The Basel leverage ratio fundamentally threatens the business model of clearing members and will endanger the stability of the global financial markets, according to a joint industry comment letter.
Thirty signatories, representing exchanges, clearinghouses and other market participants, including ABN AMRO Clearing Bank, Eurex, the Options Clearing Corporation and Nasdaq, issued a joint response to the Basel Committee on Banking Supervision’s (BCBS) latest draft of the leverage ratio framework to highlight their concerns that further work is needed to minimise market disruption.
The letter’s signatories took particular issue with the current exposure method (CEM), arguing that the standardised approach for counterparty credit risk (SA-CCR) offers a better alternative to calculating leverage for exchange-traded derivative (ETD) exposures.
“[With the CEM], the application of the leverage ratio will result in vastly increased capital requirements for general clearing members offering clearing services to market makers and liquidity providers,” the letter stated.
“The leverage ratio does not take the different characteristics and risks of ETD and OTC instruments into account. For ETD, we believe that a different treatment compared to over-the-counter derivatives would be warranted recognising the applicable netting rules and CCP clearing processes.”
The letter also drew attention to a number of unintended consequences that the current leverage ratio framework threatens to impose on the affected industries.
“We note that a number of GCMs have already ceased their operations while others are re-assessing their business models. Data from the US Commodity Futures Trading Commission shows a steady decrease in the number of FCMs, while at the same time the number of total cleared client assets has increased significantly driven by new clearing mandates since 2009,” the letter stated.
“We fear that a further reduction of GCMs will result in an undesirable lack of choice for end-users and decrease available (global) balance sheet capacity for clearing of derivatives transactions, including those that are anticipated to become subject to mandatory clearing.”
The letter was issued in response to the BCBS consultation on revisions to the Basel III leverage ratio framework, which was issued in April. The BCBS hopes to complete the review by the end of the year.
