Derivatives clearing still at risk after Basel III review, says FIA

The Basel III capital framework is under intense scrutiny from banks and clearing brokers.

The Futures Industry Association (FIA) has criticised a recent review of the Basel III leverage ratio framework, arguing it has failed to identify the impact the capital rules will have on holding client collateral.

The Basel Committee on Banking Supervision (BCBS) released a consultation paper on Wednesday proposing changes to how it measures banks exposures to derivatives.

However, the FIA expressed disappointment that the new Basel III framework does not include an offset for initial margin, which has resulted in widespread shrinkage in the derivatives clearing industry.

Walt Lukken, president and CEO of the FIA, said: “The leverage ratio should not stand in the way of the G-20’s goal of reducing systemic risk through greater adoption of central clearing. Our concern is that this will make it more difficult for market participants to hedge risk using cleared derivatives. Worse, it may harm the safety and resilience of our clearing system.”

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 Basel Committee has called for additional data to evaluate the issue, with comments on the Basel III proposals open until 6 July.

“We will work with industry members to facilitate the Committee’s efforts to gather and analyse data on the impact of capital requirements,” Lukken added.