International Swaps and Derivatives Association says revised US Basel III endgame proposal cuts projected FRTB capital increase but needs targeted fixes

The International Swaps and Derivatives Association has published a response to the US Basel III endgame consultation alongside updated quantitative analysis of the revised proposal. Based on input from the eight US global systemically important banks, ISDA said the market risk treatment has improved materially since the original draft, with the projected increase in capital under the Fundamental Review of the Trading Book falling to 89% from 101% under the standardized approach and to 30% from 73% under the internal models approach. ISDA said the revised package is more risk sensitive and makes internal models more viable, but argued that several elements still overstate risk. Its main concern is cross-product netting under the standardized approach for counterparty credit risk, where the proposal recognizes offsets across derivatives and repos but uses a conservative methodology that, in ISDA's view, would overstate capital requirements. ISDA recommended a hedge coverage ratio to calibrate netting benefits according to how effectively repos hedge derivatives. It also called for changes to the FRTB default risk charge, which it said overstates the risk of short-dated equity derivatives used to hedge longer-dated equity exposures, and to the credit valuation adjustment capital requirement so it distinguishes between regulated and non-regulated financial counterparties. With US policymakers moving toward a final Basel III endgame rule, ISDA said these remaining issues should be addressed in the final framework to improve alignment between capital requirements and economic risk.