H. Rept. 113-134 - 113th Congress (2013-2014)
June 28, 2013, As Reported by the Financial Services Committee

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House Report 113-134 - FINANCIAL COMPETITIVE ACT OF 2013




[House Report 113-134]
[From the U.S. Government Printing Office]


113th Congress                                            Rept. 113-134
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     Part 1

======================================================================



 
                   FINANCIAL COMPETITIVE ACT OF 2013

                                _______
                                

 June 28, 2013.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 1341]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 1341) to require the Financial Stability 
Oversight Council to conduct a study of the likely effects of 
the differences between the United States and other 
jurisdictions in implementing the derivatives credit valuation 
adjustment capital requirement, having considered the same, 
report favorably thereon with amendments and recommend that the 
bill as amended do pass.
    The amendments (stated in terms of the page and line 
numbers of the introduced bill) are as follows:

    Page 3, line 22, strike ``; and'' and insert a semicolon.

    Page 4, line 2, strike the period at the end and insert ``; 
and'' and after such line insert the following:

          (C) ensure that the Financial Stability Oversight 
        Council fulfills its statutory mandate to identify 
        risks and respond to emerging threats to financial 
        stability.

                          PURPOSE AND SUMMARY

    H.R. 1341, the Financial Competitive Act of 2013, requires 
the Financial Stability Oversight Council (FSOC) to study the 
likely effects of the differences between the U.S. and other 
jurisdictions in implementing the derivatives credit valuation 
adjustment (CVA) capital requirement. The bill also requires 
the study to examine the impact on derivatives end users and on 
the international derivatives market.

                  BACKGROUND AND NEED FOR LEGISLATION

    The Capital Requirements Directive IV package (``CRD IV''), 
announced by the European Union (EU) on February 28, 2013, 
includes the CVA requirement and Basel III, which will 
implement internationally agreed-upon standards on capital and 
liquidity across the European Union. Derivatives transactions 
with sovereign, pension fund and corporate counterparties 
(which are exempt from clearing obligations) will be exempt 
from the CVA.
    The EU CVA exemption has raised concerns that there will 
not be global derivatives regulatory alignment and that the CVA 
exemption could impact the pricing of trades and the amount of 
liquidity available for non-financial U.S. derivative end-
users, as their transactions would not receive the CVA 
exemption. The FSOC study mandated by the bill 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 Committees on Agriculture, Nutrition and Forestry and 
Banking, Housing and Urban Affairs of the Senate.
    On April 11, 2013, Ken Bentsen, Acting CEO and President of 
the Securities Industry and Financial Markets Association, 
testified before the Subcommittee on Capital Markets and 
Government Sponsored Enterprises of the House Committee on 
Financial Services that

          This common sense bill would require [FSOC] to 
        examine how variations in the implementation of Basel 
        III capital rules related to derivatives will affect 
        the health of the U.S. financial system. Furthermore, 
        the legislation would require U.S. regulators to report 
        to Congress with recommendations on how to develop 
        greater uniformity in the standards and on how to 
        minimize any adverse impact on both U.S. financial 
        institutions and end-users of derivatives.\1\
---------------------------------------------------------------------------
    \1\The official transcript of this hearing was not available as of 
the time of the filing of this report. Mr. Bentsen's testimony is 
available via hyperlink on the Financial Services Committee's website 
at <http://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=326536>.

    As noted above, the CRD IV proposal would provide European 
banks with an exemption from CVA capital requirements for 
derivatives transactions with certain entities, including 
pension funds, sovereigns and all corporate counterparties. 
Consequently, the U.S. financial system (as well as all non-
European jurisdictions) will be left with a misalignment of 
standards that, if unaddressed, could have a significant impact 
on the real economy.
    More specifically, a potential division between the U.S. 
and other jurisdictions with regard to CVA implementation could 
lead to price imbalances that will put U.S.-based institutions 
at a significant competitive disadvantage. Impacted entities 
include not only U.S. banks that could lose business to 
institutions based overseas, but also mainline commercial 
businesses that will be forced to pay higher prices for hedging 
their risk than their international competitors. In this 
context, it is worth noting a recent decision by Canadian 
officials to delay that country's CVA capital requirement, 
despite moving forward with the rest of Basel III, until there 
is more clarity around implementation in other jurisdictions 
and the impact on Canada's financial services and business 
communities.

