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

Creating Value - IQ June 2025

Ever since its establishment 40 years ago, ISDA has worked to enhance the safety and efficiency of derivatives markets. That has motivated everything we do – from the development of standard documentation and the rollout of new digital solutions to...

Paper on EC’s Sustainability Omnibus Proposal

On June 9, ISDA published a position paper setting out its views on the European Commission’s (EC) Sustainability Omnibus Package. In the paper, ISDA urges European authorities to: Ensure a proportionate, harmonized and symmetrical approach to the use of derivatives...

Bulk Adherence Upload Page

Please download the attached Excel worksheet and fill out a separate row for each adherence. Then select and upload your completed file using the buttons below. If any errors are found, please correct and re-upload. Please allow the process time...