Trade bodies detail concerns with leverage ratio rules

Industry associations have raised several concerns with leverage ratio rules, following BCBS’s request for comments.

Several industry trade associations have expressed concerns about upcoming leverage ratio rules to the Basel Committee on Banking Supervision’s (BCBS).

The Financial Industry Association (FIA), Global Financial Markets Association (GFMA), International Swaps and Derivatives Association (ISDA) and others, explained the rules could lead to unintended consequences.

The Associations agreed the regulations will make client clearing more difficult, and the increasing capital constraints for firms could affect “efficient financing”.

GFMA’s chief executive officer Kenneth Bentsen, explained even the client transactions designed to reduce risk will require broker-dealers to expand their balance sheets.

He said: “Regulations should not impair clients’ ability to conduct risk-reducing transactions in cases where these transactions do not add risk to banks’ balance sheets.

“By excluding cash and cash equivalents from the exposure measure of the leverage ratio, regulators could alleviate the constraints on these important market activities, especially in distressed markets.”

The FIA added that the leverage capital should only be held against actual economic exposure.

The association’s written response explained “the exposure-reducing effect of initial margin in cleared derivatives transactions will have a significantly negative effect on the ability of bank or bank-affiliated clearing members to provide client clearing services.”

FIA’s members believe this will result in an increase of costs for clients, whist reducing incentives for banking organisations.

Earlier this month, the Bank of England called for changes regarding the capital rules, in order to prevent banks withdrawing from the cleared derivatives business.

In April, the FIA highlighted the Basel II leverage ratio framework had failed to recognise the impact the rules will have on holding client collateral.

The main 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.