More on central clearing and the leverage ratio

I talked some days ago about client clearing and some research that I have done on whether some new regulations (mainly the leverage ratio—LR) might increase its costs and reduce the willingness of banks to provide such services. I have since found out that the Bank for International Settlements has published a couple of relevant documents:

A consultative document to get feedback about whether to change the LR treatment of client cleared derivatives. The three options are—apologies for translating them in my own words:

  • Do nothing.
  • Allow initial margin to offset the potential future exposure (PFE).
  • Forget that this is a leverage ratio requirement and use the risk-based framework instead.

I would pick either the first or the second option. Well. No. The first option. I do think that, at the moment, the second option might be slightly better (not crazily better—I think our results do suggest that the cost is small although more work needs to be done and we are doing it) but the trend is clearly towards being more lenient, so I would favour resisting as much as possible unless the case is crystal clear.

The second is a more general report on the incentives to centrally clear. It has been developed by a bunch of international organisations in what is definitely a mouthful: FSB, BCBS, IOSCO, and CPMI (I did not know this last one). This report cites our previously mentioned research. You can tell the care and work put in the crafting of this report by reading my surname spelled “Rodriquez” instead of “Rodriguez” (fourth most common surname in Spain). Joking aside, I hope to comment on it in the near future once I am able to read it properly.

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