Two separate proposed rules put forward by US regulators would dramatically increase capital requirements for derivatives clearing services that banks offer to their clients, according to the Futures Industry Association (FIA).
The Association estimates that if you were to consider just the six largest US banks that offer clearing, these provisions would increase their capital requirements for client clearing by more than 80%.
Namely, the Global Systematically Investment Banks (GSIB) Surcharge Proposal’s changes to the treatment of client cleared OTC derivatives transactions would surge the required capital to engage in client clearing activities by over 58%.
The Basel III Endgame Proposal, which would apply to both GSIB and non-GSIB banks, would increase the required capital to engage in client clearing activities by over 22%, according to the FIA.
If these proposals were to come into fruition, FIA stated that the rules would make it a lot more expensive for banks to provide their clients with clearing services for futures, options and OTC derivatives.
Elsewhere, FIA argued that the proposed rules would have the unintended consequence of increasing systemic risk by reducing the capacity to move customer positions out of a clearing firm in case that firm goes bankrupt.
In a statement, FIA noted that it is “troubled by the absence of any apparent cost-benefit analysis” considering these potential negative impacts on end users and on systemic stability.
“In the wake of the 2008 financial crisis, regulators recognised the need to move more of the derivatives markets into central clearing,” said Walt Lukken, president and chief executive of FIA.
“They understood that central clearing is one of the most effective ways to make the financial system more stable and resilient when markets are in turmoil. That makes it all the more surprising that US bank regulators are ignoring one of the most important lessons of the financial crisis.”