Options Markets Stability Act

Mr. Speaker, I move to suspend the rules and pass the bill (S. 488) to increase the threshold for disclosures required by the Securities and Exchange Commission relating to compensatory benefit plans, and for other purposes, as amended.

Mr. Speaker, I ask unanimous consent that all Members may have 5 legislative days in which to revise and extend their remarks and include extraneous material on this bill.

Mr. Speaker, I yield myself as much time as I may consume.

Mr. Speaker, two things that are vital to the American economy: number one, 3 percent economic growth, and number two, competing with China.

Three percent economic growth, Mr. Speaker, is so important because, when you look at the history of America, if you look at jobs that are created, if you look at increasing incomes, if you look at decreasing unemployment, this happens in our 3 percent-plus growth years, and that is why it is so great that America is once again seeing 3 percent-plus economic growth.

But, Mr. Speaker, can we keep it?

There are some alarming trends that we have to arrest, and that is that, unfortunately, entrepreneurship, that is, launching new businesses, recently hit a generational low. Companies that are going public--and 90 percent of the jobs that a company creates happen after they go public, IPOs, initial public offerings--they have been in a decline, a 20-year decline, and they have reached a new low.

If we look at what China is trying to do with their 2025 program, Mr. Speaker, and dominate the world in high tech and then we turn around and we see that China has over a third of the world's IPOs, America-- our decline is now down to 11 percent--has got to change.

So thus, today, we are taking up the JOBS and Investor Confidence Act, also known as the JOBS Act 3.0.

What we are trying to do, Mr. Speaker, number one, we are doing it on a bipartisan basis, but we are trying to ensure that our entrepreneurs at least don't face the challenge of having the capital they need to launch their companies, because, Mr. Speaker, when we have more small businesses that are launching new enterprises and going public and staying public, these are the Amazons and the Googles and the Microsofts of the future.

So, again, Members on both sides of the aisle have come together because, historically, capital formation has been a bipartisan issue here. We have come together, Democrat and Republican, to make sure that these small

businesses get this start. And we try to treat the whole capital formation ecosystem, from venture capital with the HALOS Act and helping accredited investors be able to bring their capital to the table, to early growth companies and how they have to handle the very expensive 404(b) Sarbanes-Oxley provision, to the stages of companies going public, but once they go public, Mr. Speaker, the ability to stay public, and so we have a venture exchange bill to make sure that they can concentrate their liquidity in one area.

So this is important. It is important to keep 3 percent economic growth. It is important that America's garages have fewer old cars, more new startups.

I want to thank Members on both sides of the aisle, but I especially want to thank the ranking member, the gentlewoman from California, working so strongly and fervently and on a good, bipartisan, cooperative basis to produce the JOBS and Investor Confidence Act.

Mr. Speaker, I expect that we can have a strong bipartisan vote on the floor, and I reserve the balance of my time.

Mr. Speaker, I yield 2 minutes to the gentleman from Michigan (Mr. Huizenga), the chairman of the Capital Markets, Securities, and Investments Subcommittee, the real leader of this capital formation package on the Republican side of the aisle, and also the sponsor of two provisions of the bill: H.R. 477, the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act, and H.R. 6139, the Improving Investment Research for Small and Emerging Issuers Act.

Mr. Speaker, I yield 1 minute to the gentleman from Ohio (Mr. Chabot), who is the chairman of the House Small Business Committee and who has sponsored a very important provision in the package, H.R. 79, the Helping Angels Lead Our Startups Act.

Mr. Speaker, I yield 1 minute to the gentlewoman from Missouri (Mrs. Wagner), the chair of our Oversight and Investigations Subcommittee, also the lead sponsor of an important provision in this package of bills, H.R. 5970, the Modernizing Disclosure for Investors Act.

Mr. Speaker, I yield 1 minute to the gentleman from Kentucky (Mr. Barr), the chair of our Monetary Policy and Trade Subcommittee.

