22 November 2012

ISDA: EC compromise draft on capital requirements for bank exposures to CCPs in the CRR

In particular, ISDA and AFME were grateful to learn that the omission of the scalar in method 2 to convert risk-weighted assets to capital was unintended, and would be corrected in the next draft by applying the 8* risk weight to the right side of the term.

ISDA and AFME also learned that the omission of the 4 per cent capitalisation category was an oversight, brought about by the short time available to produce the wording. ISDA and AFME consider that if trialogues took a consistent approach to omnibus accounts in Europe, where comparable protections afforded to client omnibus accounts may also exist, many additional issues with the cross-implication of regulatory reform would fall away, including in relation to the implementation of EU to US indirect clearing arrangements.

However, ISDA and AFME strongly disagreed with two of the intentional differences between the Draft CRR Text and the Basel international standards set out in the interim framework for determining capital requirements for bank exposures to CCPs (“BCBS 227”). ISDA and AFME also wish to emphasise that Basel should be implemented without deviation, especially if the maths of any deviation is not sound.

Ability to choose between methods 1 & 2

ISDA and AFME understand that the EC seeks to avoid arbitrage between the two methods and a regime where firms select the approach that gives them the lowest capital requirement; the ability to cherry pick irrespective of risk. EC did advise of appetite to allow ESMA/EBA to determine which method should be used for each CCP if some “criteria” other that regulatory capital reduction is proposed.

However, ISDA and AFME do not consider that further criteria are necessary, given that method 2 takes an extreme approach for estimating a very conservative regulatory capital requirement against the risk of members experiencing losses on a Qualifying CCP (“QCCP”)’s default fund (“DF”).

Committed but unfunded default fund

ISDA and AFME agree that the risk of loss of an assessment was low given it would take place in a scenario where margin, CCP skin-in-the game and default fund had all been exhausted. However, the key argument is that a separate regulatory capital requirement against this risk is not needed, because it is already included in the regulatory capital requirement specified by the Basel Committee which covers clearing members’ entire exposure to a CCP’s default fund, i.e. not only the risk of loss on pre-funded contributions but also the risk of loss on contractually committed contributions.

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