House gives nod to bill calling on regulators to calculate counterparty credit risk exposure

Legislation designed to facilitate liquidity in options markets by calling on federal banking agencies to provide targeted capital relief was approved by the House Tuesday on a 368-19 vote.

The Options Markets Stability Act (H.R. 5749), authored by Rep. Randy Hultgren (R-Ill.), would require the federal banking 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. Once enacted, regulators would have 360 days for the federal banking regulators to adopt a rule.

According to a press release by Hultgren, options markets provide opportunity for investors to plan for the future and hedge risk. “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,” Hultgren said in the release. He said the legislation would allow investors to manage risk in volatile markets at a lower cost.

The legislation would also require regulators to consider availability of liquidity, economic value of delta weighting and netting of positions, safety and soundness of financial institutions and overall financial stability (among other things). The Federal Reserve would also be required to submit a report to Congress assessing the impact of the final rule it issues.

The legislation heads to the Senate for consideration.

June 14 release: Financial Services Committee Unanimously Passes Hultgren’s Options Markets Stability Act

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