House Ag on Capital and Margin Impacts on End-Users
House
Agriculture Subcommittee on Commodity Exchanges, Energy and Credit
Impact
of Capital and Margin Requirements on End-Users
Thursday,
April 28, 2016
Key
Topics & Takeaways
-
Calls for Cumulative
Impact Assessment: Reps. Conaway (R-Texas), Kelly (R-Pa.) and Davis
(R-Ill.) agreed that policymakers should take a step back, assess the capital
and margin rules already in place, and examine the cumulative impact of
regulatory changes on financial markets and end-users. Scott O’Malia of the
International Swaps and Derivatives Association added that a myriad of rules
have not yet been implemented so the true cost of the regulations has not yet
been felt. He also pointed to a survey conducted by
SIFMA AMG, which he said illustrates that end-user investors are
experiencing price increases and reduced access to clearing in derivatives
markets.
- Leverage Ratio
Fix: Davis explained that Kay Swinburne, Member of the EU Parliament,
intends to fix the unintended consequences of the Leverage Ratio unilaterally
if the U.S. and other jurisdictions do not act. Walter Lukken of the
Futures Industry Association explained that the industry hopes the issue will
be resolved through the Basel Committee on Banking Supervision but acknowledged
that there is “growing consensus in Europe” that it is a problem that needs to
be addressed.
Witnesses
-
Walter Lukken,
President and Chief Executive Officer, Futures Industry Association
- Scott O’Malia, Chief
Executive Officer, International Swaps and Derivatives Association
- Thomas Deas, Jr.,
Chairman, Representative of the Center for Capital Markets Competitiveness and
Coalition for Derivatives End-Users
- Tyler Gellasch,
Founder, Myrtle Makena, LLC
Opening Remarks
Rep. Austin Scott (R-Ga.), Chairman
In
his opening
remarks, Chairman Scott explained that each individual rulemaking is meant
to achieve an intended outcome, however it is unclear if the drove of financial
regulatory requirements has led to unintended consequences. Scott contended
that the Subcommittee aims to protect end-users from “bearing the burdens of
the financial crisis.”
Rep. David Scott (D-Ga.), Ranking Member
Ranking
Member Scott indicated that the Subcommittee aims to find the right balance
between having capital and margin requirements that are high enough to keep the
financial system safe, while at the same time ensuring that the industry can be
profitable and prosperous. Scott reiterated that farmers, ranchers, and other
end-users “did absolutely nothing to cause the financial crisis,” and called
for that to “always be taken into consideration.”
Walter
Lukken, President and Chief Executive Officer, Futures Industry Association
In
his remarks,
Lukken explained that both margin and bank capital play an important role in
protecting the safety and soundness of the financial system, but that each
serves a specific function. However, Lukken explained that the Leverage Ratio
is problematic since it fails to properly recognize that customer margin
received that offsets the bank’s actual exposure to the clearinghouse. Lukken
cautioned that, if left unfixed, the Leverage Ratio will result in an
inaccurate measure of the actual exposure of the bank and lead to higher costs
for end-users and hedgers in derivatives markets. He also noted that several
clearing members have exited the derivatives clearing market due to the onerous
capital requirements, which he said results in fewer players supporting the
safety and soundness of the clearinghouse. Lukken closed by encouraging U.S.
policymakers to work together with the Basel Committee on Banking Supervision (BCBS)
to ensure that regulatory rules work without jeopardizing end-users’ access to
risk management tools.
Scott O’Malia, CEO, International Swaps and
Derivatives Association
In
his testimony,
O’Malia emphasized the need for a comprehensive and cumulative impact
assessment to ensure that capital, liquidity and margin requirements are being
implemented in a cost-effective manner. O’Malia noted the substantial progress
that the industry has made in holding more and better quality capital than ever
before. Yet he explained that core aspects of BCBS agenda are still evolving,
and will likely significantly increase costs for banks and impede their ability
to provide core services to end-users. He pointed specifically to the
unintended consequences of the Net Stable Funding Ratio (NSFR) and the Leverage
Ratio, reiterated that the impact of the rule sets are still unknown, and urged
regulators to undertake a cumulative and comprehensive impact study before they
implement the BCBS requirements. O’Malia also explained that margin for
non-cleared derivatives will have a significant cost impact for the industry
amounting to $300 billion, according to a study by the Commodity Futures
Trading Commission. He also urged regulators to finalize their cross-border
margin rules as soon as possible.