Mr. Speaker, I yield 1 minute to the gentleman from Illinois (Mr. Hultgren), who is the vice-chairman of our Capital Markets, Securities, and Investment Subcommittee.

Mr. Hultgren is the lead sponsor of two provisions of the bill, H.R. 5749, the Options Market Stability Act, and H.R. 6319, the Expanding Investment in Small Businesses Act.

Mr. Speaker, I yield 1 minute to the gentleman from Wisconsin (Mr. Duffy), who is the chairman of our Housing and Insurance Subcommittee. Mr. Duffy is the sponsor of a provision of this bill, H.R. 4537, the International Insurance Standards Act.

Mr. Speaker, I yield 1 minute to the gentleman from North Carolina (Mr. Pittenger), who is the vice-chairman of the Financial Services Subcommittee on Terrorism and Illicit Finance.

Mr. Speaker, I yield 1 minute to the gentleman from Pennsylvania (Mr. Rothfus), the vice chairman of our Financial Institutions Subcommittee, who is also the lead Republican sponsor of one of the bills in the package, H.R. 6069, the Fight Illicit Networks and Detect Trafficking Act.

Mr. Speaker, I yield 1 minute to the gentleman from California (Mr. Sherman), a senior Democrat on the committee and the lead sponsor of the bill.

Mr. Speaker, I yield 1 minute to the gentleman from Texas (Mr. Williams), the vice chairman of the Financial Services Subcommittee on Monetary Policy and Trade.

Mr. Speaker, I yield 1 minute to the gentleman from Arkansas (Mr. Hill), the majority whip of the committee and also the lead sponsor of H.R. 5783, the Cooperate with Law Enforcement Agencies and Watch Act, and who worked, also, extensively on H.R. 1585, the Fair Investment Opportunities for Professional Experts Act.

Mr. Speaker, I yield 1 minute to the gentleman from Minnesota (Mr. Emmer), who is the lead sponsor of a very important provision in the package, H.R. 5877, the Main Street Growth Act.

Mr. Speaker, I yield 1 minute to the gentleman from Georgia (Mr. Loudermilk), who is the lead sponsor of two provisions in the package: H.R. 3555, the Exchange Regulatory Improvement Act, and H.R. 5953, the earlier referenced BUILD Act.

Mr. Speaker, I yield 1 minute to the gentleman from North Carolina (Mr. Budd), the lead sponsor of one of the provisions in the bill, H.R. 3903, the Encouraging Public Offerings Act.

Mr. Speaker, I yield the gentlewoman from California an additional 30 seconds.

Mr. Speaker, may I inquire how much time I have remaining.

Mr. Speaker, I yield myself the balance of my time.

Indeed, Mr. Speaker, some would say the ranking member and I can't agree even on the time of day. I was told when this debate started that thunderstorms came over Washington, D.C., it was that monumental of an achievement.

But in seriousness, I do want to offer my thanks and my gratitude to the ranking member. She and her staff worked very constructively with us on this bill and the preceding important bill, the CFIUS reform, which we are still trying to work out our differences on with the Senate. But, long story short, we came together.

This is going to be an important day for small business. It is an important day for 3 percent economic growth, which is so important to American families.

I, too, want to echo how important the work of our staffs is. Particularly on the majority side, I wish to thank Kevin Edgar and Fritz Vaughan and their staff for their contribution.

This is going to make a difference, ultimately, because small businesses one day become big businesses. This will make a difference in economic growth for all Americans.

Mr. Speaker, I urge all Members to support the JOBS and Investor Confidence Act of 2018, and I yield back the balance of my time.

Mr. Speaker, on that I demand the yeas and nays.

Mr. Speaker, I yield myself such time as I may consume.

Mr. Speaker, this bill is an example of true bipartisanship. I want to thank Chairman Hensarling, the members of the Financial Services Committee, and the staff on both sides of the aisle for their work on this legislative package.

