CFTC Commissioners Urge Bank Regulators to Change to Leverage Ratio Treatment of Cleared Derivatives

Four Commissioners of the CFTC urged U.S. banking regulators to amend the calculation of the supplementary leverage ratio in order to recognize client-posted initial margin in cleared derivatives. The Commissioners’ comments came in response to a rule proposal by the banking regulators to update the calculation of derivative contract exposure amounts under the regulatory capital rules, previously covered here.

In a comment letter, CFTC Commissioners Dan Berkovitz, Rostin Behnam and Brian Quintenz said that the banking regulators (the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency) neglected to acknowledge the “risk-reducing impact” of client initial margin that the clearing member banking organization holds on behalf of clients. The Commissioners contended that a supplementary leverage ratio (“SLR”) calculation that permits initial margin to offset potential future exposures would eliminate an unnecessary impediment to banks offering client clearing services.

According to the Commissioners, the adoption of the standardized approach for counterparty credit risk (SA-CCR) without offset will:

  • “maintain or increase the clearing members’ SLRs by more than 30 basis points on average”;
  • continue to “disincentivize clearing members” from supplying clearing services; and
  • limit access to clearing in “contravention of G20 mandates and Dodd-Frank.”

Commissioner Dawn Stump recused herself from providing commentary on the proposed rule.

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