Bank of England backs leverage ratio changes

The Basel Committee has received mounting pressure to review its capital framework.

The Bank of England has called for changes regarding incoming capital rules in order to prevent  banks withdrawing from the cleared derivatives business.

The Bank of England’s Financial Policy Committee (FPC), has appealed for a review of the leverage ratio rules to allow clearing banks to use client collateral as a means to reduce their potential future exposures.

“Under current BCBS (Basel Committee on Banking Supervision) proposals, however, the bank has to count the full value of the PFE towards their leverage exposure and cannot use the initial margin posted by the client to reduce it,” the Bank’s Financial Stability Report outlines.

“Not allowing this initial margin to reduce PFE could lead clearing members to raise fees for client clearing of derivatives or withdraw from providing client clearing services.”

The primary concern for clearing banks is how the Basel III framework treats collateral, in which client segregated margin is treated as part of the total leverage ratio calculation, requiring more capital from banks.

This has led to a number of clearing brokers, such as Nomura, State Street, and RBS, shutting down their derivatives clearing business.

The FPC has called for the BCBS to review the potential unintended consequences its capital rules will have on post-financial crisis derivatives reforms.

In April, the BCBS released a consultation paper proposing changes to how it measures bank exposures to derivatives. However, the revised Basel III framework does not include an offset for initial margin, which has resulted in widespread shrinkage in the derivatives clearing industry.