Legislation introduced by U.S. Rep. Randy Hultgren (R-IL) that would benefit investors unanimously passed the U.S. House Financial Services Committee last week.
The Options Markets Stability Act, H.R. 5749, which Rep. Hultgren authored and introduced on May 10, would facilitate liquidity in options markets by requiring federal bank regulators to provide timely, targeted capital relief, according to a statement provided by the congressman’s office on June 14 following the committee’s 54-0 vote on the bill.
“Healthy options markets provide ample opportunity for investors to plan for the future and hedge risk,” said Rep. Hultgren, who serves as vice chair of the U.S. House Financial Services Subcommittee on Capital Markets, Securities, and Investment.
“Investors do not have the luxury of waiting any longer on our bank regulators to act,” he said. “I sponsored the Options Markets Stability Act so investors can manage risk in volatile markets at a lower cost.”
H.R. 5749 would require federal bank regulators to establish a methodology for calculating the counterparty credit risk exposure, at default, of a financial institution pursuant to the risk-based and leveraged-based capital rules, according to a bill summary released by Rep. Hultgren’s staff. Federal banking regulators would have 360 days to adopt a rule under the bill.
H.R. 5749 also would require federal banking regulators to consider several items for this process, such as the availability of liquidity, the economic value of delta weighting and netting of positions, the safety and soundness of financial institutions, and overall financial stability, according to the summary.
“The market volatility seen in equity markets earlier this year exposed the extent to which existing rules are restricting liquidity when it is needed the most,” Rep. Hultgren said. “Unfortunately, market-makers who provide liquidity for listed options are indirectly constrained by bank capital rules from fulfilling their role in maintaining price stability, leading to less liquidity and higher costs for investors who want to hedge risk.”
Additionally, H.R. 5749 would require the Federal Reserve to submit a report to Congress assessing the impact of their final rule.
H.R. 5749 has been aligned with the U.S. Treasury Department’s October 2017 capital markets report, which recommends “that regulators properly balance the post-crisis goal of moving more derivatives into central clearing with appropriately tailored and targeted capital requirements.”
Treasury’s report was prepared in response to a Feb. 3, 2017 executive order set by President Donald Trump that established a policy to regulate the United States financial system in a manner consistent with a set of seven core principles, including to: “Foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry,” according to the report.
“I thank the Financial Services Committee for its support and look forward to the full House taking up this legislation soon,” said Rep. Hultgren.