Central Clearing and Liquidity
Governor Jerome H. Powell
At the Federal Reserve Bank of Chicago Symposium on Central Clearing, Chicago, Illinois
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Having pushed for the move to greater central clearing, global authorities have a responsibility to ensure that CCPs do not themselves become a point of failure for the system. The progress I have just described is helping to meet this responsibility by making central clearing safer and more robust. Global authorities also have a responsibility to ensure that bank capital standards and other policies do not unnecessarily discourage central clearing. In my view, the calibration of the enhanced supplementary leverage ratio (SLR) for the U.S. global systemically important banks (G-SIBs) should be reconsidered from this perspective. A risk-insensitive leverage ratio can be a useful backstop to risk-based capital requirements. But such a ratio can have perverse incentives if it is the binding capital requirement because it treats relatively safe activities, such as central clearing, as equivalent to the most risky activities. There are several potential approaches to addressing this issue. For example, the BCBS is currently considering a proposal that would set a G-SIB’s SLR surcharge at a level that is proportional to the G-SIB’s risk-based capital surcharge. Taking this approach in the U.S. context could help to reduce the cost that the largest banks face in offering clearing services to their customers.
The Federal Reserve is also considering other steps. First, we are developing an interpretation of our rules in connection with the movement of some centrally cleared derivatives to a “settled-to-market” approach. Under this approach, daily variation margin is treated as a settlement payment rather than as posting collateral. Under our capital rules, this approach reduces the need for a bank to hold capital against these exposures under risk-based and supplementary leverage ratios. Second, we are also working to move from the “current exposure method” of assessing counterparty credit risk on derivative exposures to the standardized approach for counterparty credit risk (SA-CCR). The current exposure method generally treats potential future credit exposures on derivatives as a fixed percentage of the notional amount, which ignores whether a derivative is margined and undervalues netting benefits. SA-CCR is a more risk-sensitive measurement of exposure, which would appropriately recognize the counterparty risks on derivatives, including the lower risks on most centrally cleared derivatives.
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The full speech and slides are available at https://www.federalreserve.gov/newsevents/speech/powell20170623a.htm