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
FINMA Approves Merger of Credit Suisse and UBS
The Swiss Financial Market Supervisory Authority (FINMA) has approved the takeover of Credit Suisse by UBS.
BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks
The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
APRA Assesses Macro-Prudential Policy Settings, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) published an information paper that assesses its macro-prudential policy settings aimed at promoting stability at a systemic level.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
MFSA Sets Out Supervisory Priorities, Issues Reporting Updates
The Malta Financial Services Authority (MFSA) outlined its supervisory priorities for 2023
German Regulators Issue Multiple Reporting Updates for Banks
Deutsche Bundesbank published the nationally deactivated validation rules for the German Commercial Code (HGB) users on the taxonomy 3.2, which became valid from December 31, 2022
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.
