During Federal Reserve Chairman Jerome Powell’s testimony on Capitol Hill, Rep. Randy Hultgren asked Chairman Powell about targeted capital relief for bank-affiliated clearers of options liquidity providers.
Recall that Rep. Hultgren authored legislation – the Options Market Stability Act – that just passed the House. That legislation seeks to provide relief for clearers by directing banking regulators “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.” (Emphasis added.)
Action from the Fed could take the form of adopting SA-CCR, which accounts for offsetting positions, as a replacement for the Current Exposure Methodology (CEM), which is currently used to determine capital requirements of clearers. But it could take some other form, too.
In response to the question from Rep. Hultgren about capital relief, Chairman Powell said, “We think SA-CCR is good policy. We’re working on a rule on it now. I hope it can get out before 8 or 12 months. I’ll go back to the office and check in. It’s a priority – I know there’s actual drafting going on and negotiation between agencies. So, it’ll happen.”
This is important because it is uncertain whether Rep. Hultgren’s legislation would make it through the Senate despite its widespread bipartisan support in the House. But legislation is not required for the Fed to alter these rules – it simply forces the Fed to act.
Chairman Powell’s comments today show that the Fed will act to revamp the bad math of CEM regardless of the legislation, removing reliance on the legislature to prompt necessary changes to the current burdensome capital regime.