Thomas Deas, Jr., Chairman, Representative of the Center
for Capital Markets Competitiveness and Coalition for
Derivatives End-Users
In
his testimony,
Deas commended Congress for recognizing that end-users simply utilize
derivatives to hedge risks associated with their day-to-day business
activities, and do not engage in risky or speculative activities. Deas called
for legislative and regulatory relief, as well as a cumulative impact study on
the “elaborate web of new rules and regulations” that have been imposed on
end-users and their counterparties. He also pointed to several regulatory
drivers – including margin requirements, the NSFR, the Credit Valuation
Adjustment (CVA) charge, and the Leverage Ratio – as factors increasing costs
for end-users and reducing counterparty choice, since many dealers are being
forced to leave the market. Deas also explained the dichotomy that
end-users were exempt from the CVA charge in Europe, but not in the U.S., which
he said will lead to significant price differences and a competitive
disadvantage for U.S. firms.
Tyler Gellasch, Founder, Myrtle Makena,
LLC
In
his remarks,
Gellasch recalled that “inadequate regulation turned a mortgage crisis into a
worldwide financial meltdown” and maintained that rules put in place since then
have improved the safety and soundness of financial markets. Gellasch contested
the notion that financial regulatory reforms are having a meaningful adverse
impact on end-users, since the “elaborate rules” do not apply to end-users.
Further, he equated the incremental cost of margin being passed down to
end-users to the cost of a “ham sandwich.”
Question and Answer
Pass-Through
Charges
In
response to a question from Chairman Scott, Lukken explained that pass-through
charges resulting from capital and margin requirements are estimated to cost
end-users $32-66 billion dollars, or “much more than a ham sandwich,” he
quipped. He added that such costs act as an effective tax on the futures
market, which he claimed had “nothing to do with the financial crisis.” O’Malia
added that regulators intended for financial reforms to change behavior by
imposing significant costs on these products. He argued that costs are
not going up “by a ham sandwich,” instead, “they are going up by billions of
dollars.”
EU
Discriminatory Practices
Ranking
Member Scott expressed concern about the “discrimination” by EU policymakers
against U.S. businesses, such as central counterparties (CCPs). Lukken
agreed that CCP recognition is a very important issue for the industry, and
that the tentative agreement reached by EU and U.S. regulators still has to be
ratified by the EU Parliament by the June deadline. He urged policymakers
to develop a transparent process (including a mechanism for public comment) by
which these cross-border recognition decisions would be made in the future.
Scott also suggested that U.S. policymakers might put in place retaliatory
measures to protect American businesses against discriminatory practices in the
EU.
Rep.
Conaway (R-Texas) recapped the onslaught of capital and liquidity rules
implemented since the financial crisis and asked at what point is “too much,
too much?” He suggested that policymakers take a step back, assess the
rules already in place, and examine the impact of those regulatory changes. He
also asked about the BCBS’s intention to move away from internal models to
calculate capital requirements, which O’Malia explained would result in a less
risk-sensitive framework with higher capital requirements.
Rep.
Kelly (R-Penn.) expressed his support for policymakers undertaking an
assessment of the cumulative impact of regulatory changes on financial markets
and end-users. O’Malia added that a myriad of rules have not yet been
implemented so the true cost of the regulations has not yet been felt. He
also pointed to a survey
conducted by SIFMA AMG, which he said illustrates that end-user investors
are experiencing price increases and reduced access to clearing in derivatives
markets.
Market
Consolidation & Access
Rep.
Davis (R-Ill.) expressed concern about constituents losing access to
derivatives markets as a result of rules discouraging central clearing. Lukken
affirmed that clearing members are already “divorcing” themselves of clients in
order to reduce their capital burdens, which he said discourages clearing and
ultimately raises costs for end-users.
Gellasch,
however, disputed that consolidation has led to higher costs.
Davis
explained that Kay Swinburne, Member of the EU Parliament, intends to fix the
unintended consequences of the Leverage Ratio unilaterally if the U.S. and
other jurisdictions do not act. Lukken explained that the industry hopes
the issue will be resolved through the BCBS but acknowledged that there is
“growing consensus in Europe” that it is a problem that needs to be
addressed.
