Rise in capital could impact vibrancy of US capital markets, says ISDA
17 January 2024 US
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The International Swaps and Derivatives Association (ISDA) warns that the increase in capital requirements for bank trading activities in the US Basel III Endgame could impact the liquidity and vibrancy of US capital markets.
ISDA submitted a response with the 网爆吃瓜 Industry and Financial Markets Association (SIFMA) on the Federal Reserve鈥檚 notice of proposed rulemaking (NPR).
The Associations note that the increase in capital bank trading activities do not reflect underlying risks and could increase costs and reduce choice for US businesses.
The introduction of the Fundamental Review of the Trading Book (FRTB) and the revised credit valuation adjustment (CVA) framework would result in a 129 per cent increase in market risk and CVA risk-weighted assets (RWAs) under the new expanded risk-based approach (ERBA) versus the current US standardised approach, says ISDA.
The Association explains that an increase of this magnitude would constrain bank balance sheets, forcing banks to scale back or withdraw from certain activities and businesses that become uneconomic.
Consequently, ISDA says this 鈥渨ill impact the availability and cost of financing, hedging and intermediary services鈥� and is likely to lead to less liquid and vibrant capital markets, negatively affecting US businesses and households and 鈥渨eighing on US economic growth鈥�.
Its response with SIFMA proposes a number of calibration changes that aim to ensure the rules are appropriate, risk sensitive and avoid adverse consequences to US capital markets.
The recommendations include a comprehensive evaluation of how the proposal would interact with other prudential requirements, particularly the stress testing framework and the G-SIB surcharge.
Additionally, ISDA notes that US agencies should make certain critical revisions to improve the recognition of diversification when calculating market risk RWAs under the ERBA, to reflect actual risk exposure and effective risk management practices.
ISDA suggests that, if material changes to the calibration cannot be achieved without further consultation, a re-proposal of the rules may be necessary.
To ensure banking organisations have sufficient time to implement the requirements, ISDA indicates that rules should become effective no earlier than 18 months from the publication of the final rule.
ISDA and SIFMA also submitted a response to a separate consultation by the US Federal Reserve on proposed changes to the G-SIB surcharge.
The response raises concerns that the revised G-SIB surcharge would lead to 鈥渋nappropriately high鈥� capital requirements for banks offering client clearing services, potentially discouraging them from participating in this business and 鈥渃ontravening a long-standing policy objective to promote central clearing鈥�.
The Association鈥檚 response argues that client derivatives transactions cleared under the agency model should not be included in the complexity and interconnectedness categories of the G-SIB surcharge calculation.
ISDA submitted a response with the 网爆吃瓜 Industry and Financial Markets Association (SIFMA) on the Federal Reserve鈥檚 notice of proposed rulemaking (NPR).
The Associations note that the increase in capital bank trading activities do not reflect underlying risks and could increase costs and reduce choice for US businesses.
The introduction of the Fundamental Review of the Trading Book (FRTB) and the revised credit valuation adjustment (CVA) framework would result in a 129 per cent increase in market risk and CVA risk-weighted assets (RWAs) under the new expanded risk-based approach (ERBA) versus the current US standardised approach, says ISDA.
The Association explains that an increase of this magnitude would constrain bank balance sheets, forcing banks to scale back or withdraw from certain activities and businesses that become uneconomic.
Consequently, ISDA says this 鈥渨ill impact the availability and cost of financing, hedging and intermediary services鈥� and is likely to lead to less liquid and vibrant capital markets, negatively affecting US businesses and households and 鈥渨eighing on US economic growth鈥�.
Its response with SIFMA proposes a number of calibration changes that aim to ensure the rules are appropriate, risk sensitive and avoid adverse consequences to US capital markets.
The recommendations include a comprehensive evaluation of how the proposal would interact with other prudential requirements, particularly the stress testing framework and the G-SIB surcharge.
Additionally, ISDA notes that US agencies should make certain critical revisions to improve the recognition of diversification when calculating market risk RWAs under the ERBA, to reflect actual risk exposure and effective risk management practices.
ISDA suggests that, if material changes to the calibration cannot be achieved without further consultation, a re-proposal of the rules may be necessary.
To ensure banking organisations have sufficient time to implement the requirements, ISDA indicates that rules should become effective no earlier than 18 months from the publication of the final rule.
ISDA and SIFMA also submitted a response to a separate consultation by the US Federal Reserve on proposed changes to the G-SIB surcharge.
The response raises concerns that the revised G-SIB surcharge would lead to 鈥渋nappropriately high鈥� capital requirements for banks offering client clearing services, potentially discouraging them from participating in this business and 鈥渃ontravening a long-standing policy objective to promote central clearing鈥�.
The Association鈥檚 response argues that client derivatives transactions cleared under the agency model should not be included in the complexity and interconnectedness categories of the G-SIB surcharge calculation.
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