The Global Financial Markets Association (GFMA), the Institute of International Finance (IIF), the International Swaps and Derivatives Association (ISDA), the Japan Financial Markets Council (JFMC) and The Clearing House (TCH), yesterday responded to the Basel Committee’s (BCBS) consultation on Revisions to the Basel III leverage ratio framework (Proposed Framework).
The Associations say they continue to support the BCBS’s efforts to create a simple, transparent and non-risk-based back-stop to the risk-based framework. They also commend the BCBS for consulting on various issues that improve the harmonization of the exposure measure and take into account developments elsewhere in the regulatory agenda. However, the Associations strongly encourage the BCBS to expand the scope of the review and carefully consider the way cash and unencumbered cash equivalent assets are treated in the leverage ratio.
Kenneth E Bentsen Jr, Chief Executive Officer, GFMA, commented: “Even client transactions that are designed to reduce risk will require broker-dealers to expand their balance sheets. Regulations should not impair clients’ ability to conduct risk-reducing transactions in cases where these transactions do not add risk to banks’ balance sheets. By excluding cash and cash equivalents from the exposure measure of the leverage ratio, regulators could alleviate the constraints on these important market activities, especially in distressed markets.”
“The leverage ratio is an important part of the overall Basel capital framework, and it should remain a meaningful backstop measure as originally intended,” said Tim Adams, president and CEO, IIF. “We are concerned that, unless properly designed, the Leverage Ratio may become the binding capital constraint for an increasing number of firms. It is vital that the Leverage Ratio is calibrated in a way which does not constrain efficient financing for economic growth and job creation.”
“The leverage ratio as it stands makes the economics of client clearing extremely difficult for clearing members, which runs counter to the objective set by the Group-of-20 nations to encourage central clearing. We welcome the decision by the Basel Committee to collect data to study the impact of the leverage ratio on client clearing, but we are disappointed it has not taken the opportunity to consult on the recognition of initial margin more widely,” said Scott O’Malia, ISDA’s chief executive.
“The proposed changes in credit conversion factors must be recalibrated so that they align with recent credit experience and do not severely limit the availability or cost of the associated loan commitments for retail and wholesale customers including small businesses and thereby hinder the nascent global economic recovery,” said David Wagner, executive managing director, The Clearing House.
Against these broader concerns, the Associations’ response sets out in detail the recommendations and changes that they consider necessary so that the leverage ratio framework captures real leverage without damage to functioning of financial markets. Among others, they make specific recommendations regarding the trade versus settlement date accounting proposals, cash pooling, calibration of credit conversion factors, and treatment of securitisations and derivatives.