The Honorable Robert E. Rubin
Secretary of the Treasury
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

Dear Mr. Secretary:

I am writing to you in your capacity as chairman of the Working Group on Financial Markets, with respect to the stock market's recent decline -- the Dow Jones Industrial Average has fallen 559 points or nearly 8 percent in less than four weeks -- and the market's increased levels of intraday volatility.

As you know, in March of 1988, the President established by executive order the Working Group, chaired by the Secretary of the Treasury and including as members the chairmen of the Federal Reserve Board, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. When this Committee wrote the Market Reform Act of 1990, we required the members of the Working Group to report to Congress annually through 1995 on the following (see section 8 of Public Law 101-432, October 16, 1990):

(1) the efforts their respective agencies have made relating to the coordination of regulatory activities to ensure the integrity and competitiveness of United States financial markets;
(2) the efforts their respective agencies have made to formulate coordinated mechanisms across marketplaces to protect the payments and market systems during market emergencies;
(3) the views of their respective agencies with respect to the adequacy of margin levels and use of leverage by market participants; and
(4) such other issues and concerns relating to the soundness, stability, and integrity of domestic and international capital markets as may be appropriate.

In light of current market conditions, I respectfully request that the Working Group advise us of the present status of these efforts, particularly as to the adequacy and effectiveness of mechanisms within and across marketplaces to protect the payments and market systems during market emergencies. I regard this matter of utmost importance.

Relatedly, on October 19, 1994, the then-chairman of the Working Group sent this Committee a report summarizing approximately 80 actions, taken or proposed to be taken by seven Federal regulators and numerous other government-related entities, to reduce risk in financial markets. On the strength of these representations, Congress decided not to pursue broad new legislative authority for these entities to protect the integrity and efficient functioning of the financial markets. Please advise us of the status of each of the summarized actions. Where an action has not been completed but rather is still pending or some substitute action has been taken instead or no action is currently planned, please so advise us and explain why.

One of the areas highlighted in both the Working Group's 1994 report and the accompanying transmittal letter was the need for improved accounting and disclosure standards regarding OTC and exchange-traded derivatives. For example, the report said at page 10: "The Working Group...and the Interagency Task Force on Bank-Related Derivatives Activities...have urged the FASB to act promptly to address derivatives issues, including hedge accounting." In its May 1994 report, Financial Derivatives: Actions Needed to Protect the Financial System (GAO/GGD-94-133), GAO also called for the adoption of "comprehensive, consistent accounting rules and disclosure requirements for derivative products." (p. 16) After careful study, GAO found:

Accounting for end-user hedging activities is the most problematic derivatives accounting issue. Accounting rules for these activities are incomplete and contradictory and could be easily misapplied to result in inappropriate reporting of gains and losses from these activities. As a result, financial reports of end-users may be inconsistently presented; unrepresentative of the substance and risks of derivatives activities; and misleading to investors, creditors, regulators, and others....[R]eported financial results may...lack the transparency necessary for effective business and economic decisionmaking. (pp. 92-3)

Ironically, and inexplicably under current conditions, both the SEC's final rules and FASB's exposure draft are under Republican attack in this Congress. Please advise whether the Working Group continues to believe in the need for improved derivatives accounting and disclosure.

 Thank you for your cooperation and attention to this request.

Sincerely,

JOHN D. DINGELL
RANKING MEMBER

cc: The Honorable Tom Bliley
The Honorable Michael G. Oxley
The Honorable Thomas J. Manton

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