[Congressional Record Volume 164, Number 115 (Tuesday, July 10, 2018)]
[House]
[Pages H6000-H6003]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
OPTIONS MARKETS STABILITY ACT
Mr. HUIZENGA. Mr. Speaker, I move to suspend the rules and pass the
bill (H.R. 5749) to require the appropriate Federal banking agencies to
increase the risk-sensitivity of the capital treatment of certain
centrally cleared options, and for other purposes, as amended.
The Clerk read the title of the bill.
The text of the bill is as follows:
H.R. 5749
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
[[Page H6001]]
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Options Markets Stability
Act''.
SECTION 2. RULEMAKING.
Within 180 days of the date of enactment of this Act, the
Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, and the Comptroller of the
Currency shall, jointly, issue a proposed rule, and finalize
such rule within 360 days of the date of enactment of this
Act, to adopt a methodology for calculating the counterparty
credit risk exposure, at default, of a depository
institution, depository institution holding company, or
affiliate thereof to a client arising from a guarantee
provided by the depository institution, depository
institution holding company, or affiliate thereof to a
central counterparty in respect of the client's performance
under an exchange-listed derivative contract cleared through
that central counterparty pursuant to the risk-based and
leverage-based capital rules applicable to depository
institutions and depository institution holding companies
under parts 3, 217, and 324 of title 12, Code of Federal
Regulations. In issuing such rule, the Board of Governors of
the Federal Reserve System, the Federal Deposit Insurance
Corporation, and the Comptroller of the Currency shall
consider--
(1) the availability of liquidity provided by market makers
during times of high volatility in the capital markets;
(2) the spread between the bid and the quote offered by
market makers;
(3) the preference for clearing through central
counterparties;
(4) the safety and soundness of the financial system and
financial stability, including the benefits of central
clearing;
(5) the safety and soundness of individual institutions
that may centrally clear exchange-listed derivatives or
options on behalf of a client, including concentration of
market share;
(6) the economic value of delta weighting a counterparty's
position and netting of a counterparty's position;
(7) the inherent risk of the positions;
(8) barriers to entry for depository institutions,
depository institution holding companies, affiliates thereof,
and entities not affiliated with a depository institution or
depository institution holding company to centrally clear
exchange-listed derivatives or options on behalf of market
makers;
(9) the impact any changes may have on the broader capital
regime and aggregate capital in the system; and
(10) consideration of other potential factors that impact
market making in the exchange-listed options market,
including changes in market structure.
SEC. 3. REPORT TO CONGRESS.
At the end of the 5-year period beginning on the date the
final rule is issued under section 2, the Board of Governors
of the Federal Reserve System shall submit to the Committee
on Financial Services of the House of Representatives and the
Committee on Banking, Housing, and Urban Affairs of the
Senate a report detailing the impact of the final rule during
such period on the factors described under paragraphs (1)
through (10) of section 2.
The SPEAKER pro tempore. Pursuant to the rule, the gentleman from
Michigan (Mr. Huizenga) and the gentlewoman from California (Ms. Maxine
Waters) each will control 20 minutes.
The Chair recognizes the gentleman from Michigan.
General Leave
Mr. HUIZENGA. Mr. Speaker, I ask unanimous consent that all Members
may have 5 days in which to revise and extend their remarks and to
include extraneous material on the bill.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Michigan?
There was no objection.
Mr. HUIZENGA. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I rise today in support of H.R. 5749, the Options
Markets Stability Act, which would adjust the risk sensitivity of the
capital treatment of centrally cleared options.
Mr. Speaker, I congratulate my friend from Illinois and fellow member
of the Financial Services Committee, Mr. Hultgren, for his tireless
work on this. Mr. Speaker, it may come as no surprise that this may not
be the most exciting portion of the work that is done in our committee,
it is not necessarily the most sexy of issues that we deal with, but it
is extremely important. I appreciate the work of the gentleman as well
as members on the committee from all sides.
As I said, Mr. Speaker, options are incredibly useful and powerful
risk mitigation tools that can help protect an investor's financial
portfolio. From buying puts to hedge the downside risk of owning a
stock to writing covered calls to collect income and cap potential
losses, listed options strategies are protective tools employed by
individual investors, institutions, and pension funds.
But options do have a sensitivity to the price of the underlying
stock such that, at any given point in time, the value of an option
will respond differently to changes in the price of the option's
underlying shares.
Increased volatility in equity markets during recent months has
revealed that certain bank capital requirements using the current
exposure method--or CEM, as it is known--from the Basel Committee on
Banking Supervision discourages the use of central clearing, which is a
central tenet of the Dodd-Frank Act. This is actually counterintuitive
and the reason why we are here today trying to fix that.