S. 488, the JOBS and Investor Confidence Act of 2018, is evidence that Democrats and Republicans can come together to strengthen our Nation's small businesses and entrepreneurs, bolster investor confidence, protect consumers, promote financial stability, and counter human and drug trafficking.

S. 488 helps small businesses grow by encouraging capital formation and requires the Securities and Exchange Commission to consider unique issues facing rural small businesses and small investment advisers. When entrepreneurs are looking to retire, S. 488 allows them to easily sell their businesses.

The bill also requires several rulemakings and studies to encourage small businesses to go public, including by protecting them from excessive underwriting fees.

Main Street investors and consumers also benefit from S. 488. One provision, which I authored, cracks down on corporate insiders engaged in illegal insider trading.

Democrats also led provisions to enhance disclosures about outsized insider voting power.

The bill also creates a task force at the SEC to protect seniors and their financial best interests.

Additionally, the bill helps nonprofits, like Habitat for Humanity, continue to extend affordable mortgages to low-income families aspiring to the dream of homeownership.

Thanks to Mr. Ellison, the legislation enables millions of Americans with thin credit files to improve and build their credit by allowing alternative types of data, like the on-time payment of rent and utilities, to be included in their credit reports without preempting State law.

S. 488 also improves financial stability. The bill directs regulators to improve the calculation for bank capital held to offset risk in the options and derivatives markets so that riskier products are covered by more capital

Finally, S. 488 strengthens our government's efforts to stop drug and human trafficking by preventing criminals who engage in these unconscionable acts from accessing the financial system.

There are several provisions that we did not reach bipartisan agreement on in time, including reforms to private offerings under regulation D that requires issuers to file disclosures before their first sell and after the termination of the offering. I am pleased that the chairman has offered to continue working on this and other issues with me, and I hope that the Senate has its own chance to make these and other changes.

Throughout my work on this legislation, I insisted that nothing could be included that would weaken Dodd-Frank's financial reforms, harm consumers, or provide giveaways to Wall Street. Instead, building on the bipartisan work of the Financial Services Committee, S. 488 includes measures that will help small businesses grow and protect hardworking Americans who entrust their savings to the capital markets.

Mr. Speaker, I again thank my colleagues for their strong bipartisan support on this legislation, and I reserve the balance of my time.

Mr. Speaker, I yield 2 minutes to the gentlewoman from New York (Mrs. Carolyn B. Maloney), the ranking member of our Capital Markets, Securities, and Investment Subcommittee of the Financial Services Committee, and the leading sponsor and Democratic cosponsor of several of the bills in this package.

Mr. Speaker, I yield 2 minutes to the gentleman from Georgia (Mr. David Scott), a senior member of the Financial Services Committee and the leading Democratic cosponsor of several of the bills in this package.

Mr. Speaker, I yield an additional 30 seconds to the gentleman.

Mr. Speaker, I yield 2 minutes to the gentleman from Connecticut (Mr. Himes), a member of the Financial Services Committee, the chair of the New Democrat Coalition, and the author of one of the bills in this package that ensures companies aren't paying excessive fees to go public.

Mr. Speaker, I yield 2 minutes to the gentleman from Illinois (Mr. Foster), who is a member of the Financial Services Committee and a leading Democratic cosponsor on several of the bills in this package.

Mr. Speaker, I yield the gentleman from Illinois an additional 20 seconds.

Will the Speaker please check the minutes again? We have calculated differently, and we think I have 9 minutes.

I am sorry. What is the Chair saying about the time that I have remaining?

Mr. Speaker, I yield 2 minutes to the gentlewoman from Ohio (Mrs. Beatty), who is a member of the Financial Services Committee who helped ensure that this bill cracks down on the use of digital currency in human trafficking.

Mr. Speaker, I yield 2 minutes to the gentleman from New Jersey (Mr. Gottheimer), who is a member of the Financial Services Committee and author of one of the bills in this package.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I continue to reserve the balance of my time.

Mr. Speaker, I have no further requests for time, and I yield myself the remainder of my time to close.