                                HEARINGS

    The Subcommittee on Capital Markets and Government 
Sponsored Enterprises of the Financial Services Committee held 
a hearing on H.R. 1341 on April 11, 2013.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
May 7, 2013, and ordered H.R. 1341, as amended, to be reported 
favorably to the House by a recorded vote of 59 yeas to 0 nays 
(recorded vote no. FC-10), a quorum present.

                            COMMITTEE VOTES

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the recorded 
votes on the motion to report legislation and amendments 
thereto. The only recorded vote occurred on the motion to 
report the bill, as amended, favorably to the House. The motion 
was adopted by a recorded vote of 59 yeas to 0 nays (recorded 
vote no. FC-10).

                                              RECORD VOTE NO. FC-10
----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Hensarling.................        X   ........  .........  Ms. Waters.......        X   ........  .........
Mr. Gary G. Miller (CA)........        X   ........  .........  Mrs. Maloney (NY)        X   ........  .........
Mr. Bachus.....................        X   ........  .........  Ms. Velazquez....        X   ........  .........
Mr. King (NY)..................        X   ........  .........  Mr. Watt.........        X   ........  .........
Mr. Royce......................        X   ........  .........  Mr. Sherman......        X   ........  .........
Mr. Lucas......................        X   ........  .........  Mr. Meeks........        X   ........  .........
Mrs. Capito....................        X   ........  .........  Mr. Capuano......        X   ........  .........
Mr. Garrett....................        X   ........  .........  Mr. Hinojosa.....        X   ........  .........
Mr. Neugebauer.................        X   ........  .........  Mr. Clay.........        X   ........  .........
Mr. McHenry....................        X   ........  .........  Mrs. McCarthy            X   ........  .........
                                                                 (NY).
Mr. Campbell...................        X   ........  .........  Mr. Lynch........        X   ........  .........
Mrs. Bachmann..................        X   ........  .........  Mr. David Scott          X   ........  .........
                                                                 (GA).
Mr. McCarthy (CA)..............        X   ........  .........  Mr. Al Green (TX)        X   ........  .........
Mr. Pearce.....................  ........  ........  .........  Mr. Cleaver......        X   ........  .........
Mr. Posey......................        X   ........  .........  Ms. Moore........        X   ........  .........
Mr. Fitzpatrick................        X   ........  .........  Mr. Ellison......        X   ........  .........
Mr. Westmoreland...............  ........  ........  .........  Mr. Perlmutter...        X   ........  .........
Mr. Luetkemeyer................        X   ........  .........  Mr. Himes........        X   ........  .........
Mr. Huizenga (MI)..............        X   ........  .........  Mr. Peters (MI)..        X   ........  .........
Mr. Duffy......................        X   ........  .........  Mr. Carney.......        X   ........  .........
Mr. Hurt.......................        X   ........  .........  Ms. Sewell (AL)..        X   ........  .........
Mr. Grimm......................        X   ........  .........  Mr. Foster.......        X   ........  .........
Mr. Stivers....................        X   ........  .........  Mr. Kildee.......        X   ........  .........
Mr. Fincher....................        X   ........  .........  Mr. Murphy (FL)..        X   ........  .........
Mr. Stutzman...................        X   ........  .........  Mr. Delaney......        X   ........  .........
Mr. Mulvaney...................        X   ........  .........  Ms. Sinema.......        X   ........  .........
Mr. Hultgren...................        X   ........  .........  Mrs. Beatty......        X   ........  .........
Mr. Ross.......................        X   ........  .........  Mr. Heck (WA)....        X   ........  .........
Mr. Pittenger..................        X   ........  .........
Mrs. Wagner....................        X   ........  .........
Mr. Barr.......................        X   ........  .........
Mr. Cotton.....................        X   ........  .........
Mr. Rothfus....................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

                      COMMITTEE OVERSIGHT FINDINGS

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee has held hearings and 
made findings that are reflected in this report.

                    PERFORMANCE GOALS AND OBJECTIVES

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 1341 
will require the Financial Stability Oversight Council (FSOC) 
to study, among other things, the likely effects of the 
differences between the U.S. and other jurisdictions in 
implementing the derivatives credit valuation adjustment (CVA) 
capital requirement.

   NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        COMMITTEE COST ESTIMATE

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                 CONGRESSIONAL BUDGET OFFICE ESTIMATES

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, June 7, 2013.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 1341, the 
Financial Competitive Act of 2013.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                         Robert A. Sunshine
                              (For Douglas W. Elmendorf, Director).
    Enclosure.

