FIA Analysis: Leverage ratio proposals will negatively impact client clearing 

“Our aggregate analysis confirms what we have been hearing from individual clearing members: without an offset for initial margin, the leverage ratio will ultimately increase costs for end-users and decrease access to clearing,” said Walt Lukken, president and CEO of FIA. “It also undercuts the G20’s goal of increasing central clearing to mitigate systemic risk. Mandatory clearing in Europe is just beginning and regulators should work together to make sure this mandate isn’t thwarted by inappropriate capital requirements.”

Using data collected from 14 clearing members, FIA showed that the aggregate leverage exposure of the 14 participating firms would be 80 percent higher under the Standardized Approach for Counterparty Credit Risk (SA-CCR) without an offset for initial margin than it would be using SA-CCR with an offset. FIA’s analysis confirms that the clients that would be most adversely affected by the lack of an offset would be asset managers, insurers, and other end-users that use cleared derivatives to hedge risk.

FIA urged the Basel Committee to include an offset for initial margin in its final revised leverage ratio standard, concluding that, “none of these results is warranted given the plainly exposure-reducing effect of initial margin – and, more to the point, the failure to recognize such exposure-reduction would needlessly produce significantly adverse consequences.”

“This is a high priority issue for our industry and I’m grateful to our members for their collaborative effort to provide a quantitative response to the Basel Committee,” Lukken said.  “This work clearly demonstrates how critical it is to provide an offset for initial margin.”

The full response is available here.

Background:

The Basel Committee’s International regulatory framework for banks (Basel III) is a set of principles designed to “strengthen the regulation, supervision and risk management of the banking sector” by improving resiliency, risk management, and transparency. In April, the Basel Committee published a consultative document which proposed revisions to the design and calculation of the Basel III leverage ratio. The leverage ratio is designed to supplement risk-based capital requirements. The Basel Committee’s proposed revisions modify the leverage ratio in a number of ways, including replacing the Current Exposure Method (CEM) of calculating derivatives exposures with a modified version of the Standardized Approach for Counterparty Credit Risk (SA-CCR).  The Basel Committee’s proposal did not include an offset for client initial margin, despite the exposure reducing effects of initial margin.  The consultative document did, however, note that an offset is still under consideration for inclusion in the final standard, and the Basel Committee has requested additional information regarding the effects of the leverage ratio on client clearing.

FIA has been actively engaged on this issue.  Our past work is available here, and highlights are below.

FIA president testifies on impact of capital and margin requirements

FIA President: Basel capital requirements will harm end-users

FIA pledges to continue working with Basel Committee on impact of capital requirements

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FIA is the leading global trade organization for the futures, options and centrally cleared derivatives markets, with offices in London, Singapore and Washington, D.C. FIA’s membership includes clearing firms, exchanges, clearinghouses, trading firms and commodities specialists from more than 48 countries as well as technology vendors, lawyers and other professionals serving the industry. FIA’s mission is to support open, transparent and competitive markets, protect and enhance the integrity of the financial system, and promote high standards of professional conduct. As the principal members of derivatives clearinghouses worldwide, FIA’s member firms play a critical role in the reduction of systemic risk in global financial markets.

For more information, contact Heather Vaughan at +1 202.466.5460.