79–006 

115TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 115–893 

DERIVATIVES FAIRNESS ACT 

AUGUST 7, 2018.—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 

together with 

MINORITY VIEWS 

[To accompany H.R. 5323] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Financial Services, to whom was referred the 

bill (H.R. 5323) to amend the Dodd-Frank Wall Street Reform and 

Consumer Protection Act to establish an exemption from the credit 

valuation adjustment calculation for uncleared derivatives transactions with end-users so that United States companies are not disadvantaged, and for other purposes, having considered the same, 

report favorably thereon with an amendment and recommend that 

the bill as amended do pass. 

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘Derivatives Fairness Act’’. 

SEC. 2. CREDIT VALUATION ADJUSTMENT RELIEF. 

(a) IN GENERAL.—The Dodd-Frank Wall Street Reform and Consumer Protection 

Act (12 U.S.C. 5361 et seq.), is amended by inserting after section 176 the following 

new section: 

‘‘SEC. 177. CREDIT VALUATION ADJUSTMENT. 

‘‘Prudential risk-based capital requirements and generally applicable risk-based 

capital requirements established by the appropriate Federal banking agencies shall 

not apply a fair value adjustment to reflect counterparty credit risk in valuation of 

over-the-counter derivative contracts with respect to transactions with a 

counterparty that— 

‘‘(1) is described under section 2(h)(7)(A) of the Commodity Exchange Act; 

2 

‘‘(2) is a person or class of persons that meets any qualifications required by 

a regulation issued by the Commodity Futures Trading Commission with respect to such person or class of persons qualifying for an exemption under section 4(c)(1) of the Commodity Exchange Act from the requirements of section 

2(h)(1)(A) of such Act; or 

‘‘(3) is an affiliate that meets the requirements for an exception under section 

2(h)(7)(D) of the Commodity Exchange Act.’’. 

(b) CONFORMING AMENDMENT.—The table of contents in section 1(b) of the DoddFrank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5301 note) is 

amended by inserting after the item relating to section 176 the following new item: 

‘‘Sec. 177. Credit valuation adjustment.’’. 

PURPOSE AND SUMMARY

On March 19, 2018, Representative Warren Davidson introduced 

H.R. 5323, the ‘‘Derivatives Fairness Act’’. H.R. 5323 amends Title 

I of the Dodd-Frank Wall Street Reform and Consumer Protection 

Act (Dodd-Frank Act) to add a new section 177 entitled ‘‘Credit 

Valuation Adjustment.’’ This new section would exempt non-cleared 

derivatives with certain counterparties commonly described as 

‘‘end-users’’ from the costly Credit Valuation Adjustment (CVA) 

capital charge. 

BACKGROUND AND NEED FOR LEGISLATION

The goal of H.R. 5323 is to eliminate unnecessary and burdensome costs for certain users of derivatives, commonly known as 

‘‘end-users’’ to ensure that U.S. companies are not at a competitive 

disadvantage versus end-users operating in other global markets so 

they can better manage business risks, help sustain growth, create 

jobs, and provide goods and services to the economy with greater 

predictability in the price of those goods and services. 

During the financial crisis, banks suffered significant 

counterparty credit risk (CCR) losses on their over-the-counter 

(OTC) derivatives contracts, which came mostly from fair value adjustments on derivatives, rather than counterparty defaults. But 

hedging activity by end-users did not contribute to the financial crisis; it also does not create meaningful systemic risk, as end-users 

comprise less than 10 percent of the notional amount of the OTC 

derivatives market. 

Under the Basel II framework, CCR was designed to capitalize 

for default and migration risk rather than potential accounting 

losses. As a result, the Basel Committee on Banking Supervision 

introduced a new capital charge to address this regulatory gap in 

Basel III. The updated Credit Valuation Adjustment (CVA) capital 

charge was intended to improve banks’ resilience against potential 

mark-to-market losses relating to variability in counterparty credit 

risk for non-cleared derivatives trades. The CVA applies only to 

non-cleared trades, as exposures toward central counterparties are 

exempt from the CVA charge. Banks are permitted to reduce their 

CVA exposures through hedging by entering into credit default 

swaps (CDS). 