Title VII of the Dodd-Frank Act requires derivatives, including
options, to be centrally cleared in order to take advantage of the
risk-mitigating benefits of clearing. As a result, the role of clearing
members, or houses, and the amount of transactions cleared by these
institutions has expanded significantly.
However, businesses and end users which use these options to manage
business risks can only trade through a clearing member, as they are
unable to access clearinghouses directly.
The risk-based and leverage-based capital requirements for banks have
made it cost prohibitive for clearing members to expand their
derivatives clearing services when there is higher volume. As a result,
liquidity providers who depend on banks to centrally clear their
options are having trouble providing liquidity during instances of
market volatility, therefore making it more expensive for individuals
and institutions to hedge their positions through the use of options
contracts. As I pointed out, Mr. Speaker, that is exactly the opposite
of what the intent of the Dodd-Frank Act was in this area.
Although the Basel Committee agreed to replace CEM by January of 2017
with a more risk-sensitive method known as the standardized approach
for measuring counterparty credit risk, or SA-CCR, exposures, the Board
of Governors of the Federal Reserve has not yet implemented SA-CCR, and
the transition is not imminent.
To remedy these problems, H.R. 5749, the Options Markets Stability
Act introduced by Representative Hultgren and Representative Foster,
two colleagues from Illinois, will help alleviate the unnecessary
adverse impact of the current exposure method, or CEM, on the listed
options market.
This legislation would require the Federal Reserve Board, Office of
the Comptroller of the Currency, and the Federal Deposit Insurance
Corporation to implement a risk-adjusted approach to value centrally
cleared options as it relates to capital rules to better and more
accurately reflect exposure and promote options market-making activity.
Specifically, the bill changes how the calculation of the CEM on
options contracts is calculated on their notional face value rather
than through a risk-adjusted value, which reflects actual exposures.
{time} 1515
By changing this calculation, it will incentivize the use of hedged
positions and would reduce the amount of capital required to place
these positions and reduce overall exposure.
Market-maker liquidity is critical to vibrant options markets, and
the knock-on effects are increased costs to investors, a heightened
possibility of market dislocation during volatile environments, and the
discouragement of centrally cleared products that help limit the
systemic risk that we are all trying to eliminate.
This bipartisan bill, which passed the Financial Services Committee
by a vote of 54-0, is a modest adjustment to the risk- and leverage-
based capital rules to better take into account the actual risk of
clearing options.
I commend my colleagues, Representative Hultgren and Representative
Foster, for their bipartisan work on this important bill, and I urge
all of my colleagues to vote in favor of H.R. 5749.
Mr. Speaker, I reserve the balance of my time.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield myself such
time as I may consume.
Mr. Speaker, I rise in support of H.R. 5749, which is a tailored,
bipartisan solution to the problems facing our Nation's options
markets.
[[Page H6002]]
Options are a type of derivative contract that provide investors with
the right to buy or sell stock or other securities at some point in the
future. According to the Chicago Board Options Exchange, which supports
the bill, bank affiliates that clear options on behalf of large traders
have been restricting their services because of the current bank
capital calculation and resulting costs.
As a consequence, they argue that large options traders, known as
market-makers, are not readily able to trade when investors need them
to and are having to charge more when they do trade. There are also
fewer market-makers overall and more trading activity concentrated
among the top five firms.
H.R. 5749 would direct the bank regulators to consider this problem
while still focusing on the benefits of bank capital to reduce systemic
risk.
Now, I am aware that the Federal Reserve just proposed to
significantly change banks' capital requirements, including through a
rollback of the supplementary leverage ratio. If the Fed's proposals
are finalized, FDIC-insured banks could shed as much as $121 billion in
capital, making it more likely that one of the Wall Street megabanks
will fail in a future downturn and cause untold damage to the economy.
On top of that, the President signed into law S. 2155, which will
recklessly reduce capital and other requirements on the Nation's
largest banks. I am very concerned with these developments and urge our
regulators to ensure the safety and soundness of megabanks and our
financial system.
H.R. 5749 would make sure that this is the case for bank capital
associated with cleared options. Specifically, the bill would require
the bank regulators to conduct a rulemaking after considering several
important factors, including the safety and soundness of the financial
system, financial stability, and the impact of the changes on the
broader capital regime.
Unlike the introduced version of the bill, which would only reduce
capital, the bill, as amended, would direct the regulators to increase
capital for riskier derivatives.
It also would create a retrospective rule review so that, 5 years
after implementation, the regulators would study the impact of their
rule.
So I want to thank Representative Foster and Representative Hultgren
for working together to promote trading in our options markets without
sacrificing bank safety and soundness.
I encourage my colleagues to join me in supporting H.R. 5749, and I
reserve the balance of my time.
