Disruption Response – IQ May 2024

People are full of contradictions, but the impact of proposed US capital rules on central clearing is a particularly blatant example. On the one hand, central clearing of derivatives is widely acclaimed by policymakers for reducing risk and increasing the resilience of financial markets. On the other, US prudential regulators apparently see it as so risky that the provision of client clearing by banks warrants an 80% increase in capital, a move that would reduce capacity and increase costs.

This contradiction was a frequent point of discussion at the ISDA Annual General Meeting (AGM) in Tokyo in April, including by US Commodity Futures Trading Commission chair Rostin Behnam, who raised concerns about the impact of the proposed capital rules on clearing during his keynote interview.  “We want to incentivise clearing – we want folks to understand the benefits of it and not create unnecessary costs that would disincentivise clearing,” he said.

According to an industry impact study conducted by ISDA and the Securities Industry and Financial Markets Association, the US Basel III proposals would increase market risk capital for US global systemically important banks (G-SIBs) by between 73% and 101%, depending on the extent to which banks use internal models. However, an ISDA survey suggests the use of internal models is likely to radically shrink due to the complexity of the new trading book requirements – a move described by Jacques Vigner, chief strategic oversight officer for global markets at BNP Paribas, as a return to the “stone age of risk management”.

This means the capital impact will likely be closer to a 101% increase, creating capacity constraints for US G-SIBs and raising financing and hedging costs for end users. “We should recognise that impeding banks’ ability to make markets and particularly to make markets in stress can come with certain negative consequences,” said Brad Tully, managing director and global head of corporate derivatives and private side sales at JP Morgan.

This issue of IQ looks back at some of the talking points that dominated the AGM. We’d like to take this opportunity to thank our sponsors, speakers and all those who made the trip to Tokyo – we hope you enjoyed it as much as we did.

Click on the attached PDF to read IQ in full.

Documents (1) for Disruption Response – IQ May 2024

Response to FCA on CFI Codes for Transparency

On March 19, ISDA responded to Chapter 3 of the UK Financial Conduct Authority’s (FCA) Quarterly Consultation CP26/8 on transparency requirements for financial instruments under Market Conduct Sourcebook (MAR) 11. Sections 3.11-3.13 of the consultation paper explain a discrepancy between...

Why We Need Safe and Efficient SFT Markets

Securities financing transactions (SFTs) play a vital role in fostering liquidity, mobilizing collateral and supporting the smooth functioning of derivatives markets. But during periods of stress, secured funding markets often come under pressure just when they’re needed most, with reduced...

Response to BoE on Clearing Exemption for PTRR

On March 11, ISDA submitted a response to the Bank of England’s consultation on a proposed approach to exempting post-trade risk reduction (PTRR) transactions from the derivatives clearing obligation under Article 4 of the European Market Infrastructure Regulation (EMIR). ISDA...

IQ Interview with David Bailey

The Bank of England’s Prudential Regulation Authority recently finalized its Basel 3.1 framework for implementation at the start of 2027. David Bailey, executive director for prudential policy, talks to IQ about the importance of global consistency and the need to...