Additional
information about this event can be accessed here,
and the archived webcast here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Derivatives,Hearing Summaries Agency:House Agriculture Committee,Publish Year:2016
House
Agriculture Subcommittee on Commodity Exchanges, Energy and Credit
Impact
of Capital and Margin Requirements on End-Users
Thursday,
April 28, 2016
Key
Topics & Takeaways
-
Calls for Cumulative
Impact Assessment: Reps. Conaway (R-Texas), Kelly (R-Pa.) and Davis
(R-Ill.) agreed that policymakers should take a step back, assess the capital
and margin rules already in place, and examine the cumulative impact of
regulatory changes on financial markets and end-users. Scott O’Malia of the
International Swaps and Derivatives Association added that a myriad of rules
have not yet been implemented so the true cost of the regulations has not yet
been felt. He also pointed to a survey conducted by
SIFMA AMG, which he said illustrates that end-user investors are
experiencing price increases and reduced access to clearing in derivatives
markets.
- Leverage Ratio
Fix: Davis explained that Kay Swinburne, Member of the EU Parliament,
intends to fix the unintended consequences of the Leverage Ratio unilaterally
if the U.S. and other jurisdictions do not act. Walter Lukken of the
Futures Industry Association explained that the industry hopes the issue will
be resolved through the Basel Committee on Banking Supervision but acknowledged
that there is “growing consensus in Europe” that it is a problem that needs to
be addressed.
Witnesses
-
Walter Lukken,
President and Chief Executive Officer, Futures Industry Association
- Scott O’Malia, Chief
Executive Officer, International Swaps and Derivatives Association
- Thomas Deas, Jr.,
Chairman, Representative of the Center for Capital Markets Competitiveness and
Coalition for Derivatives End-Users
- Tyler Gellasch,
Founder, Myrtle Makena, LLC
Opening Remarks
Rep. Austin Scott (R-Ga.), Chairman
In
his opening
remarks, Chairman Scott explained that each individual rulemaking is meant
to achieve an intended outcome, however it is unclear if the drove of financial
regulatory requirements has led to unintended consequences. Scott contended
that the Subcommittee aims to protect end-users from “bearing the burdens of
the financial crisis.”
Rep. David Scott (D-Ga.), Ranking Member
Ranking
Member Scott indicated that the Subcommittee aims to find the right balance
between having capital and margin requirements that are high enough to keep the
financial system safe, while at the same time ensuring that the industry can be
profitable and prosperous. Scott reiterated that farmers, ranchers, and other
end-users “did absolutely nothing to cause the financial crisis,” and called
for that to “always be taken into consideration.”
Walter
Lukken, President and Chief Executive Officer, Futures Industry Association
In
his remarks,
Lukken explained that both margin and bank capital play an important role in
protecting the safety and soundness of the financial system, but that each
serves a specific function. However, Lukken explained that the Leverage Ratio
is problematic since it fails to properly recognize that customer margin
received that offsets the bank’s actual exposure to the clearinghouse. Lukken
cautioned that, if left unfixed, the Leverage Ratio will result in an
inaccurate measure of the actual exposure of the bank and lead to higher costs
for end-users and hedgers in derivatives markets. He also noted that several
clearing members have exited the derivatives clearing market due to the onerous
capital requirements, which he said results in fewer players supporting the
safety and soundness of the clearinghouse. Lukken closed by encouraging U.S.
policymakers to work together with the Basel Committee on Banking Supervision (BCBS)
to ensure that regulatory rules work without jeopardizing end-users’ access to
risk management tools.
Scott O’Malia, CEO, International Swaps and
Derivatives Association
In
his testimony,
O’Malia emphasized the need for a comprehensive and cumulative impact
assessment to ensure that capital, liquidity and margin requirements are being
implemented in a cost-effective manner. O’Malia noted the substantial progress
that the industry has made in holding more and better quality capital than ever
before. Yet he explained that core aspects of BCBS agenda are still evolving,
and will likely significantly increase costs for banks and impede their ability
to provide core services to end-users. He pointed specifically to the
unintended consequences of the Net Stable Funding Ratio (NSFR) and the Leverage
Ratio, reiterated that the impact of the rule sets are still unknown, and urged
regulators to undertake a cumulative and comprehensive impact study before they
implement the BCBS requirements. O’Malia also explained that margin for
non-cleared derivatives will have a significant cost impact for the industry
amounting to $300 billion, according to a study by the Commodity Futures
Trading Commission. He also urged regulators to finalize their cross-border
margin rules as soon as possible.
