August 2020

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What is less costly to trade on bank balance sheets helps determine what business gets done. Between an OTC derivative and a securities financing transaction as a securities loan or a repo, the answer requires delving into the main regulations governing capital rules for each product and their impacts on the most capacity constrained factor on the balance sheet.

Recent changes to Leverage Ratios in the US and Europe mean that different jurisdictions must be considered in determining the cost of doing business. A temporary US exemption for US Treasuries in the Supplementary Leverage Ratio results in a different outcome than a similar trade for another product. Europe’s planned introduction of Basel IV introduces yet more variation. 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 may be useful reading for any market participant trading OTC derivatives, conducting repo transactions or lending or borrowing securities. This report updates our 2015 analysis on the costs of OTC derivatives vs. securities finance transactions.

Table of Contents

  • Executive Summary
  • Market Dynamics and Balance Sheet
    • – The Push Towards Central Clearing
    • – Methodology
  • The SA-CCR Cost of OTC Derivatives
    • – Basel IV Output Floors and Regional Variations
  • Calculating Capital for an Equity Securities Loan
  • The Case of Repo
  • Policy Implications
  • About the Author
  • About Finadium LLC

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