Leverage Ratio Treatment of Client Cleared Derivatives
Summary
SIFMA AMG and Managed Funds Association responded to the Basel Committee’s consultative document on the leverage ratio treatment of client cleared derivatives. SIFMA AMG members, on behalf of their clients, and MFA members use futures and cleared swaps, as well as other derivatives, for a range of purposes, including as a means to manage or hedge investment risks such as changes in interest rates, exchange rates, and commodity prices.
We support the adoption of a targeted and limited revision of the leverage ratio to recognize the effect of initial margin provided by a client in a client cleared derivative transaction in reducing the exposure of the bank acting as clearing member.
Excerpt
Basel Committee on Banking Supervision
Bank for International Settlements
Centralbahnplatz 2
CH-4002 Basel
Switzerland
Re: Response to Consultative Document: Leverage Ratio Treatment of Client Cleared Derivatives (BCBS d451)
Dear Sirs and Madams:
The Securities Industry and Financial Markets Association’s Asset Management Group (“SIFMA AMG”) and Managed Funds Association (“MFA”)1 write to respond to the Basel Committee’s consultative document on the leverage ratio treatment of client cleared derivatives (the “Consultation”).2 SIFMA AMG members, on behalf of their clients, and MFA members use futures and cleared swaps, as well as other derivatives, for a range of purposes, including as a means to manage or hedge investment risks such as changes in interest rates, exchange rates, and commodity prices. We support the adoption of a targeted and limited revision of the leverage ratio to recognize the effect of initial margin provided by a client in a client cleared derivative transaction in reducing the exposure of the bank acting as clearing member.
Central clearing of derivatives is intended to reduce counterparty risk, promote market stability, and enhance transparency. However, since its adoption in 2014, the leverage ratio has significantly impaired the full realization of these benefits by reducing market liquidity, imposing barriers to access clearing, and increasing systemic risk. Data provided in this letter shows that SIFMA AMG member clients have experienced reduced access to clearing services and higher clearing fees resulting from the implementation of the leverage ratio. We also have serious concerns that in the event of market-wide stress, the leverage ratio would significantly disincentivize banks from acquiring a failing clearing member’s book of client positions through a “port,” which would leave clients exposed and without access to clearing services.