Finadium: Decoding Basel III Endgames for Securities Finance and Collateral

This report offers a plain-English reading of the European, US and UK Basel III Endgame rules that most impact securities finance, repo and collateral desks. The report provides highlights, citations and commentary on the main impacts of standardized, advanced and Expanded Risk-Based Approaches for calculating risk-weighted exposures, the calculation of the standardized approach to counterparty credit risk (SA-CCR) and the impact of new counterparty risk weights across jurisdictions.

Basel III Endgames around the world, also called Basel 3.1 and Basel IV, are leading towards uneven playing fields for regulated banks and new opportunities for non-bank financial intermediation. National regulators have adapted the most recent Basel Committee framework to suit their local needs, and in some cases have abandoned Basel norms altogether in favor of a more “gold-plated” approach to mitigating potential future risk. The end result is a confusing mix of overlapping rules and proposals in major financial jurisdictions.

Most financial markets participants have heard of Basel III’s Standardised Approach and Advanced Approach methods for calculating credit risk exposures. If this report were about the differences between the Basel Committee’s 2017 revisions and Europe and the UK’s versions of these approaches then this report could have been relatively short. But the US has elected to pursue a new regime, the Expanded Risk-Based Approach (ERBA), which bypasses most elements of the Advanced Approach in favor of a new set of calculations designed to limit the variability evident in bank calculated results. The report breaks down the ERBA and how it differs from the Basel III Endgame that is being mostly adopted in the rest of the world.

This report is useful reading for business users looking to understand the primary levers of capital movements in Basel III Endgame rules and proposals and how these changes will impact internal capital requirements, client conversations and the use of third-party market utilities and service providers. This report aims to simplify the main points in accessible language for an educated financial services professional who is not necessarily well versed in regulatory jargon.

The desk activities of securities finance, repo and collateral markets participants will be impacted by the final rules, along with their parent companies and their counterparties. Some changes may be positive while others may be punitive for selected counterparties to the point of an inability to pursue bilateral business. Although margin may be seen as expensive, central counterparties (CCPs) could become a more attractive option as a result. Every participant will need to calculate what the new rules mean for themselves in each jurisdiction.

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