Featured Product

    BoE Paper Examines Impact of Leverage Ratio on Client Clearing

    June 18, 2018

    BoE published a working paper that examines the impact of the leverage ratio on client clearing. This paper assesses the relative importance and interaction of capital requirements and "margining" in over-the-counter (OTC) derivative markets.

    As part of the post-crisis regulatory reform, many interest-rate derivative transactions are required to be centrally cleared. The treatment of this type of transaction under the leverage ratio requirement does not allow for the use of initial margin to reduce the exposure, thus increasing capital costs. Consequently, the leverage-ratio-affected clearing member banks may be more reluctant to provide central clearing services to clients given this additional cost. This in turn can prevent some real economy firms from hedging their risks. The paper analyzes whether this is the case by exploiting detailed confidential transaction- and portfolio-level data as well as the introduction and posterior tightening of the leverage ratio in the UK in a diff-in-diff framework.

    The results suggest that the leverage ratio had a dis-incentivizing effect on client clearing, both in terms of daily transactions as well as the number of clients; however, this impact seems to be driven by a reduced willingness to take on new clients. Faced with higher capital charges, clearing member banks could drop some of their smaller clients because they do not generate the same level of profit as larger ones. These clients in turn may then temporarily lose access to the derivative market, precluding them from hedging part of their risks. Overall, this reduced availability of clearing services may run counter to the globally endorsed goal of promoting clearing to address systemic risk.

    The results found in this paper are consistent with the claims that the leverage ratio might increase the cost of providing clearing services in the OTC derivatives market, pushing some clearing members to reduce these services. However, the magnitudes of this reduction are not extremely big, with reductions of the number of transactions and clients of about 5%—and mostly when the UK leverage ratio was introduced rather than in its posterior tightening. Therefore, the study documents a potentially unintended consequence of the leverage ratio and considers that if the leverage ratio, as it is, is delivering net social benefits, adding the costs found in this paper will probably not alter this conclusion.



    Related Link: Working Paper

    Keywords: Europe, UK, Banking, Leverage Ratio, Client Clearing, OTC Derivatives, BoE

    Related Articles
    News

    HKMA Revises Implementation Schedule for Initial Margin Rules

    HKMA intends to adopt a revised implementation schedule for the margin requirements for non-centrally cleared derivatives.

    August 16, 2019 WebPage Regulatory News
    News

    HKMA Revises Guideline on Application of Banking Disclosure Rules

    HKMA issued a revised version of the Supervisory Policy Manual module CA-D-1 on guideline on the application of the Banking (Disclosure) Rules (BDR).

    August 16, 2019 WebPage Regulatory News
    News

    ECB Decision on Recognizing Reporting Member States Under AnaCredit

    ECB has finalized the Decision 2019/1348 (ECB/2019/20) that establishes procedure for recognizing non-euro area member states as reporting member states under the AnaCredit Regulation (EU 2016/867).

    August 16, 2019 WebPage Regulatory News
    News

    FASB Proposes to Extend CECL Standard Deadline for Certain Entities

    FASB proposed an Accounting Standards Update that would grant private companies, not-for-profit organizations, and certain small public companies additional time to implement FASB standards on current expected credit losses (CECL), leases, and hedging.

    August 15, 2019 WebPage Regulatory News
    News

    IASB Adds Phase Two of IBOR Reform to Its Work Plan

    IASB (or the Board) has added the second phase of its project focused on potential financial reporting implications linked to the interest rate benchmark reform—interbank offer rate (IBOR) reform—to its work plan.

    August 15, 2019 WebPage Regulatory News
    News

    FED Updates Draft Instructions for Proposed FR Y-14 Reporting Forms

    FED updated draft instructions for the monthly, quarterly, and annual capital assessments and stress testing reports, also known as forms FR Y-14M, FR Y-14Q, FR Y-14A, respectively.

    August 15, 2019 WebPage Regulatory News
    News

    FASB Proposes Taxonomy Changes Related to Topics 326, 815, and 842

    FASB is proposing taxonomy improvements for the proposed Accounting Standards Update on clarifying the interactions among topic 321 on investments in equity securities), topic 323 on investments under equity method and joint ventures), and topic 815 on derivatives and hedging.

    August 15, 2019 WebPage Regulatory News
    News

    OCC Updates Bank Accounting Advisory Series in August 2019

    OCC released an update to the Bank Accounting Advisory Series (BAAS), which reflects accounting standards issued by FASB, through March 31, 2019, on topics such as hedging and credit losses.

    August 15, 2019 WebPage Regulatory News
    News

    APRA Consults on Final Phase Margin Rules for Uncleared Derivatives

    APRA is consulting on amendments to the prudential standard CPS 226 on margin and risk mitigation requirements for non-centrally cleared derivatives.

    August 14, 2019 WebPage Regulatory News
    News

    APRA Applies Additional Capital Requirement for an Australian Insurer

    APRA decided to apply an additional $250 million capital requirement to Allianz Australia Limited to reflect the issues identified in the risk governance self-assessment by the insurer.

    August 14, 2019 WebPage Regulatory News
    RESULTS 1 - 10 OF 3646