Last Thursday the House Committee on Financial Services unanimously passed H.R. 5749, the Options Markets Stability Act. The legislation authored by U.S. Rep. Randy Hultgren (IL-14) would facilitate liquidity in options markets by calling on bank regulators to provide targeted capital relief.
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, said Rep. Hultgren. 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.
H.R. 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 also requires the Federal Reserve to submit a report to Congress assessing the impact of their final rule.
The legislation is consistent with the U.S. Treasury Departments October 2017 Report on Capital Markets which recommends, that regulators properly balance the post-crisis goal of moving more derivatives into central clearing with appropriately tailored and targeted capital requirements.
As a member of the House Committee on Financial Services, Rep. Hultgren serves as the Vice-Chair of the Subcommittee on Capital Markets, Securities, and Investment, and is also a member of the Subcommittee on Housing and Insurance.