Shearman & Sterling LLP | Financial Regulatory Developments Focus | Basel Committee on Banking Supervision Consults on Leverage Ratio Treatment of Client-Cleared Derivatives
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  • Basel Committee on Banking Supervision Consults on Leverage Ratio Treatment of Client-Cleared Derivatives
    The Basel Committee on Banking Supervision has published a consultation paper entitled "Leverage ratio treatment of client-cleared derivatives," seeking views from stakeholders on whether a targeted and limited revision of the leverage ratio exposure measure is warranted with respect to the treatment of client cleared derivatives.

    On the publication of the finalized Basel III framework in December 2017, the Basel Committee stated that it would continue to monitor the impact of the Basel III leverage ratio’s treatment of client-cleared derivative transactions. It confirmed that it would review the impact of the leverage ratio on banks’ provision of clearing services and any consequent impact on the resilience of central counterparty clearing. The Basel Committee has completed its review and is of the view that only a strong evidence-based case would justify making revisions to the current leverage ratio treatment of client cleared derivatives.

    In the consultation paper, the Basel Committee invites stakeholders to consider two possible options for revision: (i) a treatment that would allow amounts of cash and non-cash initial margin received from a client to offset the potential future exposure of derivatives centrally cleared on the client’s behalf; and (ii) a treatment that would align the treatment of client-cleared derivatives with the measurement as determined per the standardized approach to measuring counterparty credit risk exposures for risk-based capital requirements. The consultation paper includes drafts of the revisions that would be made to the leverage ratio standard to effect these changes.

    Additionally, the Basel Committee seeks views on the merit of requiring that any forms of initial margin to be made eligible for offsetting client cleared derivative exposures should be made subject to segregation criteria so that those amounts would be available in the event of a client’s default.

    Comments on the consultation are invited by January 16, 2019. The Basel Committee intends to publish its conclusions once it has reviewed the consultation responses.

    View the consultation.

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