I once again thank my colleagues for their outstanding bipartisan work on this carefully crafted bipartisan legislation. S. 488, the JOBS and Investor Confidence Act of 2018, is an example of Members on both sides of the aisle working together to support our Nation's small businesses and investors.

S. 488 facilitates access to capital for small businesses, increases protections for consumers and investors, fights the scourge of drug and human trafficking, and promotes financial stability.

S. 488 is supported by institutional investors, angel investors, venture capitalists, biotech companies, credit unions, small businesses, entrepreneurs, and exchanges. This bill will help entrepreneurs, small businesses, and investors to thrive in our economy.

Finally, I would like to thank Mr. Hensarling for his foresight in knowing that this was possible because both sides of the aisle really support small businesses. It was Mr. Hensarling who said: Given that we do both support small businesses, why can't we come together around a package where we have already shown our support on individual bills either in committee or on the floor and put it all together?

He did that. He provided that leadership. I joined with him.

Our staffs are to be congratulated because they worked very hard on both sides of the aisle to work out any concerns that we may have, any differences that we may have. They did a magnificent job, and they are responsible for helping us to understand what certainly is and was possible.

So despite this, if I may say, there are many onlookers who never thought this could happen. There are many pundits, those who come from special interests, those who come from right here in the House on both sides of the aisle, who are still questioning.

Mr. Speaker, I had one inquiry from one of the magazines, I believe it was, who said: Tell me what happened in the background, what was really going on. How did this all come together?

I want the gentleman from Texas to know I told him it is none of his business. It really happened, and we are pleased about it. We worked very hard on that.

Mr. Speaker, I thank Mr. Hensarling and all of the members who worked so hard to make this happen, and I yield back the balance of my time.

Mr. Speaker, I move to suspend the rules and pass the bill (H.R. 5749) to require the appropriate Federal banking agencies to increase the risk-sensitivity of the capital treatment of certain centrally cleared options, and for other purposes, as amended.

Mr. Speaker, I ask unanimous consent that all Members may have 5 days in which to revise and extend their remarks and to include extraneous material on the bill.

Mr. Speaker, I yield myself such time as I may consume.

Mr. Speaker, I rise today in support of H.R. 5749, the Options Markets Stability Act, which would adjust the risk sensitivity of the capital treatment of centrally cleared options.

Mr. Speaker, I congratulate my friend from Illinois and fellow member of the Financial Services Committee, Mr. Hultgren, for his tireless work on this. Mr. Speaker, it may come as no surprise that this may not be the most exciting portion of the work that is done in our committee, it is not necessarily the most sexy of issues that we deal with, but it is extremely important. I appreciate the work of the gentleman as well as members on the committee from all sides.

As I said, Mr. Speaker, options are incredibly useful and powerful risk mitigation tools that can help protect an investor's financial portfolio. From buying puts to hedge the downside risk of owning a stock to writing covered calls to collect income and cap potential losses, listed options strategies are protective tools employed by individual investors, institutions, and pension funds.

But options do have a sensitivity to the price of the underlying stock such that, at any given point in time, the value of an option will respond differently to changes in the price of the option's underlying shares.

Increased volatility in equity markets during recent months has revealed that certain bank capital requirements using the current exposure method--or CEM, as it is known--from the Basel Committee on Banking Supervision discourages the use of central clearing, which is a central tenet of the Dodd-Frank Act. This is actually counterintuitive and the reason why we are here today trying to fix that.

Title VII of the Dodd-Frank Act requires derivatives, including options, to be centrally cleared in order to take advantage of the risk-mitigating benefits of clearing. As a result, the role of clearing members, or houses, and the amount of transactions cleared by these institutions has expanded significantly.

However, businesses and end users which use these options to manage business risks can only trade through a clearing member, as they are unable to access clearinghouses directly.

