10.18.2018

Basel Consults On Client Cleared Derivatives Leverage

The Basel Committee on Banking Supervision today published a consultative document entitled Leverage ratio treatment of client cleared derivatives.

A key element of the Basel Committee’s post-crisis Basel III reforms is the introduction of a leverage ratio requirement. The leverage ratio complements the risk-based capital requirements by providing a safeguard against unsustainable levels of leverage and by mitigating gaming and model risk across both internal models and standardised risk measurement approaches. By design, the leverage ratio does not differentiate risk across different asset classes.

As part of the finalised Basel III reforms published in December 2017, the Committee noted that it would conduct a review of the leverage ratio’s impact on banks’ provision of derivatives client clearing services and any consequent impact on the resilience of central counterparty clearing.

The Committee has conducted its review and has considered key policy objectives of G20 Leaders to prevent excessive leverage and improve the quality and quantity of capital in the banking system as well as to promote central clearing of standardised derivatives contracts. Accordingly, the Committee seeks the views of stakeholders on whether a targeted and limited revision of the leverage ratio’s treatment of client cleared derivatives may be warranted.

Stakeholders are invited to provide concrete and robust empirical evidence to support their views. Pending feedback provided in response to this consultation, the range of treatments that the Committee may consider include:

  • no change to the current treatment;
  • an amendment to the treatment of client cleared derivatives to allow cash and non-cash initial margin received from a client to offset the potential future exposure of client cleared derivatives; and
  • alignment of the treatment of client cleared derivatives with the standardised approach for measuring counterparty credit risk exposures. This would have the effect of allowing both cash and non-cash forms of initial margin and variation margin received from a client to offset the replacement cost and potential future exposure amounts of client cleared derivatives.

The Committee also welcomes feedback on the merits of introducing a requirement for initial margin to be segregated in order for any amended leverage ratio treatment to apply. It also seeks views on forward-looking behavioural dynamics of the client clearing industry that might result from any amended treatment.

The Committee welcomes comments on all aspects of this consultative document by Wednesday 16 January 2019. All comments will be published on the Bank for International Settlements website unless a respondent specifically requests confidential treatment.

Source: BIS

FIA Statement on Basel Committee’s Consultation on Capital

FIA President and CEO Walt Lukken today made the following statement regarding the Basel Committee on Banking Supervision’s announcement of a consultation on the leverage ratio treatment of client cleared derivatives:

“As FIA has consistently emphasized and demonstrated in our dialogue with policymakers, the leverage ratio has a direct and significant negative impact on the ability of banks to provide clearing services to customers. FIA welcomes the Basel Committee’s decision to publish this consultation and looks forward to responding.

The financial crisis dramatically proved the value of central clearing, and as a result, policymakers made mandatory clearing a central pillar of the G20 recommendations. Unfortunately, the application of certain capital charges works against that mandate by creating economic disincentives for client clearing.

As the leading trade association for the listed and cleared derivatives industry, FIA has undertaken a multi-year effort to demonstrate to global regulators that initial margin posted increases by clients mitigates exposure.”

Related articles

  1. MarketAxess Expands in Asia

    Phase 5 of the uncleared margin rules (UMR) took effect from September 2021.

  2. Temporary equivalence is set to expire on June 30 2022.

  3. Margins Raised Ahead of Brexit Vote

    IRS trading volumes have fragmented without an equivalence agreement.

  4. New Collateral Transformers To Emerge

    Phase 5 of the uncleared margin rules came into effect on 1 September.

  5. Buy Side Forced to Review Collateral Arrangements

    Triparty repos can be executed across U.S. Treasury securities to central clearing.