The International Swaps and Derivatives Association (ISDA) published welcoming remarks by chief executive Scott O’Malia calling for the US Basel III ‘endgame’ proposals to be redrafted to improve risk sensitivity and avoid disproportionate cost increases that, in ISDA’s view, would constrain bank intermediation and weaken market liquidity. The remarks also stressed that the prudential framework should be assessed alongside other market reforms, including expanded clearing requirements in the US Treasury market. ISDA reiterated prior calibration recommendations informed by its industry impact work, including greater recognition of diversification in the market risk framework, targeted changes for securities financing transactions, and adjustments to the credit valuation adjustment (CVA) risk framework such as exempting the client clearing leg of a cleared derivatives transaction from CVA capital. It highlighted a sharper-than-expected retreat from internal models under the FRTB market risk framework, citing an ISDA study in which only 10 of 26 global banks planned to use internal models for a significantly reduced scope of trading desks, raising concerns about reliance on standardized approaches and potential concentration and herd effects. On clearing, ISDA pointed to a quantitative impact study estimating that the combined effect of the Basel III endgame and the global systemically important bank (G-SIB) capital surcharge would increase capital for US G-SIB client clearing businesses by USD 7.2 billion, more than 80%, and argued this could conflict with policy objectives to promote central clearing. The remarks linked these capital concerns to the Securities and Exchange Commission’s US Treasury market reforms, which include mandatory clearing of certain cash Treasury securities from the end of this year and repos in mid-2026, and called for improved recognition of cross-product netting for US Treasury and interest rate futures exposures. ISDA also urged changes to the supplementary leverage ratio (SLR), including reintroducing on a permanent basis the exclusion of US Treasury securities that was applied temporarily in April 2020, and said it would welcome an industry consultation on the best way to adjust the SLR.
ISDA 2025-02-05
International Swaps and Derivatives Association urges recalibration of the US Basel III endgame to avoid an 80% capital increase for client clearing
The International Swaps and Derivatives Association (ISDA) called for a redraft of US Basel III 'endgame' proposals to improve risk sensitivity and avoid cost increases that could impede bank intermediation and market liquidity. ISDA expressed concerns about moving away from internal models under the Fundamental Review of the Trading Book (FRTB) and the impact of higher capital requirements on US global systemically important bank (G-SIB) client clearing businesses, connecting these to the Securities and Exchange Commission's US Treasury market reforms.