U.S. Treasury Seal
ASSISTANT SECRETARY
DEPARTMENT OF THE TREASURY
                        WASHINGTON


                  September 25, 1998

The Honorable James A. Leach
Chairman
Committee on Banking and Financial Services
U.S. House of Representatives
Washington, D.C. 20515

Dear Mr. Chairman:

I am replying to your letter of September 17, and the September 15 letter you enclosed from Chairman Hyde, regarding H.R. 4393, the "Financial Contract Netting Improvement Act of 1998."

First, let me thank you for your support of H.R. 4393. The President's Working Group on Financial Markets spent more than two years working on a proposal to update and harmonize the Bankruptcy Code and the bank insolvency laws. When Secretary Rubin, as Chairman of the Working Group, transmitted the proposal to Congress, he wrote: "The proposed legislation . . . is important to the achievement of systemic risk reduction in our financial markets." We appreciate all your efforts toward achieving that goal.

Second, we agree completely with the principles set forth by Chairman Hyde in his letter to you. Preservation of a debtor's estate is key to giving a debtor a chance to reorganize, which is one of the central goals of the Bankruptcy Code. Further, the automatic stay is essential to that preservation. When Deputy Assistant Secretary Anderson testified on the Working Group proposal before the Senate Judiciary Subcommittee on Administrative Oversight and the Courts, he said, "In general, the automatic stay not only serves to protect the debtor's estate until matters can be sorted out but also serves to protect creditors from each other. . . . Consequently, it is our view that exceptions to the automatic stay should not be written into the law except when there is an overriding public policy purpose."

Congress has determined, however, that there is an overriding public policy interest in making limited exceptions to the automatic stay in order to protect markets important to the operation of the economy as a whole. The exceptions to the automatic stay currently in the Code for the termination and netting of certain financial contracts have been adopted in order to minimize systemic risk to the financial markets.

Cross-product netting is one of the most important changes in H.R. 4393. It would allow positions in certain securities contracts, commodity contracts, forward contracts, repurchase agreements and swaps to be netted against each other. Because of concerns about not creating exceptions to the automatic stay unless the overriding goal of minimizing systemic risk justifies it, however, H.R. 4393 limits the use of cross-product netting to just those entities that are eligible to net the underlying contracts.

We believe this limited expansion of the current exceptions to the automatic stay is justified to help reduce systemic risk. Accordingly, we believe the cross-product netting provisions of H.R. 4393 should stay in the bill.

We also believe that Section 12 of H.R. 4393, the provision dealing with asset-backed securitizations, would reduce uncertainty in the marketplace by clearly defining the conditions under which an asset-backed securitization effectively transfers assets out of the property of the estate. As with the cross-product netting provisions, Section 12 was written with specific limitations and conditions, so as not to create a huge loophole under which assets could leave a debtor's estate and give rise to the concerns expressed by Chairman Hyde.

The asset-backed securitization provisions, however, were not part of the original Working Group proposal to Congress, and we can understand how further review of these provisions may be desired. Accordingly, we would be receptive to deferring consideration of these asset-backed securitization issues until the next Congress.

Thank you again for your support. We look forward to working with you and the other members of Congress to finalize this valuable legislation.

The Office of Management and Budget has advised that there is no objection from the standpoint of the Administration's program to the presentation of this report.

cc: The Honorable Henry J. Hyde
      The Honorable John Conyers
      The Honorable George W. Gekas
      The Honorable Jerrold Nadler