In July 2013, the Board of Governors of the Federal Reserve System and other banking agencies approved final rules to enact the 

U.S. regulatory capital rules as part of a comprehensive framework 

that includes the adoption of the Basel III regime as well as capital 

provisions from the Dodd-Frank Act. Meanwhile, the European 

Union (EU) adopted their Basel III standards through the Capital 

3 

Requirements Regulation and Capital Requirements Directive, published in June 2013. In their regulations, however, the EU diverged 

from Basel III—and the U.S. implementation of Basel III—by 

adopting a CVA capital charge that exempts transactions between 

EU-based banks and non-financial corporations in order to reflect 

the exemption under the European Market Infrastructure Regulation (EMIR) to centrally clear derivative transactions for non-financial corporates. As a result, U.S. banks that have to apply a CVA 

charge for uncleared end-user derivatives contracts are at a competitive disadvantage vis-a`-vis European banks. For instance, an 

end-user would likely find it cheaper to hedge interest rate risk 

with an EU dealer rather than a US dealer. 

Additionally, the CVA charge for uncleared end-user derivatives 

transactions is inconsistent with end-user relief included in Title 

VII of the Dodd-Frank Act as well as amendments enacted in 2015. 

Title VII of the Dodd Frank Act provides exemptions from the 

clearing and margin requirements from certain qualifying derivatives transactions for end-users, but derivatives by end-users with 

U.S. banks still are subjected to the CVA capital charge. Again, at 

a competitive disadvantage as EU regulations align end-user relief 

with the CVA exemption. 

End-users typically require fairly-priced, tailor-made and widely 

offered derivative products to protect core business activities from 

commercial and financial risk. End-users executing uncleared 

swaps with banking organizations that are subject to the CVA are 

likely to see increased transaction costs as the dealer bank is likely 

to pass along the CVA capital charge in the form of higher fees to 

execute these transactions. As part of testimony before the Subcommittee on Capital Markets, Securities, and Investment in February 2018, Scott O’Malia, CEO of the International Swap and Derivatives Association (ISDA), stated: ‘‘When banks that are subject 

to the CVA execute non-cleared swaps with end-users, the endusers are likely to see increased transaction costs since the banking 

organizations generally pass through the costs of the CVA capital 

charge in the form of higher pricing on their uncleared swap transactions.’’ 

Further, Tom Deas, Chairman of the National Association of Corporate Treasurers testified before the Capital Markets Subcommittee in February 2018 on behalf of the Coalition for Derivatives End-Users that: ‘‘The lack of a CVA exemption in the United 

States significantly reduces the benefits of the statutory exemptions from clearing and margin requirements, which were granted 

by Congress under Dodd-Frank. An exemption would put U.S. businesses on equal footing with their non-U.S. counterparts.’’ 

HEARINGS

The Committee on Financial Services held a hearing examining 

matters relating to H.R. 5323 on February 14, 2018. 

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on 

March 21, 2018, and ordered H.R. 5323 to be reported favorably to 

the House without amendment by a recorded vote of 34 yeas to 26 

nays (recorded vote no. FC–174), a quorum being present. 

4 

COMMITTEE VOTES

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion 

to report legislation and amendments thereto. A motion by Chairman Hensarling to report the bill favorably to the House without 

amendment was agreed to by a recorded vote of 34 yeas to 26 nays 

(Record vote no. FC–174), a quorum being present. An amendment 

offered by Representative Kihuen was not agreed to by a recorded 

vote of 25 ayes to 35 nays (FC–173), a quorum being present. 

5 


Insert offset folio 6 here HR893.001

Record vote no. FC-173 

Representative Yea Nay Present Representative Yea Nay Present 

Mr. Hensarling •••••.......... X Ms. Maxine Waters (CAl ...... ll 

Mr. McHenry ................ . X Mrs. Carolyn B. Maloney (NY).. ll 

Mr. King .................... . X Ms. Velazquez ............... . ll 

Mr. Royce (CA) ............. .. X Mr. Sherman ............... .. ll 

Mr. Lucas .................. .. ll Mr. Meeks .................. . l! 

Mr. Pearce ................. .. X Mr. Capuano ............... .. ll 

Mr. Posey .................. .. ll Mr. Clay .................... . ll 

Mr. Luetkemeyer . _ .......... .. .l! Mr. lynch .................. .. ll 

Mr. Huizenga ............... . X. Mr. David Scott (GA) ........ .. ~ 

Mr. DuffY.. .................. . ll Mr. AI Green (TX) ............ . l! 

