Leverage ratio could see banks walk away from options trading

OCC warns banks could pull out of listed options markets in wake of higher capital rules.

Banks could pull out of listed options markets in the wake of higher capital rules, the Options Clearing Corporation (OCC) has warned.

The Basel III capital rules, or the supplementary leverage ratio (SLR) rules in the US, have caused a number of banks to re-evaluate their derivatives options due to higher balance sheet costs, with many pulling out of certain markets.

“We are starting to see evidence of this evolution with a number of general clearing members (GCM) having already ceased their operations while others are re-assessing their business models,” writes John Fennell, executive vice president of financial risk management, OCC, on the company’s website.

Fennell claims that the current rules do not recognise the “risk limiting effects” associated with being long and short options of different strikes.

“We fear that a further reduction of GCMs (general clearing members) will result in greater concentration risks and a decrease of available balance sheet capacity for clearing of derivatives transactions, including those that are anticipated to become subject to mandatory clearing,” he adds.

The OCC has co-signed a letter with 30 exchanges and trading firms, including Bats, CBOE, ICE, Eurex and Virtu Financial, for regulators to adopt the Standardised Approach for Counterparty Credit Risk (SA-CCR) method to calculate exposure risks for exchange-traded derivatives.

It has also called for an exemption for options market makers from the leverage ratio rules.