ISDA Responds to BCBS Proposal on Treatment of Cryptoasset Exposures
The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures. The BCBS consultation was published in June 2021. ISDA and the other associations support the BCBS decision to engage in an iterative approach for the prudential treatment of cryptoassets and suggest certain improvements to the proposal. Overall, the response letter reinforces that making greater use of the existing international prudential framework (Basel III) is the best way to achieve the principles underpinning the consultation.
The Associations agree with BCBS that the approach should follow the principle of “same risk, same activity, same treatment” and that the prudential framework should be technology-neutral. However, adjustments are needed to achieve true technological neutrality. The Associations also believe that the framework should be as simple as possible and suggest that certain aspects of the proposal should be further simplified and/or made more risk-sensitive. Given the cross-border nature of the cryptoasset markets, the Associations support having minimum global standards, supported by coordination across jurisdictions to help ensure an approach that is consistent and comparable. The Associations recommend BCBS to ensure that the framework is not overly conservative, so that it does not preclude regulated bank involvement in certain segments of cryptoasset markets. The Associations recommend to BCBS that the framework for cryptoassets should utilize the existing prudential framework for all other bank exposures that has been developed over many years taking into account the following criteria:
- The framework would allow for technological neutrality and be designed to reflect underlying risk.
- The availability and use of effective hedging should be recognized in the prudential framework.
- The need for differences in the capital treatment of cryptoassets held in the banking book versus the trading book should be recognized in the framework as it is for other bank exposures; this will help to appropriately capitalize the different risks of trading and banking book activities. For certain Group 2 cryptoassets, the exposure to changes in price is best captured through the market risk framework. Thus, for banking book exposures to this set of cryptoassets, applying the market risk framework would be appropriate, similar to the treatment of foreign exchange and commodities risk in the banking book under the current framework and net short credit and equity risk in the banking book in the future.
- The capital treatment of Group 2 cryptoassets should be tied to the risks of the assets, not their accounting treatment. This approach should help avoid disparate treatment across jurisdictions resulting from different accounting regimes. Assets with different risk profiles should be subject to correspondingly different capital standards.
Related Links
Keywords: International, Banking, Securities, Cryptoassets, Basel, Credit Risk, Market Risk, Large Exposures, Regulatory Capital, Hedging, Banking Book, Trading Book, BCBS, ISDA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
HMT Announces First Issuance of Government Green Bonds in UKRelated Articles
OSFI Issues Phase2 Consultation on Climate Scenario Exercise for Banks
The Office of the Superintendent of Financial Institutions (OSFI) recently announced a consultation on the second phase of the Standardized Climate Scenario Exercise (SCSE) for banks and other financial institutions it regulates in Canada.
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.