Basel III Capital Proposal for Trading Activities and Counterparty Credit Risk (Joint Trades)

Summary

Excerpt

Executive Summary

The Associations appreciate the Agencies’ efforts to modernize and improve the risk sensitivity of the regulatory capital framework for large banking organizations and firms with significant trading activities. The Associations particularly support the Agencies’ principles-based consideration of the overall calibration of regulatory capital requirements, including taking into account the effects of the stress capital buffer. 3 The current proposal reflects a constructive step forward in several respects, particularly by recognizing the importance of calibration for capital markets and trading activities.

The benefits of appropriately calibrated regulatory capital requirements extend well beyond the prudential regulation of the covered firms themselves. The calibration of the regulatory capital framework directly affects the pricing, availability and structure of market intermediation, client hedging, financing and liquidity services provided by large banking organizations. Capital requirements that are more risk sensitive promote the efficient functioning of U.S. capital markets (including the market for U.S. Treasury securities), reduce costs for end users seeking to hedge or finance positions, and better support market liquidity.

To better achieve these benefits, the final rule should build on the progress reflected in the Proposal by more accurately aligning capital requirements with underlying economic risk, properly recognizing hedging and netting, and supporting prudent risk management and broader public policy objectives.

The Associations’ quantitative impact study (“QIS”) and the technical analysis set out in this letter indicate that several aspects of the Proposal would produce outcomes that are not sufficiently aligned with economic risk. The recommendations in this letter are intended to improve the Proposal’s overall risk sensitivity while preserving the safety and resilience objectives of the capital framework.