Mr. Stivers .................. . Mr. Cleaver ................. . .l! 

Mr. Hultgren ................ . Ms Moore .................. .. ll 

Mr. Ross .................... . Mr.Eihson ................. .. l! 

Mr. Pittenger ................ . Mr. Perlmutter .............. . .l! 

Mrs. Wagner ................ . Mr. Himes .................. . ~ 

Mr. Barr .................... . Mr. Foster ................... . ~ 

Mr. Rothfus ................. . Mr K1ldee ................... . ~ 

Mr. Messer .................. . Mr. Delaney ................ .. l! 

Mr. Tipton .................. .. Ms.Sinema ................. . l! 

Mr. Williams ............... .. Mrs. Beatty ......... _ ...... .. l! 

Mr. Poliquin ................ .. Mr Heck ................... .. l! 

Mrs. love .................. .. Mr. Vargas ................. .. l! 

Mr. Hill .................... .. Mr. Gottheimer .............. . l! 

Mr. Emmer .................. . Mr. Gonzalez (TX) ............ . l! 

Mr. Zeldm ................... . Mr. Crist ................... .. l! 

Mr. Trott ................... .. Mr.Kihuen ................. .. ll 

Mr. Loudermilk .............. . 

Mr. Mooney rNVl.. .......... .. 

Mr. MacArthur ............... . 

Mr Oav1dson................. -~ 

Mr. Budd.................... ~ 

Mr. Kustoff (TNL............ ~ 

Ms. Tenney................... ~ 

Mr. Hollingsworth............. ll 
6 


Insert offset folio 7 here HR893.002

Representative 

Mr. Hensarling ••.••.••....... 

Mr. McHenry .•.••...•.......• 

Mr. King ••••.•....•......••.• 

Mr. Royce (CA) .............. . 

Mr Lucas .•••••••......•..... 

Mr. Pearce ......••••••••••••. 

Mr. Posey ................... . 

Mr. Luetkemeyer ...•.•.....•.. 

Mr. Huizenga •••••.•...•..... 

Mr. DuffY .................... . 

Mr. Stivers ................. .. 

Mr. Hultgren ............... .. 

Mr. Ross .................... . 

Yea 

Mr. Pittenger................. X 

Mrs. Wagner .... . . ....... .... .ll 

Mr. Barr..................... X 

Mr. Rothfus .. .. • . . .. .. . . . .. . . X 

Mr. Messer................... ll 

Mr. Tipton.................... X 

Mr. Williams .. . .. .. . . . . .. . . . . X 

Mr. Poliquin.................. ll 

Mrs. Love.................... .X 

Mr. Hill...................... X 

Mr. Emmer................... X 

Mr. Zeldin.................... X 

Mr Trott .................... . 

Mr. Loudermilk ............. .. 

Mr. Mooney CNVl.. ........... . 

Mr. MacArthur................ .X 

Mr. Davidson................. )\ 

Mr. Budd .................... X 

Mr. Kustoff (TNL............. .>\ 

Ms. Tenney................... .ll 

Mr. Hollingsworth............. .ll 

Record vote no. FG-17 4 

Nay Present Representative 

Ms. Maxine Waters (CAl ....... 

Mrs. Carolyn B. Maloney (NY)__ 

Ms. Velazquez ............... . 

Mr. Sherman ................ . 

Mr. Meeks ................... . 

Mr. Capuano ••••••.••..•..... 

Mr. Clay .................... . 

Mr. Lynch ................... . 

Mr. David Scott (GAl ......... . 

Mr. AI Green (TX) ............ . 

Mr. Cleaver ................. . 

Ms. Moore ................. .. 

Mr. Ellison .................. . 

Mr. Perlmutter ............... . 

Mr. Himes .................. . 

Mr Foster ................... . 

Mr. K1ldee ................... . 

Mr. Delaney ................ .. 

Ms. Sinema ................. . 

Mrs. Beatty ................. . 

Mr. Heck ................... .. 

Mr. Vargas ................. .. 

Mr. Gottheimer .............. . 

Mr. Gonzalez (TXl.. ......... .. 

Mr. Crist .................... . 

Mr K1huen .................. . 

