On 18 October 2018, the Basel Committee on Banking Supervision (Basel Committee) issued a consultative document seeking views on whether a targeted and limited revision of the leverage ratio’s treatment of client cleared derivatives may be warranted.

The leverage ratio complements the risk-based capital requirements by providing a safeguard against levels of leverage and by mitigating gaming and model risk across both internal models and standardised risk measurement approaches. By design, the leverage ratio does not differentiate risk across different asset classes.

The options the Basel Committee is considering include:

  • retaining the existing treatment of client cleared derivatives as currently set out in the framework. This approach would adhere to the leverage ratio principle that “banks must not take account of physical or financial collateral, guarantees or other credit risk mitigation techniques to reduce the leverage ratio exposure measure”;
  • amending the currently specified treatment of client cleared derivatives to allow standards of cash and non-cash initial margin that are received from the client to offset the potential future exposure of derivatives centrally cleared on the client’s behalf; or
  • amending the currently specified treatment of client cleared derivatives to align it with the measurement as determined per the standardised approach to measuring counterparty credit risk exposures as used for risk-based capital requirements. This option would permit both cash and non-cash forms of initial margin and variation margin received from the client to offset replacement cost and potential future exposure for client cleared derivatives only.

The Basel Committee is also seeking views on the merit of requiring that any forms of initial margin to be made eligible for offsetting client cleared derivative exposures be subject to segregation criteria so as to ensure that those amounts will be available in the event of a client’s default. Such segregation criteria could include requirements that initial margin be recorded as separate from the clearing member bank’s own assets and be legally segregated in the event of default of the entity that holds the margin, and could specify limitations on the permitted uses by clearing member banks of initial margin received from clients.

The deadline for comments on the consultation is 16 January 2019. Once the Basel Committee has reviewed responses and completed its own further analyses, it intends to publish its consultation on the treatment of client cleared derivatives within an appropriate time frame.