Basel Committee seeks views on the leverage ratio treatment of client cleared derivatives

The Basel Committee on Banking Supervision today published a consultative document entitled Leverage ratio treatment of client cleared derivatives.

A key element of the Basel Committee’s post-crisis Basel III reforms is the introduction of a leverage ratio requirement. The leverage ratio complements the risk-based capital requirements by providing a safeguard against unsustainable levels of leverage and by mitigating gaming and model risk across both internal models and standardised risk measurement approaches. By design, the leverage ratio does not differentiate risk across different asset classes.

As part of the finalised Basel III reforms published in December 2017, the Committee noted that it would conduct a review of the leverage ratio’s impact on banks’ provision of derivatives client clearing services and any consequent impact on the resilience of central counterparty clearing.

The Committee has conducted its review and has considered key policy objectives of G20 Leaders to prevent excessive leverage and improve the quality and quantity of capital in the banking system as well as to promote central clearing of standardised derivatives contracts. Accordingly, the Committee seeks the views of stakeholders on whether a targeted and limited revision of the leverage ratio’s treatment of client cleared derivatives may be warranted.

Stakeholders are invited to provide concrete and robust empirical evidence to support their views. Pending feedback provided in response to this consultation, the range of treatments that the Committee may consider include:

  • no change to the current treatment;
  • an amendment to the treatment of client cleared derivatives to allow cash and non-cash initial margin received from a client to offset the potential future exposure of client cleared derivatives; and
  • alignment of the treatment of client cleared derivatives with the standardised approach for measuring counterparty credit risk exposures. This would have the effect of allowing both cash and non-cash forms of initial margin and variation margin received from a client to offset the replacement cost and potential future exposure amounts of client cleared derivatives.

The Committee also welcomes feedback on the merits of introducing a requirement for initial margin to be segregated in order for any amended leverage ratio treatment to apply. It also seeks views on forward-looking behavioural dynamics of the client clearing industry that might result from any amended treatment.

The Committee welcomes comments on all aspects of this consultative document by Wednesday 16 January 2019. All comments will be published on the Bank for International Settlements website unless a respondent specifically requests confidential treatment.

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