International Swaps and Derivatives Association calls for revisions to the US Basel III endgame after analysis shows a USD 7.2 billion capital increase for six G-SIB client clearing businesses

The International Swaps and Derivatives Association (ISDA) published a CEO commentary urging US regulators to comprehensively recalibrate the proposed Basel III “endgame” capital rules to avoid undermining market liquidity and banks’ ability to provide intermediation, hedging and client clearing services. ISDA reiterated recommendations it submitted to US regulators based on a quantitative impact assessment, including greater recognition of diversification in the market risk framework and changes to aspects of the credit valuation adjustment and securities financing transaction rules. It also argued that capital requirements should be assessed holistically across interacting measures, pointing to its analysis that the proposed US Basel III rules and the global systemically important bank (G-SIB) capital surcharge would raise capital requirements for six US G-SIB client clearing businesses by USD 7.2 billion, or more than 80%, potentially disincentivizing central clearing. Additional issues highlighted included the lack of cross-product netting recognition for US Treasury security and interest rate futures transactions under the standardized approach for counterparty credit risk, and the supplementary leverage ratio (SLR) acting as a non-risk-sensitive constraint that can impede intermediation and client clearing. ISDA argued regulators could begin work on the SLR, cross-product netting and the G-SIB surcharge before the Basel III endgame is finalized, and framed this as increasingly pressing given the US Securities and Exchange Commission is due to introduce mandatory clearing in the US Treasury market from the end of this year.