Basel III alleviates nonsensical leverage ratio requirement - AFTER A YEAR
Published 28 Jun, 2019
The regulations Basel III committee made in regard to leverage ratio, were not only out of touch with the commercial reality of the market, they
The Basel III leverage rules were intended to make banks’ involvement in capital markets more stable by requiring them to hold higher capital buffers against client positions. However, there have been numerous unintended consequences caused in part by the difference of application of the rules across jurisdictions. SLR (supplementary Leverage Ration) regulations were actually opposed to commercial reality and caused some fund to shutter.
Basel III leverage ratio failed to acknowledge the risk-reducing impact of initial margin that clearing members hold on behalf of clients. Currently, client margin, which is posted to reduce the risk in a trade, conversely increased the amount of capital a bank has to hold against that client’s position.
In a statement late on Thursday, Walt Lukken, chief exec and president of the Futures Industry Association (FIA) welcomed the changes.
“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 Leaders' commitment to provide greater clearing post-crisis as an essential and risk-reducing financial market reform.”
The FIA also recommended considering additional necessary changes that have a negative impact on clearing, especially for end-users.
Outgoing US Commodity Futures Trading Commission (CFTC) chairman Christopher Giancarlo similarly called for a quick implementation of the revisions, saying they address the “unfounded bias against cleared derivatives”. “Once the Basel Committee publishes its standards, I urge prudential regulatory authorities to expeditiously implement them in their respective rules,” he said.
A CFTC study last July found the Basel III leverage rules resulted in a substantial shift of options clearing away from the US banks to their EU counterparts.
Basel III leverage rules have resulted in a substantial shift of options clearing away from the US banks to their EU counterparts, the CFTC has said.
In a Policy Brief released last month, the US regulator published a study that analysed the impact of leverage rules on US banks on the S&P E-mini options on futures market.
CFTC study found that before the introduction of the Basel III leverage rules in the US in January 2015, 46% of E-mini futures options positions were held in customer accounts at US banks, which has declined to 36.5%.
In contrast, EU domiciled banks, which are subject to a lower leverage ratio, increased their market share from 38.7% to 47.9%.
The study also finds that US banks have lost out to their EU counterparts in low-delta options, which have a relatively small risk compared to other products.