H.R. 1341--Financial Competitive Act of 2013

    The Third Basel Accord, the latest in a series of 
international agreements among central banks and financial 
regulators to standardize capital requirements for banks, 
directs financial institutions to, among other things, set 
aside additional capital reserves to account for the risk that 
counterparties participating in certain derivative agreements 
could default on the transaction. This additional capital 
requirement is known as the credit-value adjustment (CVA). H.R. 
1341 would direct the Financial Stability Oversight Council 
(FSOC) to complete a study of the likely effects that 
differences between the way the United States and foreign 
regulators implement the CVA would have on financial 
institutions, users of derivatives, and derivatives markets. 
The study would include, among other things, an examination of 
the effect those differences would have on the pricing and cost 
of derivatives as well as the competitiveness of United States 
derivatives markets. H.R. 1341 would direct the FSOC to prepare 
a report of its findings for the Congress within 90 days of the 
date of enactment of the bill.
    Based on information from the FSOC, CBO estimates that the 
bill would increase direct spending by about $1 million over 
the 2014-2023 period for additional staff to conduct the study 
and prepare the report. Under current law, the FSOC is 
authorized to levy an assessment on certain financial 
institutions to offset its operating costs. Those assessments 
are recorded in the budget as revenues; CBO expects that the 
FSOC would exercise that authority, and therefore, we estimate 
that enacting the bill would increase revenues by about $1 
million as well.
    In addition, CBO expects that the FSOC could use the 
expertise of staff from the regulatory agencies that make up 
the Council (the Federal Reserve System or the Securities and 
Exchange Commission, for example) to complete the study. CBO 
estimates that any additional costs incurred by those agencies 
would not be significant. On net, CBO estimates that enacting 
the bill would not have a significant effect on the deficit 
over the 10-year period. Because enacting H.R. 1341 would 
increase both direct spending and revenues, pay-as-you-go 
procedures apply.
    H.R. 1341 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA) and would not affect 
the budgets of state, local, or tribal governments.
    Assuming that the Financial Stability Oversight Council 
increases fees to offset the costs of conducting the study 
required by the bill, H.R. 1341 would impose a private-sector 
mandate by increasing the cost of an existing mandate on 
financial institutions required to pay those fees. Based on 
information from the FSOC, CBO estimates that the cost of the 
mandate would total about $1 million over the next 10 years, 
and thus fall well below the annual threshold for private-
sector mandates established in UMRA ($150 million in 2013, 
adjusted annually for inflation).
    The CBO staff contact for this estimate is Susan Willie. 
The estimate was approved by Theresa Gullo, Deputy Assistant 
Director for Budget Analysis.

                       FEDERAL MANDATES STATEMENT

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      ADVISORY COMMITTEE STATEMENT

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  APPLICABILITY TO LEGISLATIVE BRANCH

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act.

                         EARMARK IDENTIFICATION

    H.R. 1341 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

                    DUPLICATION OF FEDERAL PROGRAMS

    Pursuant to section 3(j) of H. Res. 5, 113th Cong. (2013), 
the Committee states that no provision of H.R. 1341 establishes 
or reauthorizes a program of the Federal Government known to be 
duplicative of another Federal program, a program that was 
included in any report from the Government Accountability 
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most 
recent Catalog of Federal Domestic Assistance.

                   DISCLOSURE OF DIRECTED RULEMAKING

    Pursuant to section 3(k) of H. Res. 5, 113th Cong. (2013), 
the Committee states that H.R. 1341 does not contain any 
directed rulemakings.

      SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION (AS AMENDED)

    Section 1. Short Title. This section states that the Act 
may be cited as the Financial Competitive Act of 2013.
    Section 2. Study of Implementation of Basel III Capital 
Requirements Related to Derivatives Exposures. This section 
requires the FSOC to conduct a study of the likely effects that 
differences between the U.S. and other jurisdictions in 
implementing the derivatives CVA capital requirements would 
have on: (i) U.S. financial institutions that conduct 
derivatives transactions and participate in derivatives 
markets; (ii) end users of derivatives; and (iii) international 
derivatives markets. The section requires certain content to be 
included in the study and requires the study to offer 
recommendations that Congress and the Federal financial 
regulatory agencies that comprise the FSOC should take in 
response to the study's findings.