Yea Nay Present 

X 

X 

.X 

X 

X 

X 

~ 

X 

~ 

X 

X 

.X 

X 

X 

.X 

.X 

.ll 

.ll 

X 

X 

X 

ll 

X 

X 

X 

X 
7 

COMMITTEE OVERSIGHT FINDINGS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House 

of Representatives, the findings and recommendations of the Committee based on oversight activities under clause 2(b)(1) of rule X 

of the Rules of the House of Representatives, are incorporated in 

the descriptive portions of 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. 5323 will reduce transaction costs and provide regulatory fairness by eliminating the CVA charge for uncleared end-user derivatives contracts. 

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. 

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 1, 2018. 

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. 5323, the Derivatives 

Fairness Act. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Kathleen Gramp. 

Sincerely, 

KEITH HALL, Director. 

Enclosure. 

H.R. 5323—Derivatives Fairness Act 

Summary: H.R. 5323 would prohibit the federal financial regulators from requiring banks to hold capital against certain derivative contracts. Under current law, the calculation of a bank’s capital requirement includes amounts for some derivative contracts. 

CBO estimates that implementing H.R. 5323 would, on net, in- crease the deficit by $2 million over the 2019–2028 period. That estimate includes an increase in direct spending of $2 million and an 

8 

1The DIF, which is funded by premiums paid by member institutions, resolves the assets of failed insured depository institutions and insures certain deposits up to $250,000 per depositor. 

The OLF was established to resolve failures of certain large, systemically important institutions—banks and nonbanks. In the event of a failure, the OLF’s costs would largely be recouped 

by assessments (which would be recorded as revenues in the federal budget) collected from other 

large financial institutions. 

increase in revenues of less than $500,000. Because enacting the 

bill would increase direct spending and revenues, pay-as-you-go 

procedures apply. 

CBO estimates that enacting H.R. 5323 would not increase net direct spending by more than $2.5 billion or on-budget deficits by 

more than $5 billion in any of the four consecutive 10-year periods 

beginning in 2029. 

H.R. 5323 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA). 

Basis of estimate: For this estimate, CBO assumes that the bill 

will be enacted near the end of 2018. The budgetary effects of H.R. 

5323 stem from the small chance that the Federal Deposit Insurance Corporation (FDIC) would incur additional costs to resolve financial institutions that fail. 

This cost estimate is based on the analysis underlying projections 

for the FDIC’s financial resolution programs included in CBO’s 

April 2018 baseline. Those projections incorporate a weighted probability of different outcomes for future failures of financial institutions. Most of those outcomes have a very small probability of occurring, but if they did, the costs to the FDIC’s Deposit Insurance 

Fund (DIF) or the Orderly Liquidation Fund (OLF) would be very 

large.1 On balance, CBO estimates that the federal regulations that 

require banks to maintain certain levels of capital and liquidity 

lower the FDIC’s costs for resolving failed financial institutions because they increase the proportion of losses that will be absorbed 

by shareholders and other creditors. 

Under H.R. 5323, banks would no longer be required to account 

for some derivatives in their calculation of capital ratios that are 

based on what are known as a bank’s risk-weighted assets (RWA). 

Only institutions bound by the RWA ratio would be affected by the 

bill. 

On the basis of publicly available information about the amount 

of capital held by banks for affected derivatives, CBO estimates 

that implementing H.R. 5323 would, on net, increase deficits by $2 

million over the 2019–2028 period. That estimate includes an increase in direct spending of $2 million and an increase in revenues 

of less than $500,000 for the OLF. Those budgetary effects are 

small relative to the $14.2 billion net cost that CBO projects for the 

OLF over that 10-year period. CBO estimates that most of the cost 

of H.R. 5323 would be offset after 2028 by an increase in fees paid 

by financial institutions. Finally, CBO estimates that implementing 

the bill would have no significant net effect on the DIF. 

Pay-as-you-go considerations: The Statutory Pay-As-You-Go Act 

of 2010 establishes budget-reporting and enforcement procedures 

for legislation affecting direct spending or revenues. Because H.R. 

5323 would affect direct spending and revenues (as discussed 

above) pay-as-you-go procedures apply. 

Increase in long-term direct spending and deficits: CBO estimates that enacting H.R. 5323 would not increase net direct spending by more than $2.5 billion or on-budget deficits by more than 

9 

$5 billion in any of the four consecutive 10-year periods beginning 

in 2029. 

