WASHINGTON – The House Financial Services Committee voted today to advance legislation authored by Financial Institutions and Consumer Credit Subcommittee Chairman Blaine Luetkemeyer (R-MO). H.R. 4659 will correct a misapplied standard that is driving up costs of clearing services. These rising costs are diminishing choices for agricultural and commercial end users who, in some cases, are having difficulty obtaining clearing services altogether. Chairman Luetkemeyer delivered the following statement in support of H.R. 4659:
Thank you Mr. Chairman. H.R. 4659 corrects an unintended consequence related to bank capital requirements. I want to start by making it very clear that I, like many of my colleagues, am supportive of strong capital requirements. Institutions need to hold enough capital to withstand stress, including stress that can be brought about by business activities, customers, and changes to the economy as a whole.
However, the Supplemental Leverage Ratio, or SLR, fails to take into account the exposure-reducing nature of initial client margin. This is margin that’s held in separate accounts on behalf of customers that rely on institutions to clear derivatives transactions.
Take, for example, a bank that’s clearing a transaction that has $100 dollars of exposure. The clearing bank would require that client to deposit $20 dollars of initial margin in a segregated account, meaning the bank is left with only $80 dollars of exposure if the client were to default on its obligation. As it works today, the SLR requires that clearing bank to protect against the entire $100 dollars of exposure rather than the actual $80 for which it has the exposure.
While an institution itself is certainly impacted, it will be the customers of that institution that bear the brunt of this misapplied standard. Both agricultural and commercial end-users are seeing spikes in the costs associated with clearing services, and in some cases end-users are having difficulty obtaining clearing services altogether as more and more institutions exit this important line of business.
While stringent capital requirements are important, they need to be calculated and applied in a more reasonable manner. The legislation would provide an offset in the SLR for the initial margin posted by a client. This would make clearing more cost-effective and make it easier for banks to continue to offer these services.
This is a very real issue, one that has been discussed by both Republicans and Democrats. Then-CFTC Chairman Tim Massad, an Obama appointee, expressed concern that the SLR was driving up the costs associated with this type of derivatives clearing. Current CFTC Chairman Chris Giancarlo has said the application of SLR to clearing customer margin “reflects a flawed understanding of central counterparty clearing.”
European regulators have recognized this as an issue, as well, particularly given the number of firms exiting this business, and have signaled a desire to alter the rules and give due consideration to initial margin posted by a client.
Without question, Congress should act quickly to correct this unintended consequence and reverse the unnecessary price hikes we’ve seen in clearing services.
With that, Mr. Chairman, I hope my colleagues will join Mr. Lucas and Mr. Scott in supporting H.R. 4659 today. I appreciate your willingness to bring this legislation before the Committee, and yield back the balance of my time.