Reduce capital rules for clearing brokers, says ISDA

Michael Glenister
 Industry lobby calls for BCBS to loosen requirements on direct clearing member banks

Banks acting as brokers to centrally cleared OTC derivative contracts should not be subjected to the capital buffer requirements proposed by the Basel Committee on Banking supervision, according to ISDA (International Swaps and Derivatives Association).

A paper issued this week argues that clearing broker banks are likely to be DCMs (direct clearing members) to multiples CCPs, meaning their required capital buffers should be calculated based on their consolidated exposure to CCPs and not calculated based on their exposure to individual CCPs.

“A clearing member has simultaneous exposure to all of the CCPs on which it clears and thus that exposures should not be capitalised to each on a standalone basis," reads the report.

Central clearing mandated under EMIR (European Market Infrastructure Regulation) is set to force those trading OTC derivative contracts to move from existing bilateral arrangements to clearing through a CCP.

ISDAs recommendation, if incorporated into BCBS’ 227 rules on bank capital requirements for exposures to CCPs, could lower the level of capital clearing brokers have to hold. However, it is unlikely that BCBS will adopt the suggestions for fear that it could increase risk to the system.

However, others have speculated that reducing capital requirements for clearing brokers could reduce the fees passed on to clients such as those pension funds clearing swaps through a broker and CCP.

Tags: ISDABCBSClearingOTC Derivatives