FIA strongly opposes provisions of two separate proposed rules put forward by US bank regulators that would dramatically increase capital requirements for derivatives clearing services that banks offer to their clients. Looking at just the six largest US banks that offer clearing, FIA estimates that these provisions would increase their capital requirements for client clearing by more than 80%.

If enacted as proposed, these rules would make it far more expensive for banks to provide their clients with clearing services for futures, options, and OTC derivatives. In turn, this could impair access to these instruments by a wide range of companies that use derivatives to hedge their risks or manage their investments. These companies include agricultural businesses, energy producers and public utilities, manufacturing and transportation companies, mortgage lenders, insurance companies, and pension funds.  The proposed rules also would have the unintended consequence of increasing systemic risk by reducing the capacity to move customer positions out of a clearing firm in case that firm goes bankrupt.

FIA is troubled by the absence of any apparent cost-benefit analysis that considers these important negative impacts of the proposals on end users and on systemic stability. FIA urges the US bank regulators to fully consider and analyze these impacts before finalizing these rules.

“In the wake of the 2008 financial crisis, regulators recognized the need to move more of the derivatives markets into central clearing. They understood that central clearing is one of the most effective ways to make the financial system more stable and resilient when markets are in turmoil. That makes it all the more surprising that US bank regulators are ignoring one of the most important lessons of the financial crisis,” said Walt Lukken, CEO of FIA.

“Policymakers should not disincentivize the very activity that makes the marketplace safer, reduces systemic risk, and protects taxpayers. The proposals being considered will drive up the cost of client clearing for end-users that rely on these products to manage risk. FIA calls on US bank regulators to carefully consider the impact these proposals will have on the cleared derivatives markets and the farmers, energy companies and pension funds that rely upon them to manage volatility.”

FIA worked with its member firms to estimate the quantitative impact on the six banks that would be subject to both sets of the proposed increases in capital requirements. These six banks are deemed to be “global systemically investment banks” or GSIBs. They are also the largest providers of derivatives clearing services in the US.

FIA’s quantitative impact study shows that the two proposals in combination would increase the capital required for those six banks to engage in client clearing activities by more than 80%.   The GSIB Surcharge Proposal’s changes to the treatment of client cleared OTC derivatives transactions would, on their own, increase the capital required to engage in client clearing activities by more than 58%. The Basel III Endgame Proposal, which would apply to both GSIB and non-GSIB banks, would increase the capital required to engage in client clearing activities by more than 22%.

FIA filed comment letters today with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency outlining its concerns with these US bank capital rule proposals – the Board’s GSIB Surcharge Proposal and the joint Basel III Endgame Proposal.

Read FIA’s response to the joint Basel III Endgame Proposal.

Read FIA’s response to the Board’s GSIB Surcharge Proposal.

Source: FIA

ISDA  Submits Responses to US Basel III and  G-SIB Surcharge Consultations

The International Swaps and Derivatives Association, Inc. (ISDA) has submitted a response with the Securities Industry and Financial Markets Association (SIFMA) on the US Basel III ‘endgame’ notice of proposed rulemaking (NPR), warning that the resulting increases in capital for bank trading activities do not reflect underlying risks and could impact the liquidity and vibrancy of US capital markets, increasing costs and reducing choice for US businesses.

Based on an industry quantitative impact study (QIS) with input from eight US global systemically important banks (G-SIBs), the introduction of the Fundamental Review of the Trading Book (FRTB) and the revised credit valuation adjustment (CVA) framework would result in a 129% increase in market risk and CVA risk-weighted assets (RWAs) under the new expanded risk-based approach (ERBA) versus the current US standardized approach.

An increase of this magnitude would constrain bank balance sheets, forcing banks to scale back or withdraw from certain activities and businesses that become uneconomic, the associations state. This will impact the availability and cost of financing, hedging and intermediary services, as well as lead to less liquid and vibrant capital markets, negatively affecting US businesses and households and weighing on US economic growth.

The response proposes a number of calibration changes to ensure the rules are appropriate and risk sensitive and avoid adverse consequences to US capital markets. More specifically, the response makes the following recommendations:

• A comprehensive evaluation of how the proposal would interact with other prudential requirements, particularly the stress testing framework and the G-SIB surcharge (and related calibration), is needed.
• The proposal would have a negative effect on the liquidity and vibrancy of capital markets. In response, US agencies should make certain critical revisions detailed in the letter to improve the recognition of diversification when calculating market risk RWAs under the ERBA to reflect actual risk exposure and effective risk management practices.
• The proposal would increase capital requirements for markets where that outcome would not be aligned with underlying risks. The agencies should mitigate adverse effects by making key changes set out in the letter for market risk and CVA RWAs under the proposal.
• The proposal would adversely affect derivatives end users, including commercial end users, corporate and banking organizations, resulting in negative effects on investors. To avoid these significant impacts to derivative end users, as well as knock-on consequences to consumers, the agencies should enhance the risk sensitivity of the capital framework in the proposal.
• Aspects of the proposal would result in excessive volatility or material increases in capital in a manner that is not aligned with the risks and would disincentivize banking organizations from adopting the FRTB internal models approach. In response, US agencies should make key revisions to the proposal’s market risk framework, as detailed in the letter.

If material changes to the calibration cannot be achieved without further consultation, a re-proposal of the rules may be necessary, ISDA says. To ensure banking organizations have sufficient time to implement the requirements, the response recommends the rules should become effective no earlier than 18 months from the publication of the final rule.

ISDA and SIFMA also submitted a response to a separate consultation by the US Federal Reserve on proposed changes to the G-SIB surcharge.

The response raises concerns that the revised G-SIB surcharge would lead to inappropriately high capital requirements for banks offering client clearing services, potentially discouraging them from participating in this business and contravening a long-standing policy objective to promote central clearing.

Specifically, the response argues that client derivatives transactions cleared under the agency model should not be included in the complexity and interconnectedness categories of the G-SIB surcharge calculation. Failure to make this change would raise capital requirements across six G-SIBs that contributed to a QIS by $5.2 billion.

The response also recommends:

• The standardized approach for counterparty credit risk alpha factor should not be included in the interconnectedness indicator calculations.
• Cross-jurisdictional activity indicators should not include derivatives exposures. At a minimum, derivatives exposures should be net of cash and non-cash collateral in the cross-jurisdictional activity indicators.

The Basel III NPR response is available here.

The G-SIB surcharge consultation response is available here.

Source: ISDA