Mandates: H.R. 5323 contains no intergovernmental or privatesector mandates as defined in UMRA. 

Estimate prepared by: Federal Costs: Kathleen Gramp (Orderly 

Liquidation Fund) and Sarah Puro (Deposit Insurance Fund); Mandates: Jon Sperl. 

Estimate reviewed by: Kim P. Cawley; Chief, Natural and Physical Resources Cost Estimates Unit; H. Samuel Papenfuss; Deputy 

Assistant Director for Budget Analysis. 

FEDERAL MANDATES STATEMENT

This information is provided in accordance with section 423 of 

the Unfunded Mandates Reform Act of 1995. 

The Committee has determined that the bill does not contain 

Federal mandates on the private sector. The Committee has determined that the bill does not impose a Federal intergovernmental 

mandate on State, local, or tribal governments. 

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 the section 102(b)(3) of the 

Congressional Accountability Act. 

EARMARK IDENTIFICATION

With respect to clause 9 of rule XXI of the Rules of the House 

of Representatives, the Committee has carefully reviewed the provisions of the bill and states that the provisions of the bill do not 

contain any congressional earmarks, limited tax benefits, or limited 

tariff benefits within the meaning of the rule. 

DUPLICATION OF FEDERAL PROGRAMS

In compliance with clause 3(c)(5) of rule XIII of the Rules of the 

House of Representatives, the Committee states that no provision 

of the bill establishes or reauthorizes: (1) a program of the Federal 

Government known to be duplicative of another Federal program; 

(2) a program included in any report from the Government Accountability Office to Congress pursuant to section 21 of Public 

Law 111–139; or (3) a program related to a program identified in 

the most recent Catalog of Federal Domestic Assistance, published 

pursuant to the Federal Program Information Act (Pub. L. No. 95– 

220, as amended by Pub. L. No. 98–169). 

DISCLOSURE OF DIRECTED RULEMAKING

Pursuant to section 3(i) of H. Res. 5, (115th Congress), the following statement is made concerning directed rule makings: The 

Committee estimates that the bill requires no directed rule makings within the meaning of such section. 

10 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title 

This section cites H.R. 5323 as the ‘‘Derivatives Fairness Act’’. 

Section 2. Credit valuation adjustment relief 

This section amends the Dodd-Frank Wall Street Reform and 

Protection Act to ensure that regulations issued by the federal 

banking agencies to promulgate minimum risk-based capital requirements do not apply a fair value adjustment to reflect 

counterparty credit risk in valuation of OTC derivatives contracts 

for qualifying transactions with corporate end-users. 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italics, 

and existing law in which no change is proposed is shown in 

roman): 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (new matter is printed in italic 

and existing law in which no change is proposed is shown in 

roman): 

DODD-FRANK WALL STREET REFORM AND CONSUMER 

PROTECTION ACT 

SECTION 1. SHORT TITLE; TABLE OF CONTENTS. 

(a) SHORT TITLE.—This Act may be cited as the ‘‘Dodd-Frank 

Wall Street Reform and Consumer Protection Act’’. 

(b) TABLE OF CONTENTS.—The table of contents for this Act is as 

follows: 

Sec. 1. Short title; table of contents. 

* * * * * * * 

TITLE I—FINANCIAL STABILITY 

* * * * * * * 

Subtitle C—Additional Board of Governors Authority for Certain Nonbank Financial 

Companies and Bank Holding Companies 

* * * * * * * 

Sec. 177. Credit valuation adjustment. 

* * * * * * * 

TITLE I—FINANCIAL STABILITY 

* * * * * * * 

11 

Subtitle C—Additional Board of Governors 

Authority for Certain Nonbank Financial 

Companies and Bank Holding Companies 

* * * * * * * 

SEC. 177. CREDIT VALUATION ADJUSTMENT. 

Prudential risk-based capital requirements and generally applicable risk-based capital requirements established by the appropriate 

Federal banking agencies shall not apply a fair value adjustment 

to reflect counterparty credit risk in valuation of over-the-counter 

derivative contracts with respect to transactions with a counterparty 

that— 

(1) is described under section 2(h)(7)(A) of the Commodity Exchange Act; 

(2) is a person or class of persons that meets any qualifications required by a regulation issued by the Commodity Futures 

Trading Commission with respect to such person or class of persons qualifying for an exemption under section 4(c)(1) of the 

Commodity Exchange Act from the requirements of section 

2(h)(1)(A) of such Act; or 

(3) is an affiliate that meets the requirements for an exception 

under section 2(h)(7)(D) of the Commodity Exchange Act. 

