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H.R. 5749: To require the appropriate Federal banking agencies to increase the risk-sensitivity of the capital treatment of certain centrally cleared exchange-listed options and derivatives, and for other purposes.
On Motion to Suspend the Rules and Pass, as Amended in the House

This was a vote to pass H.R. 5749 (115th) in the House. This vote was taken under a House procedure called “suspension of the rules” which is typically used to pass non-controversial bills. Votes under suspension require a 2/3rds majority. A failed vote under suspension can be taken again.

H.R. 5749 requires the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation to adjust the risk-sensitivity of the capital treatment of centrally cleared options. In addition, the bills requires an offset using a “delta adjustment” and “netting” of correlated positions in the calculation of the Current Exposure Model used for bank capital rules.

In response to the 2008 financial crisis, the Basel Committee on Banking Supervision (Basel Committee) agreed to modify internationally negotiated bank regulatory standards known as the Basel Accords, to increase bank capital requirements. On July 9, 2013, the federal banking regulators, including the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), issued a final rule to implement most of the Basel III recommendations.

Under the Basel III rules, banks are required to calculate charges for cleared options using the standardized approach known as the Current Exposure Method (“CEM”). CEM is not properly calibrated for options because it is not sufficiently risk-sensitive, resulting in higher leverage ratio capital requirements for certain derivatives products (including exchange-traded derivatives) relative to risk-based measures. The CEM model, for example, requires options contracts to be sized on their notional face value rather than allowing for a risk adjustment to notional to reflect the actual exposure associated with these derivatives. Specifically, CEM does not permit a delta adjustment for the notional value measurement of options.

Moreover, the CEM methodology measures exposures on a gross basis and is, therefore, overly restrictive in permitting netting and the offsetting of long and short positions. Typically, for example, market makers and others who maintain hedged positions will execute and clear offsetting trades. When done through the same Central Counterparty (CCP), the risk of such hedged positions is reduced, or even eliminated. CEM, however, applies separately, on a gross basis, to each of the offsetting positions, compounding the capital that hedged traders’ Futures Commissions Merchants (FCMs) must set aside, even though the hedged position has reduced exposure overall. By contrast, a trader with an unhedged, directional position, by definition more risky than a hedged position, will, from a CEM perspective, have less exposure than a hedger with two offsetting trades.

The legislation calls for an offset using a “delta adjustment” and “netting” of correlated positions in the calculation of the CEM used for bank capital rules. Delta-weighting takes into account the price sensitivity of a derivative relative to changes in the price of the underlying asset, and is the number of points than an option’s price is expected to move for each one-point change in the underlying asset. Delta provides an indication of how the option's value will change with respect to price fluctuations in the underlying instrument, assuming all other variables remain the same. Netting acknowledges that counterparties may have correlated positions where one party is long and another is short on a specific position.

Source: Republican Policy Committee


All Votes R D
Yea 90%
Nay 0%
Not Voting 10%

Passed. 2/3 Required. Jul 10, 2018 at 7:11 p.m. ET. Source:

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