FIA Global sent a letter to the
The letter addresses the Basel III leverage ratio framework, which was designed to capture the total exposure a banking organization has to its customers and counterparties. Accurately capturing this exposure is critical to establishing appropriate capital requirements to mitigate risk.
"It's troubling that the Basel III leverage ratio fails to treat segregated margin appropriately,"
The letter explains that if the exposure-reducing effect of segregated margin isn't included in leverage ratio calculations, the amount of capital required for central clearing will substantially increase:
"Such a significant increase in required capital will also significantly increase costs for end users, including pension funds and businesses across a wide variety of industries that rely on derivatives for risk management purposes, including agricultural businesses and manufacturers. Further, banks may be less likely to take on new clients for derivatives clearing. As a result, market participants may be less likely to use cleared derivatives for hedging and other risk management purposes.
"In addition, the liquidity and portability of cleared derivatives markets could be significantly impaired, which would substantially increase systemic risk."
The letter identifies three potential avenues for revising the leverage ratio: an interpretive FAQ, amending the text of the leverage ratio standard, and adopting a modified calculation methodology that recognizes the benefit of collateral.
"If the leverage ratio calculation stands as-is, we will likely see fewer banks offering central clearing services and fewer opportunities for end-users to hedge risks," Lukken said. "That result is not only undesirable, but it is also completely contrary to the G20's intentions to promote central clearing."
[Category: Financial Services]
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