FIA Welcomes Basel Committee Client Clearing Adjustment

The Futures Industry Association (FIA) has welcomed news that the Basel Committee on Banking Supervision has agreed on a limited revision of the leverage ratio to allow margin received from a client to offset the exposure amount of client-cleared derivatives. The Committee met last week to discuss a range of policy issues, including the leverage ratio.

“For many years, FIA has urged regulators to address the punitive capital treatment of client initial margin for cleared derivatives,” says Walt Lukken, FIA president and CEO. “Today, the Basel Committee on Banking Supervision agreed to provide an offset for client cleared initial margin under the leverage ratio. We are extremely pleased that global prudential regulators have recognized the exposure reducing impact of margin for client clearing. Additionally, we are heartened that these recommendations reaffirm the G20 2009 Leader’s commitment to provide greater clearing post-crisis as an essential and risk-reducing financial market reform.
“We encourage US and other regulators to quickly implement this change in their final capital methodology and to consider additional necessary changes that have a negative impact on clearing, especially for end-users.”

At the meeting, the Basel Committee agreed on a “targeted and limited revision” of the leverage ratio to allow margin received from a client to offset the exposure amounts of client-cleared derivatives. “This revision seeks to balance the robustness of the leverage ratio as a safeguard against unsustainable levels of leverage with the G20 Leaders’ commitment to promote the central clearing of standardised derivative contracts,” the Committee says in a statement. “The Committee will monitor the effect of this revision on the leverage ratio framework.”

The meeting also agreed on a set of disclosure requirements to curb leverage ratio window dressing, building on the measures outlined in a Committee newsletter last year that highlighted “leverage ratio window dressing”. The latest statement says the standard will be revised to require banks to disclose their leverage ratios based on the quarter-end and average values of securities financing transactions and that the Committee will continue to monitor window-dressing behaviour across financial markets.

A report on Pillar 2 supervisory practices and approaches, which will be published shortly, was also approved at the meeting, which also reviewed the reports that assessed the implementation of the Net Stable Funding Ratio and large exposures standards in Australia, Canada and India. Publication of these reports is expected in July.

The Committee discussed its work programme for evaluating the impact of its post-crisis reforms and will publish additional information of this work in due course, it says.

Away from the leverage ratio, Committee members discussed matters related to financial technology and crypto-assets. “The Committee took note of a report on the regulatory and supervisory implications of open banking and application programming interfaces; the report will be published in due course,” a statement says. “It agreed to conduct further work on financial technology, including on the risk management challenges associated with the use of artificial intelligence and machine learning in financial services.

“Committee members took note of recent developments related to crypto-assets, and discussed the diverse range of technological and economic characteristics of crypto-assets,” it adds. “Crypto-assets have exhibited a high degree of volatility and present a number of risks for banks. The Committee continues to assess the risks from crypto-assets and the best ways to address them.”

Colin Lambert

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