In a joint comment letter, the Managed Funds Association and SIFMA AMG (collectively, the "associations") urged the Basel Committee on Banking Supervision ("BCBS") to modify the leverage ratio to align the treatment of cleared derivatives with the standardized approach for measuring counterparty risk in risk-based capital requirements.
The letter is in response to an October 2018 consultive document published by BCBS titled "Leverage Ratio Treatment of Client Cleared Derivatives." The associations criticized the current approach to cleared derivatives in the leverage ratio, arguing that it results in a bank's leverage exposure "grossly exceed[ing]" its actual economic exposure. The letter cited a series of surveys of end users noting significantly increased clearing fees. The associations asserted that the leverage ratio has been a "direct cause" of these increases. The associations noted ongoing consolidation of clearing business (stating that five bank-affiliated firms account for over 80 percent of the total client margin for cleared interest rate swaps in the U.S., UK and Japan), and argued that this concentration actually increases systemic risk. Among the three options suggested in the BCBS consultive document, the associations favored one that would allow recognition of non-cash variation margin posted by a clearing client. (A second option would have permitted client-posted margin to offset a bank's potential future exposure.)
Commentary
As previously noted, the debate over whether to change the current application of the bank leverage ratio to cleared derivatives seems to be a neverending story. The Managed Funds Association and SIFMA AMG letter does a good job of highlighting the economic and policy arguments in favor of a change. Hopefully this can (finally) be addressed by BCBS and the relevant national regulators.
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