Basel Committee proposes changes to leverage ratio

6 April 2016

On April 6, the Basel Committee on Banking Supervision released a consultation paper that seeks comment on several potential changes to the Basel III leverage ratio framework, including changes to the treatment of derivatives exposures.

The Basel Committee also acknowledged that market participants have expressed concern that the treatment of client initial margin for cleared trades will adversely impact the availability of client clearing, and announced that it will seek "further evidence and data" on the impact of the leverage ratio on client clearing and on the business models of clearing firms.

Comments must be submitted by July 6 and the proposed changes are expected to be finalized by the end of 2016.

One of the proposed changes to the leverage ratio framework would affect the measurement of counterparty credit risk in derivatives trades. The Basel Committee proposed using a modified version of the "standardized approach for measuring counterparty credit risk exposures" (SA-CCR) rather than the existing "current exposure method" (CEM). As proposed, this approach would not allow offsets from initial margin posted by clients, as FIA and other market participants have requested. The Basel Committee said, however, that it is “carefully considering” the concern about the impact on client clearing and indicated that it may consider whether to permit offsetting based on the data it gathers from the consultation.

"The Committee has decided that further evidence and data on the impact of the Basel III leverage ratio on client clearing and on CMs’ [clearing members'] business models should be collected during the consultation period, in light of the G20 mandate for central clearing," the Basel Committee said.

"The Committee will consider both the effects of the Basel III leverage ratio on the client clearing business model and the need for banks to have adequate capital to support their clearing activities in deciding whether to expand upon the measures described above, which may include permitting offsetting of a CM’s PFE [potential future exposure] with the IM [initial margin] posted by clients on whose behalf it clears derivative transactions."

Additionally, the Basel Committee highlighted that the SA-CCR approach uses a shorter margin period of risk for calculating the potential future exposure of cleared trades, a key element in the leverage ratio framework. The Basel Committee said that data it has collected on client clearing showed that this shorter time horizon would result in a "significant decrease" in the calculation of potential future exposure. "This approach can be viewed as internally consistent with the Basel III leverage ratio framework's principles and at the same time providing incentives to support the use of central clearing," the Basel Committee stated.

The Basel Committee’s announcement can be found here.

FIA issued a press release shortly after the consultation was published welcoming the Basel Committee’s decision to consider revisions to the leverage ratio but expressing its disappointment that the SA-CCR approach, as proposed, would not permit offsets from client margin.

“It’s critical that we get the calculation for the leverage ratio right,” Walt Lukken, president and CEO of FIA, said in the press release. “The leverage ratio should not stand in the way of the G-20’s goal of reducing systemic risk through greater adoption of central clearing.”

The FIA press release can be found here.

Call to Action:

FIA will be submitting comments to the Basel Committee by the July 6 deadline, with particular focus on the Committee’s call for "further evidence and data." It is critical to demonstrate how capital requirements impact client clearing and on the business models of clearing firms. FIA members wishing to contribute to this effort contact Jackie Mesa, Washington, D.C; Mitja Siraj, London; or Phuong Trinh, Singapore.

  • FIA
  • Capital
  • Clearing