Thomas Deas, Jr., Chairman, Representative of the Center
for Capital Markets Competitiveness and Coalition for
Derivatives End-Users
In
his testimony,
Deas commended Congress for recognizing that end-users simply utilize
derivatives to hedge risks associated with their day-to-day business
activities, and do not engage in risky or speculative activities. Deas called
for legislative and regulatory relief, as well as a cumulative impact study on
the “elaborate web of new rules and regulations” that have been imposed on
end-users and their counterparties. He also pointed to several regulatory
drivers – including margin requirements, the NSFR, the Credit Valuation
Adjustment (CVA) charge, and the Leverage Ratio – as factors increasing costs
for end-users and reducing counterparty choice, since many dealers are being
forced to leave the market. Deas also explained the dichotomy that
end-users were exempt from the CVA charge in Europe, but not in the U.S., which
he said will lead to significant price differences and a competitive
disadvantage for U.S. firms.
Tyler Gellasch, Founder, Myrtle Makena,
LLC
In
his remarks,
Gellasch recalled that “inadequate regulation turned a mortgage crisis into a
worldwide financial meltdown” and maintained that rules put in place since then
have improved the safety and soundness of financial markets. Gellasch contested
the notion that financial regulatory reforms are having a meaningful adverse
impact on end-users, since the “elaborate rules” do not apply to end-users.
Further, he equated the incremental cost of margin being passed down to
end-users to the cost of a “ham sandwich.”
Question and Answer
Pass-Through
Charges
In
response to a question from Chairman Scott, Lukken explained that pass-through
charges resulting from capital and margin requirements are estimated to cost
end-users $32-66 billion dollars, or “much more than a ham sandwich,” he
quipped. He added that such costs act as an effective tax on the futures
market, which he claimed had “nothing to do with the financial crisis.” O’Malia
added that regulators intended for financial reforms to change behavior by
imposing significant costs on these products. He argued that costs are
not going up “by a ham sandwich,” instead, “they are going up by billions of
dollars.”
EU
Discriminatory Practices
Ranking
Member Scott expressed concern about the “discrimination” by EU policymakers
against U.S. businesses, such as central counterparties (CCPs). Lukken
agreed that CCP recognition is a very important issue for the industry, and
that the tentative agreement reached by EU and U.S. regulators still has to be
ratified by the EU Parliament by the June deadline. He urged policymakers
to develop a transparent process (including a mechanism for public comment) by
which these cross-border recognition decisions would be made in the future.
Scott also suggested that U.S. policymakers might put in place retaliatory
measures to protect American businesses against discriminatory practices in the
EU.
Rep.
Conaway (R-Texas) recapped the onslaught of capital and liquidity rules
implemented since the financial crisis and asked at what point is “too much,
too much?” He suggested that policymakers take a step back, assess the
rules already in place, and examine the impact of those regulatory changes. He
also asked about the BCBS’s intention to move away from internal models to
calculate capital requirements, which O’Malia explained would result in a less
risk-sensitive framework with higher capital requirements.
Rep.
Kelly (R-Penn.) expressed his support for policymakers undertaking an
assessment of the cumulative impact of regulatory changes on financial markets
and end-users. O’Malia added that a myriad of rules have not yet been
implemented so the true cost of the regulations has not yet been felt. He
also pointed to a survey
conducted by SIFMA AMG, which he said illustrates that end-user investors
are experiencing price increases and reduced access to clearing in derivatives
markets.
Market
Consolidation & Access
Rep.
Davis (R-Ill.) expressed concern about constituents losing access to
derivatives markets as a result of rules discouraging central clearing. Lukken
affirmed that clearing members are already “divorcing” themselves of clients in
order to reduce their capital burdens, which he said discourages clearing and
ultimately raises costs for end-users.
Gellasch,
however, disputed that consolidation has led to higher costs.
Davis
explained that Kay Swinburne, Member of the EU Parliament, intends to fix the
unintended consequences of the Leverage Ratio unilaterally if the U.S. and
other jurisdictions do not act. Lukken explained that the industry hopes
the issue will be resolved through the BCBS but acknowledged that there is
“growing consensus in Europe” that it is a problem that needs to be
addressed.
Additional
information about this event can be accessed here,
and the archived webcast here.