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10 June 2016

Bloomberg: Banks gain ground in push to change derivatives capital rule

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The European Union’s financial-services chief, Jonathan Hill, and members of the bloc’s parliament recently joined the Bank of England in saying the global capital standard needs to be fixed.

At issue is the Basel Committee on Banking Supervision’s restriction on bank leverage, which forces lenders to have capital against billions of dollars in collateralized trades done by clients and settled at clearing houses.

The International Organization of Securities Commissions called on its members, who regulate more than 95 percent of the world’s securities markets, to “help shift this debate” by telling the Basel Committee exactly what they think, according to Paul Andrews, the group’s secretary general. IOSCO itself has made the case to the Basel Committee for how the leverage ratio requirement could hurt the clearing industry.

As currently written, the rule forces derivatives dealers to consider the collateral they receive from clients, and which is held in segregated accounts, when adding up their total assets. As a result, banks must have more capital to handle the transactions. When U.S. regulators completed their version of the leverage rule in 2014, they rejected industry pleas to exclude this collateral from the calculation.

Mark Carney, the BoE governor, told members of the European Parliament late last year that the regulation “should be top of the list” of issues that should be reviewed when Europe moves to adopt its own version of the Basel rule. “There are few unintended consequences of regulation at the international level,” Carney said. “This is one that does need to be considered and we will be considering it through the appropriate Basel processes but obviously at the European level irrespective of that we need to take heed of it.”

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© Bloomberg

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