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

Strengthening DC Governance

The Credit Derivatives Determinations Committees (DCs) play a vital role. Without a single, industry-wide determination on whether a credit event has occurred, it simply wouldn’t be possible to clear credit default swaps (CDS), making the market less safe and less...

ISDA CSA Significant Errors Notification SOP

The ISDA CSA Notification of Significant Error or Omissions Suggested Operational Practices (SOP) considers current institutional processes and outlines suggested operational practices related to the new requirement under §26.3(2) of the Canadian Trade Repositories and Derivatives Data Reporting rules rewrite...

ISDA Paper on UPI Identifiers

On July 16, ISDA submitted a paper (UPI as the Foundation for OTC Derivatives Reporting: The Case for UPI) to the UK Financial Conduct Authority (FCA). The paper was developed to complement ISDA’s response to the FCA’s discussion paper DP24/2:...

IRD Trading Activity First Quarter of 2025

This report analyzes interest rate derivatives (IRD) trading activity reported in Europe. The analysis is based on transactions publicly reported by 30 European approved publication arrangements (APAs) and trading venues (TVs). Key highlights for the first quarter of 2025 include:...