SIFMA testifies on legislative proposals regarding derivatives
15 February 2018 Washington DC
Image: Shutterstock
The Securities Industry and Financial Markets Association (SIFMA) has testified to the US House of Representatives Committee on Financial Services Subcommittee on areas that could make regulations more risk-sensitive, less complex and clearer.
The testimony, titled “Legislative Proposals Regarding Derivatives” took place on 14 February.
Kenneth Bentsen, SIFMA president and CEO, expressed the association’s concern that some of the regulations adopted as part of the Dodd-Frank reforms, in the wake of the global financial crisis, go beyond what is necessary to achieve core risk mitigation and transparency objectives.
Bentsen also stated that Dodd-Frank could impose undue costs on beneficial risk management activities by financial institutions and their end-user customers.
Key elements of his testimony focused on the damage caused to US financial services
activity by excessive capital and collateral requirements and the challenges risk-insensitive margin requirements and supplemental leverage ratios (SLR’s) could bring.
Bentsen suggested that some SIFMA members, which are subject to inter-affiliate initial margin requirements, report that they are locking up as much—and sometimes more—collateral for risk-reducing inter-affiliate transactions than they are collecting from third parties.
“Such risk-insensitive margin requirements discourage prudent risk management
strategies and make it more challenging for the affected firms to provide cost-effective
hedging solutions for end-user customers. Regulatory capital requirements should be based on the principle that taking greater risk requires greater capital”, Bentsen stated.
Bentsen also discussed that supplemental leverage ratios (SLRs), are becoming “the binding capital measures for many banking organisations, and the standardised risk-based capital requirements do not permit sufficient use of more risk-sensitive methodologies”.
As a result, the amount of required capital is increasingly unrelated to the level of risk taken,
which he said “defeats the principle of correlation between risk and capital and could lead to insufficient or excess capital levels”.
Another area that he identified as particularly problematic is the SLR’s treatment of centrally
cleared derivatives.
He stated that because the SLR’s approach to client clearing requires clearing firms to hold capital against these exposures far in excess of the risks they face, it discourages client clearing activity.
Bentsen stated that this incentive “runs directly counter to the Dodd-Frank Act’s mandates to promote central clearing”, as it would deduct any client-provided initial margin on centrally cleared derivatives from the amount of leverage exposure for the firm clearing the swap, and requires the banking regulators to amend their leverage-based capital rules to reflect this change.
Bentsen affirmed: “Targeted fixes to these regulations can help promote US competitiveness, job creation and economic growth, without undermining the increased safety and stability brought about by the reforms.”
He added: “SIFMA and its members are pleased to see that policymakers across the globe are now evaluating these issues as they take stock of recent derivatives reforms.”
The testimony, titled “Legislative Proposals Regarding Derivatives” took place on 14 February.
Kenneth Bentsen, SIFMA president and CEO, expressed the association’s concern that some of the regulations adopted as part of the Dodd-Frank reforms, in the wake of the global financial crisis, go beyond what is necessary to achieve core risk mitigation and transparency objectives.
Bentsen also stated that Dodd-Frank could impose undue costs on beneficial risk management activities by financial institutions and their end-user customers.
Key elements of his testimony focused on the damage caused to US financial services
activity by excessive capital and collateral requirements and the challenges risk-insensitive margin requirements and supplemental leverage ratios (SLR’s) could bring.
Bentsen suggested that some SIFMA members, which are subject to inter-affiliate initial margin requirements, report that they are locking up as much—and sometimes more—collateral for risk-reducing inter-affiliate transactions than they are collecting from third parties.
“Such risk-insensitive margin requirements discourage prudent risk management
strategies and make it more challenging for the affected firms to provide cost-effective
hedging solutions for end-user customers. Regulatory capital requirements should be based on the principle that taking greater risk requires greater capital”, Bentsen stated.
Bentsen also discussed that supplemental leverage ratios (SLRs), are becoming “the binding capital measures for many banking organisations, and the standardised risk-based capital requirements do not permit sufficient use of more risk-sensitive methodologies”.
As a result, the amount of required capital is increasingly unrelated to the level of risk taken,
which he said “defeats the principle of correlation between risk and capital and could lead to insufficient or excess capital levels”.
Another area that he identified as particularly problematic is the SLR’s treatment of centrally
cleared derivatives.
He stated that because the SLR’s approach to client clearing requires clearing firms to hold capital against these exposures far in excess of the risks they face, it discourages client clearing activity.
Bentsen stated that this incentive “runs directly counter to the Dodd-Frank Act’s mandates to promote central clearing”, as it would deduct any client-provided initial margin on centrally cleared derivatives from the amount of leverage exposure for the firm clearing the swap, and requires the banking regulators to amend their leverage-based capital rules to reflect this change.
Bentsen affirmed: “Targeted fixes to these regulations can help promote US competitiveness, job creation and economic growth, without undermining the increased safety and stability brought about by the reforms.”
He added: “SIFMA and its members are pleased to see that policymakers across the globe are now evaluating these issues as they take stock of recent derivatives reforms.”
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