The risk-based and leverage-based capital requirements for banks have made it cost prohibitive for clearing members to expand their derivatives clearing services when there is higher volume. As a result, liquidity providers who depend on banks to centrally clear their options are having trouble providing liquidity during instances of market volatility, therefore making it more expensive for individuals and institutions to hedge their positions through the use of options contracts. As I pointed out, Mr. Speaker, that is exactly the opposite of what the intent of the Dodd-Frank Act was in this area.

Although the Basel Committee agreed to replace CEM by January of 2017 with a more risk-sensitive method known as the standardized approach for measuring counterparty credit risk, or SA-CCR, exposures, the Board of Governors of the Federal Reserve has not yet implemented SA-CCR, and the transition is not imminent.

To remedy these problems, H.R. 5749, the Options Markets Stability Act introduced by Representative Hultgren and Representative Foster, two colleagues from Illinois, will help alleviate the unnecessary adverse impact of the current exposure method, or CEM, on the listed options market.

This legislation would require the Federal Reserve Board, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation to implement a risk-adjusted approach to value centrally cleared options as it relates to capital rules to better and more accurately reflect exposure and promote options market-making activity.

Specifically, the bill changes how the calculation of the CEM on options contracts is calculated on their notional face value rather than through a risk-adjusted value, which reflects actual exposures.

By changing this calculation, it will incentivize the use of hedged positions and would reduce the amount of capital required to place these positions and reduce overall exposure.

Market-maker liquidity is critical to vibrant options markets, and the knock-on effects are increased costs to investors, a heightened possibility of market dislocation during volatile environments, and the discouragement of centrally cleared products that help limit the systemic risk that we are all trying to eliminate.

This bipartisan bill, which passed the Financial Services Committee by a vote of 54-0, is a modest adjustment to the risk- and leverage- based capital rules to better take into account the actual risk of clearing options.

I commend my colleagues, Representative Hultgren and Representative Foster, for their bipartisan work on this important bill, and I urge all of my colleagues to vote in favor of H.R. 5749.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield as much time as he may consume to the gentleman from Illinois (Mr. Hultgren), the vice chair of the Capital Markets, Securities, and Investment Subcommittee.

Mr. Speaker, I have no further speakers. I encourage my colleagues to vote for H.R. 5749, and I yield back the balance of my time.

Mr. Speaker, on that I demand the yeas and nays.

Mr. Speaker, I want to thank Chairman Huizenga for his work on this and so many other important things on the Financial Services Committee and the Capital Markets, Securities, and Investment Subcommittee.

I also want to begin by giving special thanks to Leader McCarthy for providing time for consideration of the Options Markets Stability Act. This legislation is very important to a number of stakeholders in Illinois, but also to market stability as a whole and the investors who depend on having access to reliable products.

I also do want to thank Chairman Hensarling and Ranking Member Waters. Without their support, my legislation would not have received a unanimous vote in the Financial Services Committee, and I am grateful for their help; and my colleague, Bill Foster, as well, for his help.

Title VII of the Dodd-Frank Act requires derivatives, including options, to be centrally cleared in order to take advantage of the risk-mitigating benefits.

Liquidity providers, many of which are in Illinois, can trade only through a clearing member; they cannot access clearinghouses directly. As a result, the role of clearing members and the amount of transactions cleared by these institutions has expanded significantly.

The risk-based and leverage-based capital requirements for bank clearing members makes it cost prohibitive to provide clearing services for listed options. This is especially acute when there is higher than expected volume.

Chicago Trading Company, one of the key liquidity providers for listed options, wrote in a letter to the Treasury Department last summer that: ``These requirements force banks to direct capital away from the exchange-listed, centrally cleared options market, thereby hindering our ability to provide liquidity and acting in direct contravention of a core principle of post-crisis regulation: strengthening exchange-based trading and central clearing, especially for many derivatives that were previously traded on an over-the-counter basis.''

The Options Markets Stability Act, as amended, requires Federal banking regulators to more accurately measure counterparty risk by adjusting the risk- and leverage-based capital rules, and requires them to provide a report to Congress about these changes 5 years after they go into effect.

