Washington, D.C., January 16, 2024 – SIFMA AMG today submitted a comment letter to the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation on proposed modifications to the regulatory capital requirements within the Basel III Proposal and on proposed adjustments to the calculation of the capital surcharge for U.S. global systemically important bank holding companies in the GSIB Surcharge Proposal. Specifically, SIFMA AMG shared concerns about the potential far-reaching and adverse effects that the proposals may have on investors with respect to pricing, transaction costs, and market liquidity.

“SIFMA AMG members support measures to ensure the resiliency and stability of the U.S. financial markets as they execute investment and hedging strategies in support of client goals including saving for college, buying a home and planning for retirement,” SIFMA AMG commented. “We are gravely concerned the impacts are disproportionate to the potential risk being addressed, will erode the capacity for individual investors to achieve desired outcomes, and will seriously compromise the ability to hedge risks – and thereby create the unintended consequence of a much more systemically risky environment within the U.S. capital markets.”

SIFMA AMG encourages the agencies to consider revisions to the proposals, especially where certain aspects may frustrate broader goals related to systemic risk.  The letter identifies seven specific issues in the proposals that are most relevant to these concerns. Specifically, investment funds and their institutional and retail clients will be harmed through:

• The limitation of preferential risk weights to investment grade corporate exposures to entities with publicly traded securities, which may limit access to liquidity and the ability to hedge risk.
• The proposed minimum haircut floors for SFTs which will likely reduce the provision of securities lending by imposing significantly higher capital requirements on in-scope SFTs unless such institutions satisfy the minimum haircut floors.
• The new and increased capital requirements for credit valuation adjustment (CVA) risk, which would increase hedging costs.
• The proposed capital requirements for operational risk which could increase costs of bank custody and other financial services used by investment funds.
• The increased bid-ask spreads and reduced liquidity of traded securities arising from the Fundamental Review of the Trading Book.
• The proposed treatment of equity exposures to unconsolidated financial institutions, which would increase the costs of seed investments and other investments permitted under the Volcker Rule.
• The GSIB Surcharge Proposal’s treatment of holdings of ETFs by banking organizations as a systemically risky activity, thereby reducing the liquidity of ETFs, curtailing a key process by which ETFs trade, and compromising their fundamental value.

The preceding conflicts would negatively impact the ability for investors to reach their investment targets or mitigate risks in their portfolios as liquidity providers would abandon products or markets that are no longer viable under the proposals. Given this, SIFMA AMG believes any potential benefit from the proposal would be outweighed by the significant downside risk to the investing public.

The full comment letter expands on these issues in more detail and can be found here.

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SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

SIFMA’s Asset Management Group (SIFMA AMG) brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms – both independent and broker-dealer affiliated – whose combined assets under management exceed $62 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.