FIA submitted a response to the Basel Committee on Banking Supervision’s consultative document on revisions to the Basel III leverage ratio framework. FIA’s analysis shows that the current proposal’s lack of offset for initial margin would substantially increase clearing members’ total leverage exposure and, as a result, would significantly reduce clearing services to clients, increase concentration of client clearing services and negatively affect the portability of client accounts, especially in times of systemic stress.
“Our aggregate analysis confirms what we have been hearing from individual clearing members: without an offset for initial margin, the leverage ratio will ultimately increase costs for end-users and decrease access to clearing,” said Walt Lukken, president and CEO of FIA. “It also undercuts the G20’s goal of increasing central clearing to mitigate systemic risk. Mandatory clearing in Europe is just beginning and regulators should work together to make sure this mandate isn’t thwarted by inappropriate capital requirements.”
Using data collected from 14 clearing members, FIA showed that the aggregate leverage exposure of the 14 participating firms would be 80 pecent higher under the Standardized Approach for Counterparty Credit Risk (SA-CCR) without an offset for initial margin than it would be using SA-CCR with an offset. FIA’s analysis confirms that the clients that would be most adversely affected by the lack of an offset would be asset managers, insurers, and other end-users that use cleared derivatives to hedge risk.
FIA urged the Basel Committee to include an offset for initial margin in its final revised leverage ratio standard, concluding that, “none of these results is warranted given the plainly exposure-reducing effect of initial margin – and, more to the point, the failure to recognize such exposure-reduction would needlessly produce significantly adverse consequences.”
“This is a high priority issue for our industry and I’m grateful to our members for their collaborative effort to provide a quantitative response to the Basel Committee,” Lukken said. “This work clearly demonstrates how critical it is to provide an offset for initial margin.”