BCBS seeks views on leverage ratio treatment of client cleared derivatives
19 October 2018 Basel
Image: Shutterstock
The Basel Committee on Banking Supervision (BCBS) has called for stakeholder views on the leverage ratio treatment of client cleared derivatives under Basel III.
The call comes alongside a consultative document, which considers opportunities to prevent excessive leverage, improve the quality and quantity of capital in the banking system, and promote central clearing of standardised derivatives contracts.
The leverage ratio complements the risk-based capital requirements by providing a safeguard against unsustainable levels of leverage and by mitigating gaming and model risk across both internal models and standardised risk measurement approaches.
As part of the finalised Basel III reforms published in December 2017, the Committee noted that it would conduct a review of the leverage ratio's impact on banks' provision of derivatives client clearing services and any consequent impact on the resilience of central counterparty clearing.
BCBS has opened its review seeking the opinion of stakeholders on whether a targeted and limited revision of the leverage ratio's treatment of client cleared derivatives may be warranted.
Stakeholders are invited to provide “concrete and robust empirical evidence” to support their views.
The committee said it may consider a range of treatments, including no change to the current treatment and an amendment to the treatment of client cleared derivatives to allow cash and non-cash initial margin received from a client to offset the potential future exposure of client cleared derivatives.
The committee might also consider the alignment of the treatment of client cleared derivatives with the standardised approach for measuring counterparty credit risk exposures.
BCBS said this would have the effect of allowing both cash and non-cash forms of initial margin and variation margin received from a client to offset the replacement cost and potential future exposure amounts of client cleared derivatives.
The call comes alongside a consultative document, which considers opportunities to prevent excessive leverage, improve the quality and quantity of capital in the banking system, and promote central clearing of standardised derivatives contracts.
The leverage ratio complements the risk-based capital requirements by providing a safeguard against unsustainable levels of leverage and by mitigating gaming and model risk across both internal models and standardised risk measurement approaches.
As part of the finalised Basel III reforms published in December 2017, the Committee noted that it would conduct a review of the leverage ratio's impact on banks' provision of derivatives client clearing services and any consequent impact on the resilience of central counterparty clearing.
BCBS has opened its review seeking the opinion of stakeholders on whether a targeted and limited revision of the leverage ratio's treatment of client cleared derivatives may be warranted.
Stakeholders are invited to provide “concrete and robust empirical evidence” to support their views.
The committee said it may consider a range of treatments, including no change to the current treatment and an amendment to the treatment of client cleared derivatives to allow cash and non-cash initial margin received from a client to offset the potential future exposure of client cleared derivatives.
The committee might also consider the alignment of the treatment of client cleared derivatives with the standardised approach for measuring counterparty credit risk exposures.
BCBS said this would have the effect of allowing both cash and non-cash forms of initial margin and variation margin received from a client to offset the replacement cost and potential future exposure amounts of client cleared derivatives.
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