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


                  September 30, 1998

The Honorable Orrin G. Hatch
Chairman
Committee on the Judiciary
United States Senate
Washington, D.C. 20510

Dear Orrin:

I am writing to share the Administration's views on certain bankruptcy provisions in S. 1301, the bankruptcy reform bill before the conference committee, and related provisions in H.R. 4393, the "Financial Contract Netting Improvement Act of 1998."

The Administration supports the financial contract netting provisions in S. 1301. These provisions are based on a proposal from the President's Working Group on Financial Markets, which was the result of an intensive, multi-year interagency effort to improve the regime governing the recognition of netting of certain financial contracts in insolvency situations. As I noted when we transmitted our recommendations to Congress, the proposed legislation would reduce systemic risk in our financial markets, reducing the risk that a failure of a single firm would cause significant disruption and danger to our financial markets. In particular, this proposal will help to reduce systemic risk arising out of activities in the derivatives market.

The Administration also encourages the conferees to include similar provisions amending the bank insolvency laws, which are contained in H.R. 4393 as approved by the House Banking Committee. One of the goals of the Working Group effort was to harmonize, where appropriate, provisions under the Bankruptcy Code and the bank insolvency laws. The bank insolvency provisions in H.R. 4393 would accomplish that harmonization and would also clarify the power of the Federal Deposit Insurance Corporation to transfer qualified financial contracts to another financial institution. This clarification will help ensure that the resolution of a failed depository institution can be accomplished at the lowest possible cost to the deposit insurance funds administered by the FDIC.

We look forward to working with the conferees to enact these desirable reforms, in conjunction with moderate and balanced consumer bankruptcy reform legislation.