Options Markets Stability Act passed
15 June 2018 Washington DC
Image: Shutterstock
The US House Committee on Financial Services has unanimously passed HR 5749, the Options Markets Stability Act. The legislation, authored by US Representative Randy Hultgren, is aimed at facilitating liquidity in options markets by calling on bank regulators to provide targeted capital relief.
HR 5749, as amended, requires 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.
The legislation provides 360 days for the federal banking regulators to adopt a rule. It also requires them to consider a number of items including the availability of liquidity, the economic value of delta weighting and netting of positions, safety and soundness of financial institutions and overall financial stability.
The legislation, which also requires the Federal Reserve to submit a report to Congress assessing the impact of their final rule, is consistent with the US Treasury Department’s October 2017 Report on capital markets.
That report recommends that regulators properly balance the post-crisis goal of moving more derivatives into central clearing with appropriately tailored and targeted capital requirements.
The Options Clearing Corporation (OCC) is quietly seeking from behind the scenes to draw attention to its own pivotal involvement and that of the US Securities Markets Coalition in leading this effort on behalf of the US exchange-listed options industry.
Representative Hultgren is being slightly less quiet. He gave a degree of further background in the robust press release issued to celebrate the passing of the act. He said: “Illinois is the birthplace and home of listed options markets. Healthy options markets provide ample opportunity for investors to plan for the future and hedge risk.”
“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. 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.”
“Investors do not have the luxury of waiting any longer on our bank regulators to act. I sponsored the Options Markets Stability Act so investors can manage risk in volatile markets at a lower cost. I thank the Financial Services Committee for its support and look forward to the full House taking up this legislation soon.”
Representative Hultgren serves as the vice-chair of the subcommittee on capital markets, securities, and investment. He is also a member of the subcommittee on housing and insurance.
David Prosperi, senior vice president, communications, at the OCC said: “OCC, the US Securities Markets Coalition, which consists of the US financial exchanges, and other industry participants, have been working with members of Congress, regulators and their staffs to educate them on the importance of liquid and centrally-cleared exchange-listed options markets and increased capital calibration and risk sensitivity in order to benefit the users of those markets."
“This educational process has been ongoing. We are pleased that the House committee unanimously approved Congressman Hultgren’s bill, but we understand that several steps remain in the legislative process.”
HR 5749, as amended, requires 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.
The legislation provides 360 days for the federal banking regulators to adopt a rule. It also requires them to consider a number of items including the availability of liquidity, the economic value of delta weighting and netting of positions, safety and soundness of financial institutions and overall financial stability.
The legislation, which also requires the Federal Reserve to submit a report to Congress assessing the impact of their final rule, is consistent with the US Treasury Department’s October 2017 Report on capital markets.
That report recommends that regulators properly balance the post-crisis goal of moving more derivatives into central clearing with appropriately tailored and targeted capital requirements.
The Options Clearing Corporation (OCC) is quietly seeking from behind the scenes to draw attention to its own pivotal involvement and that of the US Securities Markets Coalition in leading this effort on behalf of the US exchange-listed options industry.
Representative Hultgren is being slightly less quiet. He gave a degree of further background in the robust press release issued to celebrate the passing of the act. He said: “Illinois is the birthplace and home of listed options markets. Healthy options markets provide ample opportunity for investors to plan for the future and hedge risk.”
“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. 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.”
“Investors do not have the luxury of waiting any longer on our bank regulators to act. I sponsored the Options Markets Stability Act so investors can manage risk in volatile markets at a lower cost. I thank the Financial Services Committee for its support and look forward to the full House taking up this legislation soon.”
Representative Hultgren serves as the vice-chair of the subcommittee on capital markets, securities, and investment. He is also a member of the subcommittee on housing and insurance.
David Prosperi, senior vice president, communications, at the OCC said: “OCC, the US Securities Markets Coalition, which consists of the US financial exchanges, and other industry participants, have been working with members of Congress, regulators and their staffs to educate them on the importance of liquid and centrally-cleared exchange-listed options markets and increased capital calibration and risk sensitivity in order to benefit the users of those markets."
“This educational process has been ongoing. We are pleased that the House committee unanimously approved Congressman Hultgren’s bill, but we understand that several steps remain in the legislative process.”
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