Chicago
15 August 2016
Reporter: Mark Dugdale

OCC reaffirms leverage ratio objections


The leverage ratio’s current exposure method could move liquidity away from the listed and centrally cleared markets back to the opaque bilateral over-the-counter markets, according to Options Clearing Corporation’s (OCC) financial risk management chief.

John Fennell reaffirmed OCC’s objections to the proposed current exposure method in a blog post on 11 August.

The central clearer added its signature to a letter, backed by another 30 market participants, that was sent to the Basel Committee on Banking Supervision (BCBS) last month, which strongly opposed the proposed leverage ratio framework.

The currently proposed CEM “neglects to recognise the risk limiting effects associated with being long and short options of different strikes on the same underlying instrument”, Fennell wrote.

“Hedging option risk using other options is the most effective and relied upon way option market makers mitigate the risks assumed as they fulfil their vital role of providing committed liquidity to the cleared markets.”

“The leverage ratio creates the real potential to move liquidity away from the listed and centrally cleared markets and ultimately back to the opaque bilateral over-the-counter markets. This is counter to the global mandate by regulators to bring more OTC volume into centrally cleared solutions mitigating systemic risk.”

OCC and its co-signatories want the BCBS to adopt the standardised approach for counterparty credit risk (SA-CCR) method is within the leverage ratio. Otherwise, Fennell wrote, “market makers, who serve to provide deep liquidity to the listed options market, will be significantly diminished”.

The BCBS’s proposed final leverage ratio framework is due by the end of 2016.

More clearing and settlement news
The latest news from Asset Servicing Times
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
BNP Paribas becomes first French OTC Clearing member
20 September 2017 | Hong Kong | Reporter: Barney Dixon
BNP Paribas has joined OTC Clearing Hong Kong, as the clearinghouse’s 17th member, and the first from France
Ten-year T2S saga comes to an end
19 September 2017 | Brussels | Reporter: Stephanie Palmer
The Target2-Securities pan-European harmonised settlement platform is finally fully operational, as the Spanish and Baltic markets completed their migration yesterday
SEC praises “smooth” T+2 transition
12 September 2017 | Washington DC | Reporter: Stephanie Palmer
SEC chair Jay Clayton said the move on 5 September “represents a significant accomplishment” for the industry
Citi and Deutsche Bank execute first SwapAgent trades
07 September 2017 | London | Reporter: Jenna Lomax
LCH’s new SwapAgent service has completed its first trades, facilitating an interest-rate swap and an inflation swap between Citi and Deutsche Bank
North America slims down to T+2
05 September 2017 | New York | Reporter: Drew Nicol
The shorter settlement timeframe also aligns these markets with the EU, which moved to a T+2 settlement cycle in 2014
GlobalCollateral and CloudMargin to combine forces on settlement
22 August 2017 | London | Reporter: Stephanie Palmer
CloudMargin has entered into an agreement with DTCC-Euroclear GlobalCollateral to connect with its Margin Transit Utility
LCH launches new SwapClear client account
15 August 2017 | London | Reporter: Drew Nicol
Global clearinghouse LCH has introduced a new type of client account within its SwapClear service that allows buy-side clients to deliver collateral directly and retain beneficial title
More clearing and settlement news