While market participants have long expressed concern about the current capital requirements for listed options, volatility in equity markets earlier this year exposed the extent to which existing rules are restricting liquidity when it is needed the most.

Volatility contributes to an increase in volume of listed options because of an interest by market participants to hedge their positions. However, the binding capital constraint under current rules makes it cost prohibitive to centrally clear the increased volume of equity options contracts demanded by the market.

The market-makers who provide liquidity for listed options are indirectly constrained by the bank capital rules from fulfilling their role in maintaining price stability.

Key financial regulators have underscored these issues. CFTC Chairman Giancarlo noted in testimony before the House Appropriations Committee that: ``We have some anecdotal information that shows that, during the recent market volatility, the supplementary leverage ratio impacted larger market-makers' ability to take on certain positions, thus exacerbating market volatility. The SLR is not specifically mandated in Title VII of Dodd-Frank, and it has had the opposite effect intended: pushing trades away from central clearing.''

Chairman Powell has noted that the current exposure method generally treats potential future credit exposures on derivatives as a fixed percentage of the notional amount, which ignores whether a derivative is margined and undervalues netting benefits.

The problem is that banking regulators are taking far too long to actually address the issues in our derivatives markets. Our options markets are encountering liquidity issues now because of the poorly calibrated capital rules. Investors do not have the luxury of waiting any longer on our bank regulators.

Finally, this legislation has a long list of supporters: Cboe Global Markets, the Options Clearing Corporation, NASDAQ, NYSE, CME Group, SIFMA, the Futures Industry Association, IMC, Chicago Trading Company, TD Ameritrade, just to name a handful.

A vote in support of the Options Markets Stability Act is a vote in support of listed options and central-clearing that is a cornerstone of Dodd-Frank. It is a vote in support of maintaining options for investors and their ability to manage risk in volatile markets.

Mr. Speaker, I yield myself such time as I may consume.

Mr. Speaker, I rise in support of H.R. 5749, which is a tailored, bipartisan solution to the problems facing our Nation's options markets.

Options are a type of derivative contract that provide investors with the right to buy or sell stock or other securities at some point in the future. According to the Chicago Board Options Exchange, which supports the bill, bank affiliates that clear options on behalf of large traders have been restricting their services because of the current bank capital calculation and resulting costs.

As a consequence, they argue that large options traders, known as market-makers, are not readily able to trade when investors need them to and are having to charge more when they do trade. There are also fewer market-makers overall and more trading activity concentrated among the top five firms.

H.R. 5749 would direct the bank regulators to consider this problem while still focusing on the benefits of bank capital to reduce systemic risk.

Now, I am aware that the Federal Reserve just proposed to significantly change banks' capital requirements, including through a rollback of the supplementary leverage ratio. If the Fed's proposals are finalized, FDIC-insured banks could shed as much as $121 billion in capital, making it more likely that one of the Wall Street megabanks will fail in a future downturn and cause untold damage to the economy.

On top of that, the President signed into law S. 2155, which will recklessly reduce capital and other requirements on the Nation's largest banks. I am very concerned with these developments and urge our regulators to ensure the safety and soundness of megabanks and our financial system.

H.R. 5749 would make sure that this is the case for bank capital associated with cleared options. Specifically, the bill would require the bank regulators to conduct a rulemaking after considering several important factors, including the safety and soundness of the financial system, financial stability, and the impact of the changes on the broader capital regime.

Unlike the introduced version of the bill, which would only reduce capital, the bill, as amended, would direct the regulators to increase capital for riskier derivatives.

It also would create a retrospective rule review so that, 5 years after implementation, the regulators would study the impact of their rule.

So I want to thank Representative Foster and Representative Hultgren for working together to promote trading in our options markets without sacrificing bank safety and soundness.

I encourage my colleagues to join me in supporting H.R. 5749, and I reserve the balance of my time.

Mr. Speaker, I have no further speakers, and I yield back the balance of my time.