Finadium: Leverage Ratios, SA-CCR and Securities Finance: The New Regulatory Costs of Business

The cost of balance sheet from different types of financial transactions that have a similar economic impacts drives how business gets done. In this report, Finadium delves into the Leverage Ratio calculations and considerations for OTC derivatives and securities financing trades bilaterally and on CCPs. We run the numbers for a Basel III/IV generic case and look at regional variations that impact our results.

The COVID-19 pandemic and accompanying massive central bank intervention have changed some assumptions that banks use to guide their balance sheet strategy, and some of the core regulations that underlie associated costs of derivatives and securities finance activities. Changes to the rules in the US and Japan allow some institutions to exempt their accounts held with the central bank from their Leverage Ratio; the same exemption has been proposed in Europe. The US regulatory decision to temporarily exempt US Treasuries from the Supplementary Leverage Ratio, which could become permanent, unlocks up to US$1.2 trillion in new leveraged liquidity if a revenue opportunity worth pursuing emerges. Europe’s planned introduction of Basel IV introduces yet more variation. And of course, government and central bank interventions have impacted market pricing and demand for a wide variety of financing-linked products. The cost of doing business depends on where you are.

Our report considers the Standardised Approach to measuring counterparty credit risk (SA-CCR) as the regulation for measuring OTC derivatives exposure. While not yet live in every jurisdiction, the SA-CCR has been expected for some years as the regulation that will be in force going forward. We also assess the Leverage Ratio costs for securities finance and repo transactions both bilaterally and on a CCP.

This report should be read by any market participant trading OTC derivatives, conducting repo transactions or lending or borrowing securities. It may be of particular interest to bank Treasury and liquidity managers, securities lenders looking at strategies for improving the attractiveness of their inventory, and regulators considering how to improve liquidity in physical markets for the benefit of retail and institutional investors.

A direct link to the report for Finadium research clients is

For non-subscribers, more information is available here.

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