Mr. HUIZENGA. Mr. Speaker, I yield as much time as he may consume to
the gentleman from Illinois (Mr. Hultgren), the vice chair of the
Capital Markets, Securities, and Investment Subcommittee.
Mr. HULTGREN. Mr. Speaker, I want to thank Chairman Huizenga for his
work on this and so many other important things on the Financial
Services Committee and the Capital Markets, Securities, and Investment
Subcommittee.
I also want to begin by giving special thanks to Leader McCarthy for
providing time for consideration of the Options Markets Stability Act.
This legislation is very important to a number of stakeholders in
Illinois, but also to market stability as a whole and the investors who
depend on having access to reliable products.
I also do want to thank Chairman Hensarling and Ranking Member
Waters. Without their support, my legislation would not have received a
unanimous vote in the Financial Services Committee, and I am grateful
for their help; and my colleague, Bill Foster, as well, for his help.
Title VII of the Dodd-Frank Act requires derivatives, including
options, to be centrally cleared in order to take advantage of the
risk-mitigating benefits.
Liquidity providers, many of which are in Illinois, can trade only
through a clearing member; they cannot access clearinghouses directly.
As a result, the role of clearing members and the amount of
transactions cleared by these institutions has expanded significantly.
The risk-based and leverage-based capital requirements for bank
clearing members makes it cost prohibitive to provide clearing services
for listed options. This is especially acute when there is higher than
expected volume.
Chicago Trading Company, one of the key liquidity providers for
listed options, wrote in a letter to the Treasury Department last
summer that: ``These requirements force banks to direct capital away
from the exchange-listed, centrally cleared options market, thereby
hindering our ability to provide liquidity and acting in direct
contravention of a core principle of post-crisis regulation:
strengthening exchange-based trading and central clearing, especially
for many derivatives that were previously traded on an over-the-counter
basis.''
The Options Markets Stability Act, as amended, requires Federal
banking regulators to more accurately measure counterparty risk by
adjusting the risk- and leverage-based capital rules, and requires them
to provide a report to Congress about these changes 5 years after they
go into effect.
While market participants have long expressed concern about the
current capital requirements for listed options, volatility in equity
markets earlier this year exposed the extent to which existing rules
are restricting liquidity when it is needed the most.
Volatility contributes to an increase in volume of listed options
because of an interest by market participants to hedge their positions.
However, the binding capital constraint under current rules makes it
cost prohibitive to centrally clear the increased volume of equity
options contracts demanded by the market.
The market-makers who provide liquidity for listed options are
indirectly constrained by the bank capital rules from fulfilling their
role in maintaining price stability.
Key financial regulators have underscored these issues. CFTC Chairman
Giancarlo noted in testimony before the House Appropriations Committee
that: ``We have some anecdotal information that shows that, during the
recent market volatility, the supplementary leverage ratio impacted
larger market-makers' ability to take on certain positions, thus
exacerbating market volatility. The SLR is not specifically mandated in
Title VII of Dodd-Frank, and it has had the opposite effect intended:
pushing trades away from central clearing.''
Chairman Powell has noted that the current exposure method generally
treats potential future credit exposures on derivatives as a fixed
percentage of the notional amount, which ignores whether a derivative
is margined and undervalues netting benefits.
The problem is that banking regulators are taking far too long to
actually address the issues in our derivatives markets. Our options
markets are encountering liquidity issues now because of the poorly
calibrated capital rules. Investors do not have the luxury of waiting
any longer on our bank regulators.
Finally, this legislation has a long list of supporters: Cboe Global
Markets, the Options Clearing Corporation, NASDAQ, NYSE, CME Group,
SIFMA, the Futures Industry Association, IMC, Chicago Trading Company,
TD Ameritrade, just to name a handful.
A vote in support of the Options Markets Stability Act is a vote in
support of listed options and central-clearing that is a cornerstone of
Dodd-Frank. It is a vote in support of maintaining options for
investors and their ability to manage risk in volatile markets.
Ms. MAXINE WATERS of California. Mr. Speaker, I have no further
speakers, and I yield back the balance of my time.
Mr. HUIZENGA. Mr. Speaker, I have no further speakers. I encourage my
colleagues to vote for H.R. 5749, and I yield back the balance of my
time.
The SPEAKER pro tempore. The question is on the motion offered by the
gentleman from Michigan (Mr. Huizenga) that the House suspend the rules
and pass the bill, H.R. 5749, as amended.
The question was taken.
The SPEAKER pro tempore. In the opinion of the Chair, two-thirds
being in the affirmative, the ayes have it.
Mr. HUIZENGA. Mr. Speaker, on that I demand the yeas and nays.
The yeas and nays were ordered.
The SPEAKER pro tempore. Pursuant to clause 8 of rule XX, further
proceedings on this motion will be postponed.
[[Page H6003]]
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