Proposed Regulatory Capital Rule: Risk-Based Capital Surcharges for GSIBs (Joint Trades)

Summary

SIFMA, the International Swaps and Derivatives Association (ISDA), and the Institute of International Finance (IIF) submitted a comment letter to the Board of Governors of the Federal Reserve System regarding its proposal to revise the risk-based capital surcharge framework for global systemically important bank holding companies (GSIBs) and related reporting requirements under the FR Y-15.

Excerpt

Executive Summary

The Associations appreciate the Federal Reserve’s intent to align the capital surcharge for U.S. global systemically important bank holding companies (the “GSIB Surcharge”) with underlying risks and to update and recalibrate the GSIB Surcharge to reflect changes in the U.S. economy. The 2026 GSIB Proposal represents an improvement relative to the 2023 proposal to update the GSIB Surcharge (the “2023 GSIB Proposal”).2 In particular, the Associations appreciate that the 2026 GSIB Proposal would not include client-cleared derivatives under the agency model in the complexity and interconnectedness categories of the GSIB Surcharge as proposed in the 2023 GSIB Proposal, which would have increased capital requirements for GSIBs as a result of providing clearing services and departed from longstanding public policy objectives.3 The Federal Reserve should promptly issue a final rule to update the GSIB Surcharge, taking into consideration the recommendations provided below.

This letter addresses only issues under the 2026 GSIB Proposal that are most directly relevant to derivatives.4 In that regard, the Associations offer the following specific recommendations to better refine the GSIB Surcharge consistent with underlying risks:

1. The Federal Reserve should reconsider its proposed approach to the treatment of derivatives exposures in the cross-jurisdictional activity indicator.
2. Averaging of notional amounts of OTC derivatives should be calculated using monthly values (and not more frequently than monthly), rather than daily values, to better reflect typical portfolio compression and risk-mitigation practices and to avoid overstating notional amounts due to transient build-ups between compression cycles.
3. Cross-jurisdictional activity claims and liabilities should be reported as the average of quarter-end values.
4. Further consideration will be required to evaluate potential changes to the size and interconnectedness indicators in respect of cross-product netting.
5. The proposed interconnectedness indicator appropriately would not include the SA-CCR alpha factor.