Washington, D.C. – FIA has filed comment letters responding to US federal banking regulators' proposal to revise capital standards for Category I and II banking organizations, including the implementation of Basel III’s enhanced risk-based approach (ERBA) in the US, as well as proposed changes to the Federal Reserve’s capital surcharge for US global systemically important bank holding companies (G‑SIBs).
The revised rules, released in March, would replace the July 2023 Basel III Endgame proposal and the G-SIB Surcharge Proposal, both of which drew widespread criticism for raising capital requirements beyond those set by the Basel Committee on Banking Supervision.
FIA commends the agencies for the thoughtful and constructive revisions they have made to the earlier capital proposals.
The Basel III enhanced risk-based approach includes several meaningful improvements that would strengthen risk sensitivity and better support centrally cleared derivatives markets, including:
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Excluding client-facing derivative exposures from the Credit Valuation Adjustment framework;
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Permitting the netting of settled-to-market and collateralized-to-market derivative exposures;
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Introducing a framework for cross-product netting;
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Calculating operational risk capital charges for fee-based businesses by reference to net income, rather than gross revenues or expenses; and
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Removing the requirement that an investment-grade obligor be publicly traded to qualify for a lower risk weight.
FIA also welcomes changes to the Federal Reserve’s capital surcharge for US G-SIBs. Most notably, FIA appreciates that the proposal does not add a clearing member’s exposure arising out of its guarantee of a client’s obligation to a central counterparty to the G-SIB Surcharge's Complexity or Interconnectedness indicators.
Taken together, these changes represent important progress towards ensuring that bank capital standards do not unnecessarily discourage the central clearing of derivatives. As US banking regulators have consistently observed, prudential requirements should support, rather than undermine, the use of central clearing as a tool to reduce systemic risk.
Consistent with that objective, FIA generally supports the proposals and encourages the agencies to finalize them.
“The US prudential regulators’ proposals on bank capital appropriately recognize the important role that central clearing plays in risk management,” said Jacqueline Mesa, FIA's Chief Operating Officer and Senior Vice President of Global Policy. “This is particularly important for ensuring that end-users, including farmers, corporates and producers, can continue to access clearing services to hedge risk, even during periods of market stress.
“However, the framework should go further in recognizing the true economics of risk. In particular, capital requirements should reflect the risk offsets that exist across related positions, rather than measuring exposures on a gross basis. FIA looks forward to working with regulators as they finalize the proposals.”
In its letter on Basel III’s enhanced risk-based approach, FIA offers targeted recommendations to further improve the proposal’s coherence and risk sensitivity, while preserving its overall structure and policy objectives.
FIA’s recommendations include:
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Revising the proposed cross-product netting methodology to ensure that the risk-reducing benefits of cross-product netting are appropriately reflected in the framework;
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Clarifying that if a banking organization elects to use cross-product netting for purposes of risk-weighted assets, that election will not automatically apply to calculations under the Supplementary Leverage Ratio;
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Expanding the scope of transactions eligible for cross-product netting to include eligible margin loans and cleared house transactions;
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Refining the existing operational criteria for cleared transactions to eliminate disincentives for depository institutions to seek clearing services from an affiliate;
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Finalizing the proposed framework for reflecting cross-margining agreements in the calculation of KCCP, with revisions to the allocation methodology; and
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Clarifying that the existing 1.0 alpha factor for derivative transactions with commercial end-users will be maintained.
FIA is also seeking amendments to the Federal Reserve’s G‑SIB surcharge proposal. In particular, FIA recommends additional revisions to the FR Y‑15 reporting instructions so that derivatives exposures from cleared transactions are not counted towards the Cross-Jurisdictional Activity indicator, consistent with the proposed treatment of exposures arising from client clearing of derivatives.
In addition, FIA’s response is supportive of aspects of the proposed revisions that would not apply an alpha factor to derivatives exposures for purposes of the Interconnectedness Indicator.
Finally, FIA believes the final rule should confirm that cross-product netting is not mandatory for inclusion in relevant indicators of the G‑SIB surcharge that count derivative exposures.
Read FIA's Basel Endgame Comment Letter here and G-SIB Surcharge Comment Letter here.
