FIA and ISDA bolster argument against cleared swap surcharge with additional information

22 November 2017

On Nov. 22, FIA and ISDA filed a joint supplemental response with the Federal Reserve to support their opposition to proposed changes to the capital surcharge imposed on U.S. banking organizations that are determined to be "global systemically important banking organizations."

The proposed changes would affect the treatment of client-cleared over-the-counter derivatives transactions by bringing them into the capital surcharge calculation. In an Oct. 11 letter, the two associations estimated that the proposed changes would increase the surcharge on the G-SIBs by more than $10 billion and expressed "serious concerns" with the potential harm to client clearing.

In the Nov. 22 letter, the two associations sought to bolster their argument by providing more information to the Fed. In particular, the letter described the recent growth in client clearing; set forth data demonstrating the predominance of the agency clearing model [in the U.S.]; and explained how client clearing differs from “house” trading in cleared OTC derivatives.

"As we discussed in our October 11, 2017 letter, the proposal would treat derivatives clearing…as equivalent to entering into bilateral derivatives, which would be an overly blunt way of measuring systemic risk that would not recognize meaningful differences between those activities," the two associations said.

"The proposal would substantially and unnecessarily increase the capital requirements attributable to client clearing for OTC derivatives, and thereby undermine U.S. banking organizations’ incentives to engage in client clearing. As a result, the proposal is counter to the post-crisis policy goals of incentivizing central clearing and ensuring that capital standards do not unnecessarily discourage or penalize central clearing."

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