Chicago Fed: Re-Think the SLR06.23.2017
Although regulatory reforms have done much to strengthen central clearing counterparties and their clients, Governor Jerome H. Powell at the Federal Reserve Bank of Chicago has called on the industry to continue the process of creating a more robust and efficient central clearing system.
“Having pushed for the move to greater central clearing, global authorities have a responsibility to ensure that CCPs do not themselves become a point of failure for the system,” he said speaking before the Symposium on Central Clearing in Chicago.
As part of his call to arms, Powell suggested that calibration of the enhanced supplementary leverage ratio for the US global systemically important banks should be reconsidered.
“A risk-insensitive leverage ratio can be a useful backstop to risk-based capital requirements,” he admitted. “But such a ratio can have perverse incentives if it is the binding capital requirement because it treats relatively safe activities, such as central clearing, as equivalent to the most risky activities.”
Powel offered multiple ways to address the issues during his speech.
“For example, the BCBS is currently considering a proposal that would set a G-SIB’s supplementary leverage ratio surcharge at a level that is proportional to the G-SIB’s risk-based capital surcharge,” he said. “Taking this approach in the U.S. context could help to reduce the cost that the largest banks face in offering clearing services to their customers.”
Other ideas the Federal Reserve is exploring is developing an interpretation of its rules in connection with the movement of some centrally cleared derivatives to a “settled-to-market” approach.
“Under this approach, daily variation margin is treated as a settlement payment rather than as posting collateral,” Powell explained. “Under our capital rules, this approach reduces the need for a bank to hold capital against these exposures under risk-based and supplementary leverage ratios.”
The Federal Reserve is also working to move from the “current exposure method” of assessing counterparty credit risk on derivative exposures to the standardized approach for counterparty credit risk, he noted.
“The current exposure method generally treats potential future credit exposures on derivatives as a fixed percentage of the notional amount, which ignores whether a derivative is margined and undervalues netting benefits,” said Powell. “SA-CCR is a more risk-sensitive measurement of exposure, which would appropriately recognize the counterparty risks on derivatives, including the lower risks on most centrally cleared derivatives.”
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