In July 2023, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation proposed capital rules known as the US Basel III ‘endgame’ based on the global minimum regulatory capital standards developed by the Basel Committee on Banking Supervision (BCBS). If finalized as currently drafted, the US Basel III proposal will have a significant negative impact on trading activity and the liquidity and vibrancy of the US capital markets, with adverse effects on derivatives end users, investors, businesses and consumers.

In response to the proposal, ISDA and the Securities Industry and Financial Markets Association (SIFMA) conducted a quantitative impact study (QIS) that showed that the market risk portion of the proposal, known as the Fundamental Review of the Trading Book, will result in a substantial increase in market risk capital of between 73% and 101%, depending on the extent to which banks use internal models. This matters because trading and capital markets activities play a crucial role in the ability of US businesses to raise funds and perform risk management functions, with debt capital markets in the US representing 75% of total financing. By requiring banks to hold additional capital that is misaligned with levels of risk, the proposal would significantly reduce capital market access for US end users and businesses, restrict the ability of businesses to hedge exposures to changes in commodity prices, and increase the cost of everyday consumer goods, including food and gasoline.

Based in Basel, Switzerland, the BCBS develops global minimum regulatory capital and liquidity standards through a multi-year process involving regulators from participating countries around the world. Given the BCBS has no enforcing powers, each jurisdiction transposes those standards into local law or regulation, as applicable. Although jurisdictions participating in the Basel process generally follow these standards, they may deviate to reflect philosophical differences and national priorities on local markets and economies. However, the US Basel III proposal would impose more stringent requirements than those embodied in the global framework in several areas.

This note summarizes key findings based on the results of the ISDA/SIFMA QIS.

Click on the attached PDF to read the full paper.