[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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