The G20 group of major economies endorsed the Basel III and liquidity requirements at their November 2010 Summit in Seoul to address perceived weaknesses in the banking system following the credit crisis. The Basel III framework contains both micro and macro prudential elements. According to the Basel Committee on Banking Supervision (BCBS), the Basel III proposals have two main objectives:

• Strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector;
• Improve the banking sector’s ability to absorb shocks arising from financial and economic stress.

To achieve these objectives the proposals cover three main areas addressing:

• Improvements to both the quality and quantity of regulatory capital, more conservative calculation of Risk Weighted Assets (RWA) and the introduction of a leverage ratio, capital conservation buffer and a counter-cyclical capital buffer;
• Liquidity reform covering both short term and long term ratios; and
• Other elements relating to general improvements to the stability of the financial system.

ISDA and the industry are actively engaging with the BCBS and its working groups on many areas which we believe need further development. The principal areas are:

• The Fundamental Review of the Trading Book,  including the Trading Book/Banking Book boundary;
• Credit Value Adjustment (CVA) and Debt Value Adjustment (DVA) rules covering counterparty credit risk; and
• Proposed rules concerning Central Counterparties (CCP).

A great deal of this work occurs in working groups co ordinated by ISDA’s Risk and Research Department

• Counterparty Credit Risk Working Group (CRWG)
• Counterparty Market Risk Working Group (MRWG)
• Fundamental Review Group

For more information about Basel III, contact Peter Sime, psime@isda.org.