World Federation of Exchanges Suppots Revised Basel III Leverage Ratio Framework

The World Federation of Exchanges (WFE) today responded to the Basel Committee on Banking Standards (BCBS), consultative document revisions to the Basel III Leverage Ratio Framework.

The group of more than 200 market infrastructure providers said, “it support the BCBS’ careful consideration of capital issues generally, and the Leverage Ratio specifically, and recognises that it has listened to stakeholder representations.

The organization said, while the rules are designed to strengthen banking capital, they still have a knock-on effect on the wider markets that WFE members operate and clear for.

“The WFE, therefore, remains concerned around the effect of some elements of the proposal which appear contrary to wider efforts to encourage central clearing of derivatives.”

It stated that, “the WFE remains concerned about the impact of not recognising the exposure-reducing effect of client initial margin on fair, orderly and stable markets. An inappropriate application of requirements on Clearing Members will have contagion effects in many other parts of the market for whom they clear, with no clear risk benefit.”

The WFE also has significant concerns that it would become more difficult to port positions in the event of a Clearing Member default, given it is unlikely that any alternative Clearing Member will want to take on positions if the margins that accompany them have the effect of increasing their own potential future exposure and therefore capital cost.

Chief Executive Officer of WFE, Nandini Sukumar said, “The WFE and its members are committed to ensuring the trading and clearing environments they operate are secure, stable and able to withstand shocks. We believe, however, that the BCBS’ proposed revisions to the Leverage Ratio framework will result in lower liquidity on transparent central markets, leading to higher spreads, lower volumes, more volatility and greater systemic risk. This is clearly at odds with the wider G-20 mandate, for no additional risk benefit.”

Head of Regulatory Affairs, WFE, Gavin Hill, added, “As we describe in our paper, there is more than $300bn in client segregated initial margin being held at CCPs globally, with the purpose of protecting client cleared trades on each market, and which cannot be used by the Clearing Member for their own purposes. The revised framework does not take this into consideration. Our view is that it should be, and would avoid the contagion outlined above.”