Should Regulations On Financial Institution Transactions Be Increased? (H.R. 5471)

What is H.R. 5471?

(Updated January 31, 2017)

This bill changes the process by which exemptions are granted to rules that prevent financial institutions from making transactions with their affiliates.

Such an exemption would only be allowed if the affiliate enters into an exchange to mitigate the risk of the parties who aren’t considered financial entities. This requirement aims to protect shareholders and owners of the affiliate institution.

The requirement that an affiliate enters into a swap would apply if the mitigation of risk — or hedge —  can be addressed by entering to a swap with either:

• A swap dealer or major swap participant.

• A security-based swap with a security-based swap dealer, or a major security-based swap participants.

Argument in favor

Requiring financial institutions to hedge transactions with their affiliates reduces risk and makes financial markets more stable. Stability in U.S. financial markets means stability everywhere.

Argument opposed

Increasing regulation on transactions between financial institutions and their affiliates will slow the mobility of capital. Hedging risks is something they can do on their own without regulation.

Impact

Financial Institutions and their affiliates.

Cost of H.R. 5471

A CBO cost estimate is unavailable.

Additional Info

In-Depth:

The two pieces of existing legislation that are amended by this act are the Commodity Exchange Act and the Securities Exchange Act of 1934. The Commodity Exchange Act regulates the trading of commodities — like gold, silver, corn, wheat, or oil — and futures, which are a type of security that set the price and sale date of a commodity in the future.

The Securities Exchange Act of 1934 regulates the trade of securities (like stocks or bonds) on the secondary market where the securities are traded between brokers and individuals. Compare this to the primary market where securities are purchased directly from the companies issuing them.

This legislation requires that financial institutions that are trying to make a transaction with one of their affiliates enter into a swap to reduce the risk that financial institutions expose themselves to. Swaps can be used to change the maturity of a financial contract, in this case with respect to a commodity or futures which in turn reduces the risk to the owner of the security.

There are already some regulations on the types of transactions that financial entities can engage in with their affiliates, like Regulation W. Regulation W restricts the amount of an institution’s capital that can be transacted with one or more affiliates, and requires that credit extended to affiliates is secured.

Media:

Wikipedia - Commodity Exchange Act

Wikipedia - Securities Exchange Act of 1934