SLR and SCCL changes on the horizon, says BNY Mellon
01 December 2017 New York
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Adjustments are expected on the Supplemental Leverage Ratio (SLR) and Single Counterparty Credit Limits (SCCL) in the near future, following industry concerns.
Questions around the future of the securities lending regulatory landscape dominated the BNY Mellon Markets’ Securities Finance Regulatory Update webinar, held in New York on 24 October.
The SLR remains in contention as the US Treasury is to set SLR at 5 percent of Tier One capital, while the Basel Committee has recommended 3 percent.
In the case of insured depository institutions, the target level would be 6 percent.
The recommendations were designed as a backup capital measure to ensure banks do not take on an undue risk that was not captured by the risk-based capital rules.
The problem with the current implementation is that puts US banks at a competitive disadvantage against overseas rivals that are only obliged to hold half as much capital against the same risk positions.
Therefore, market participants have urged banking supervisors to revise the SLR and provide exemptions for certain low-risk activities—from holding Treasuries on the balance sheet to placing cash on deposit at central banks—that are currently included as assets in the denominator of the ratio.
Eli Peterson, managing director at BNY Mellon’s office of public policy and regulatory affairs, said: “We expect that the Fed will undertake a review. We know that they’re already working on sort of a fundamental review of the supplementary leverage ratio.”
Peterson added: “We really do believe that the Fed, in conjunction with the other banking agencies, is likely to propose some changes to the SLR over the next few quarters.”
The Treasury also plans to place a limit on credit exposure one bank could have to another.
As it stands now, globally systemically important banks (G-SIBs) will be prohibited from having a direct counterparty exposure to another G-SIB in excess of 15 percent of that entity’s Tier One capital.
The regulation is yet to be finalised but the securities financing sector has already called for change.
The biggest concern is the methodology used to calculate securities finance exposures overstates the actual risk in lending transactions between G-SIBs.
The securities lending sector is in favour of the Basel Committee’s new calculation method, which proposes an alternative method for calculating securities finance exposures.
The revised calculation way is expected to be adopted as a standard in the US jurisdiction in the near future.
Michael McAuley, global head of product and strategy for BNY Mellon’s securities finance business, said: “Without the revised calculation methodology, [SCCL] could have a significant impact on agent lenders’ ability to provide indemnification.”
“So we’re hoping that when the large exposure limitations are finalised, they include the revised calculation that is really closer to reflecting the true risk in securities lending transactions.”
Questions around the future of the securities lending regulatory landscape dominated the BNY Mellon Markets’ Securities Finance Regulatory Update webinar, held in New York on 24 October.
The SLR remains in contention as the US Treasury is to set SLR at 5 percent of Tier One capital, while the Basel Committee has recommended 3 percent.
In the case of insured depository institutions, the target level would be 6 percent.
The recommendations were designed as a backup capital measure to ensure banks do not take on an undue risk that was not captured by the risk-based capital rules.
The problem with the current implementation is that puts US banks at a competitive disadvantage against overseas rivals that are only obliged to hold half as much capital against the same risk positions.
Therefore, market participants have urged banking supervisors to revise the SLR and provide exemptions for certain low-risk activities—from holding Treasuries on the balance sheet to placing cash on deposit at central banks—that are currently included as assets in the denominator of the ratio.
Eli Peterson, managing director at BNY Mellon’s office of public policy and regulatory affairs, said: “We expect that the Fed will undertake a review. We know that they’re already working on sort of a fundamental review of the supplementary leverage ratio.”
Peterson added: “We really do believe that the Fed, in conjunction with the other banking agencies, is likely to propose some changes to the SLR over the next few quarters.”
The Treasury also plans to place a limit on credit exposure one bank could have to another.
As it stands now, globally systemically important banks (G-SIBs) will be prohibited from having a direct counterparty exposure to another G-SIB in excess of 15 percent of that entity’s Tier One capital.
The regulation is yet to be finalised but the securities financing sector has already called for change.
The biggest concern is the methodology used to calculate securities finance exposures overstates the actual risk in lending transactions between G-SIBs.
The securities lending sector is in favour of the Basel Committee’s new calculation method, which proposes an alternative method for calculating securities finance exposures.
The revised calculation way is expected to be adopted as a standard in the US jurisdiction in the near future.
Michael McAuley, global head of product and strategy for BNY Mellon’s securities finance business, said: “Without the revised calculation methodology, [SCCL] could have a significant impact on agent lenders’ ability to provide indemnification.”
“So we’re hoping that when the large exposure limitations are finalised, they include the revised calculation that is really closer to reflecting the true risk in securities lending transactions.”
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