* * * * * * * 

(12) 

MINORITY VIEWS 

H.R. 5323 would allow megabanks to ignore risks from certain 

derivatives transactions when calculating their capital buffers that 

are supposed to prevent the bank’s failure during adverse economic 

conditions. Specifically, the bill would exempt derivatives transactions with end-users that are not conducted through a clearing 

house from the credit valuation adjustment (CVA) to a bank’s capital requirement. 

The CVA represents the change to the value of a derivative contract to account for the likelihood that the customer of the bank or 

counterparty might default on its obligations under the contract. 

Banks are required to account for these derivatives on a fair value 

basis, meaning that they have to periodically update the value of 

the derivative based on changes in their counterparty’s default 

risk, among other factors. The Basel Committee on Banking Supervision (BCBS) found that during the 2008 financial crisis roughly 

two-thirds of counterparty credit risk losses during the financial 

crisis resulted from bank writedowns of fair value in connection 

with CVA, while only one-third of such losses resulted from actual 

defaults. 

Consistent with the Basel III accords, U.S. banking regulators 

required that the largest banks, those with more than $250 billion 

in assets, hold capital to account for CVA to ensure they are better 

prepared if the party on the opposite side of a derivative transaction experiences a deterioration in creditworthiness or defaults 

on its obligation. 

H.R. 5323 would amend this requirement based entirely on the 

determination by the European Union to exclude CVA from the calculation of European banks’ capital requirements under Basel III. 

Notably, European governments tend to provide significantly more 

support to prop up their banking sectors, as well as other industries, a practice that Democrats sought to end in the United States 

through the enactment of the Dodd-Frank Act. 

Supporters of H.R. 5323 claim that relief is necessary because 

the differences in treatment of CVA between the United States and 

European Union have put U.S. derivatives end-users, like airlines 

and gas companies, at a competitive disadvantage relative to their 

European counterparts. U.S. regulators, however, determined that 

the risks that these counterparties pose to banks should be accounted for to promote the safety and soundness of the banking industry and to promote the public good. 

Importantly, H.R. 5323’s supporters have offered no evidence of 

a competitive disadvantage. In fact, during a February 14, 2018 

Capital Markets Subcommittee hearing on H.R. 5323 and other 

proposals, a representative of the International Swaps and Derivatives Association testified that, ‘‘we are trying to assess what the 

new Basel requirements would do to impact U.S. traders. And it is 

13 

very important we do the economic analysis,’’ (emphasis added). 

During the Committee’s consideration of the bill, Rep. Kihuen offered a sensible amendment to ensure that Congress first receives 

such an economic analysis. Consistent with a bill from the 113th 

Congress that received unanimous approval in Committee and 

passed the House Floor by a vote of 353–24, Rep. Kihuen’s amendment would have replaced H.R. 5323’s carve out with a requirement that the Financial Stability Oversight Council (FSOC) conduct a study of the potential effects of the differences between the 

United States’ and other jurisdictions’ implementation of the CVA 

capital requirement under Basel III. Rep. Kihuen’s amendment 

was rejected on party lines. 

H.R. 5323 is opposed by proponents of responsible banking practices, like Public Citizen and Americans for Financial Reform 

(AFR). In a letter to the Committee, AFR cautioned that, ‘‘we 

should not use the European banking system—which is generally 

recognized as significantly undercapitalized compared to the U.S. 

system as the standard for our banking and derivatives regulations. In the long run, U.S. banks will be more competitive when 

they are generally recognized as safe and sound.’’ 

For these reasons we oppose H.R. 5323. 

MAXINE WATERS. 

CAROLYN B. MALONEY. 

STEPHEN F. LYNCH. 

GREGORY W. MEEKS. 

ED PERLMUTTER. 

DAVID SCOTT. 

NYDIA M. VELA ́ ZQUEZ. 

KEITH ELLISON. 

WM. LACY CLAY. 

MICHAEL E. CAPUANO. 

JOYCE BEATTY. 

AL GREEN. 

Æ