A group of 13 derivatives exchanges and clearing members have signed a letter to the Basel Committee on Banking Supervision (BCBS) urging the committee to address the unintended consequences of the leverage ratio using the current exposure method (CEM).
The group include the Options Clearing Corporation, ABN AMRO Clearing Bank, the Intercontinental Exchange, and NASDAQ, and expressed “grave concern” over the calculation for exchange-traded derivatives exposure.
The letter suggested that the application of the leverage ratio as it stands will lead to increased capital requirements for general clearing members, as well as their underlying clients This will threaten these business models, and affect the liquidity and stability of the European and global markets
It argued that the standardised approach for measuring counterparty credit risk exposures (SA-CCR) would be a more appropriate was of calculating exposures for exchange-traded derivatives.
The letter argued that: “Market makers and liquidity providers perform essential services to facilitate efficient price discovery in the global markets using their own proprietary capital.”
It also pointed out that these players account for anything between 25 to 40 percent of turnover on the global markets, and that they predominantly generate liquidity, rather than consuming it.
The group accepted that the BCBS leverage ratio framework and disclosure requirements intend to provide simple, transparent, non-risk based, and more credible capital calculations.
However, the letter pointed out that global regulation is leading to a over-the-counter (OTC) derivatives market that is more standardised, more transparent and more focused on mitigating systemic risk. This has led to widespread adoption of the G20’s global central clearing obligations.
The letter said: “The G20 commitments are at odds with the impact of the liquidity ratio for general clearing members and their clients, mainly as a result of the ‘one-size-fits-all’ approach for exchange-traded derivatives and OTC derivative products.”
If BCBS stick to the current CEM, this is likely to prompt more general clearing members to exit the exchange-traded derivatives space.
The letter urged BCBS to “address the unintended consequences and shortcomings of the CEM methodology for CCP exposures by allowing the SA-CCR method as a replacement for CEM in the leverage calculation for ETD exposure,” adding that the latter method provides more adequate differentiation between margined and un-margined trades, plus more recognition of netting benefits and more transparency.
It also asked BCBS to conduct more analysis in to the proportionality of the leverage ratio requirements, and to adopt a more tailored approach to different institutions and business models, saying this “would contribute to a better application and effectiveness of the LR requirements.”
