ultimately had
to intervene to stop further CFTC actions in this direction.

The executive branch is currently in a far more cohesive position than it was 
a
short time ago. The person who receives
much of the credit for this rapid and marked improvement in interagency 
attitude
 is the recently appointed Chairman
of the CFTC, William J. Rainer. Chairman Rainer is the first CFTC leader to 
come
 from the financial industry. As such,
he has displayed an unprecedented sensitivity to the problems that CFTC
regulation creates for the financial
instruments that Congress never intended to be covered by it. He has
forthrightly acknowledged in recent Senate
testimony that "OTC derivatives transactions as we know them today do not
present regulatory concerns within the
scope of the CEA." Although this core principle has always been central to the
approach that our Committee and the
banking regulators have taken toward financial derivatives, it is more than a
little refreshing to hear it acknowledged
by the head of the CFTC. By acknowledging that good policy dictates that
over-the-counter derivatives should not be
subject to the CEA, Chairman Rainer reinvigorates longstanding efforts to 
dispel
 fears that law governing commodity
futures exchanges might interfere with other derivatives markets.

The first concrete manifestation of the CFTC?s new stance occurred when 
Chairman
 Rainer joined the heads of the
Treasury, the Fed, and the SEC in signing a late November report by the
President?s Working Group on Financial
Markets. In the Report, the Working Group unanimously recommends new 
legislation
 that clearly and explicitly pulls
over-the-counter derivatives out of the reach of the CEA. This would 
guarantee,
among other things, that parties who
lose money in the swaps markets would not be able to use commodity law to
attempt to renounce their obligations. The
working group also called unanimously for legislation rectifying questions
raised by CFTC actions about whether
clearing swaps and related derivatives or trading them electronically might 
make
 them illegal under the CEA. If these
measures are enacted, they will further the effectiveness and legal soundness 
of
 bank derivatives activities in the U.S.
In any event, the atmosphere of agreement is heartening after years of tension
and turf battles.

At the same time that the executive and legislative branches of government 
have
begun action to remedy legal
ambiguities hampering over-the-counter transactions, we have recognized that
this process should be accompanied by
regulatory modernization for the exchange-traded futures markets that the CEA
was intended to govern. Unnecessary
and outdated requirements under the regime the CFTC administers may keep the
U.S. futures exchanges - whose
innovation and success has been a continuing source of pride and economic
strength for this nation - from offering
innovative products, updating technology, and reducing transaction costs.
Exchanges must meet these challenges to
stay competitive.

It is interesting to note in this connection that there is no open outcry 
market
 left in Europe and that an upstart
electronic market based in Frankfurt is now the largest futures market in the
world. The loss of business resulting from
changes in the marketplace and misplaced regulatory exigencies can have real
human costs, threatening the livelihoods
of many people who depend on our futures exchanges for employment. The CFTC?s
goal of shifting its regulatory
paradigm for futures exchanges from direct regulation to oversight seems like 
a
good way to confront the difficult
challenges ahead.

For these reasons, first the leadership of the House and Senate Agriculture
Committees and later the President?s
Working Group asked the CFTC to come up with a comprehensive proposal of
administrative action to rationalize and,
where possible, reduce the regulatory burden on the trading of futures 
contracts
 on exchanges. In response to these
requests, the CFTC staff task force released a tentative initial proposal a
little over a week ago.

To the extent that it treats futures trading, the CFTC staff?s proposal is to 
be
 commended as probably the most
conscientious and creative rethinking by a regulatory agency of its role in
recent memory. But the proposal goes
further than futures contracts, further than the President?s Working Group
contemplated. Instead of just discussing
how much to regulate or deregulate futures and futures exchanges, the CFTC 
staff
 proposes an entirely new regime of
complicated exemptions, principles, and enforcement rules that appear to apply
to all derivatives, whether they are
futures or not.

Thus the proposal raises a number of serious concerns.

First, although different in substance, the new proposal stumbles into the 
same
over-the-counter derivatives mine field
that blew up Chairperson Borne?s concept release. Because of the uniquely
exclusive regulatory structure of
commodities law, the CFTC finds itself in a peculiar "Catch 22." Even if the
CFTC wants to help the problems created
for banking by the CEA, its actions may implicitly expand the agency?s
jurisdiction in such a way that legal
uncertainties increase rather than decrease. Any attempt by the CFTC to grant
relief through administrative action
lends credence to the legal argument that swaps are somehow futures under the
CEA. Asking the CFTC to fix the legal
uncertainties surrounding over-the-counter derivatives is like asking the Fed 
to
 administer farm policy.

These practical concerns are joined by a very real statutory concern. The CFTC
has authority over futures contracts and
commodity options and little else. To the extent that it purports to regulate
all derivatives, the CFTC proposal may run
counter to a fundamental limitation imposed by Congress. Even if it made sense
to expand the CFTC?s role to cover
some aspects of over-the-counter derivatives trading, it is Congress and only
Congress that should decide this. The
opt-in nature of part of the CFTC?s proposed framework does not solve the
authority problem. If one person opts to
have his swaps business regulated as futures trading, others could argue with
potentially deleterious results that
identical transactions are also futures subject to the CEA.

More fundamentally, exemptions are subject to regulatory whim and can be 
easily
revoked. As John Locke warned
three centuries ago, good princes can be particularly dangerous because, after
authority is conferred out of trust, they
are often followed by bad princes. Locke?s time-tested admonition applies to 
the
 current dilemma about CFTC
regulation. This is among the reasons why the President?s Working Group 
strongly
 urged that balanced legislation not
regulatory exemption was what was needed to deal with over-the-counter
derivatives issues.

The irony is that, after achieving better Working Group relationships, the
Executive Branch has allowed the CFTC to
release a preemptive proposal without securing the prior approval on language 
of
 the other agencies in the Working
Group. Inter-agency discourse on possible approach is simply not a substitute
for garnering support for language in an
area where the devil lurks in every detail and the preemptor in every concept.

In conclusion, let me state that I believe that the CFTC?s proposals hold the
potential of becoming first class rulemaking
if proper modifications are made. In this regard, I look forward to working 
with
 others in Congress and the CFTC to
coming up with an approach that is appropriately tailored to the CFTC?s
jurisdiction and provides sorely needed
modernization and relief for futures trading on exchanges.

As for legislation, our Committee is posited with responsibility for the 
safety
and soundness of the banking system and
we intend to keep all options open, including revisions to the banking laws
necessary to implement the general spirit
and specific recommendations of the President?s Working Group. Last Congress,
the Banking Committee reported out
legislation incorporating the President?s Working Group recommendations on the
netting of derivatives and other
financial contracts. These recommendations build on the existing statutory
framework concerning the netting of
derivatives and are designed to further the policy goal of minimizing the
systemic risks that could occur with the
insolvency of a counterparty to such contracts. This legislation will soon be
considered as part of the larger bankruptcy
bill conference.

Throughout all of our work on derivatives over the years, the goals of the 
House
 Banking Committee have remained
steadfast: ensuring the safety and soundness of the financial services 
industry;
 removing unnecessary and unintended
obstacles to the effective management of risk in the financial system; and
keeping U.S. derivatives markets as rational,
competitive, and attractive for your institutions as any derivatives markets
found elsewhere.