The House passed legislation by a vote of 353 to 24 to require the
Financial Stability Oversight Council (FSOC) to conduct a study and report to
Congress on the likely effects that differences between the U.S. and other
jurisdictions, particularly the European Union, in implementing the derivatives
credit valuation adjustment capital requirement would have on United States
financial institutions that conduct derivatives transactions and participate in
derivatives markets. The study would also be required to examine the impact on
end users of derivatives and on the international derivatives markets.
According to Rep. Stephen Fincher (R-Tenn),
the sponsor of the bill, the Financial Competitive Act, H.R.
1341, is needed because of the potential negative impact of Basel III on
the U.S. economy.
FSOC study. Specifically, H.R. 1341 requires that the FSOC
study include an assessment of the extent to which there are differences in the
approaches that the United States and other jurisdictions are taking regarding
implementation of the derivatives credit valuation adjustment capital
requirement, and the nature of the differences and the impact that the
differences would have on U.S. financial institutions that conduct derivatives
transactions and participate in derivatives markets, including their ability to
serve end users of derivatives.
The study must examine pricing and other costs of, and services
available to, end users of derivatives in the United States and other
jurisdictions, as well as the competitiveness of U.S. financial institutions
and derivatives markets, including the extent to which differences in the
credit valuation adjustment capital requirement could shift derivatives
business among jurisdictions. The study must also explore the interaction
between differing credit valuation adjustment capital requirements and margin
rules.
The FSOC study must recommend steps that Congress and the federal
financial regulatory agencies that compose FSOC, including the SEC and CFTC,
should take to minimize any expected negative effects on U.S. financial
institutions, derivatives markets, and end users. The study must also make
recommendations encouraging greater global consistency in the implementation of
internationally agreed upon capital, liquidity, and other prudential standards.
Rep. David Scott (D-Ga), a co-sponsor of the legislation, has noted
that certainty and uniformity are needed on the calculation of the derivatives
credit valuation adjustment as it relates to Basel III capital requirements.
Financial Services Committee Ranking Member Maxine Waters (D-Cal), in
supporting H.R. 1341, observed that regulators must ensure that the calculation
of the derivatives credit valuation adjustment is uniform and does not
disadvantage U.S. financial institutions.
The Committee approved an amendment sponsored by Rep. Joyce Beatty
(D-Ohio) that clarifies that the study must also indentify any risks and
threats to financial stability, thereby recognizing FSOC’s mandate to maintain
oversight of financial stability. The FSOC study must consider the cost of
failing to take regulatory action as well as the cost of taking regulatory
action. According to Ranking Member Waters, the amendment requires the FSOC
study to report on the impact not just on derivatives markets but also on the
wider markets as well.
E.U. Directive. The European Union is implementing Basel III
through the vehicle of the Capital Requirements Directive IV (CRD IV), which
would exempt E.U. supervised swap dealers from certain Basel III capital
mandates, specifically the credit valuation adjustment, when doing business
with non-financial end users, pension funds, and sovereign entities. The
securities industry finds the CRD IV exemption troubling in that it is a
diversion from a uniform application of capital standards and will result in an
unlevel playing field for U.S. and other non-E.U. dealers.
Thus, the securities industry supports H.R. 1341 as part of an
effort to promote consistent international standards that provide a level
playing field, while avoiding market distortions.
Rep. Fincher noted that Canada recently
announced a one-year delay of the derivatives credit valuation adjustment,
despite having finalized the rest of Basel III, citing the uncertainty around
the provision’s global implementation and its effect on non-financial entities.
A Committee staff memorandum issued in connection with the markup
noted that the E.U. exemption for derivatives transactions with sovereign,
pension fund, and corporate counterparties has raised concerns that derivatives
transactions will be subject to different capital requirements and that the
credit valuation adjustment could distort the pricing of trades and limit the
amount of liquidity available for non-financial U.S. derivatives end-users, as
their transactions would not receive the exemption.
The FSOC study is due within 90 days of enactment to the Chairman
and Ranking Members of the Committees on Agriculture and Financial Services of
the House of Representatives, as well as the Chairman and Ranking Members of
the Senate Committees on Agriculture and Banking.