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Banks gain ground in push to change derivatives capital rule

[LONDON] The world's biggest banks have argued for years that capital rules punish them for handling clients' derivatives trades. All that lobbying is starting to pay off.

The European Union's financial-services chief, Jonathan Hill, and members of the bloc's parliament recently joined the Bank of England in saying the global capital standard needs to be fixed. At issue is the Basel Committee on Banking Supervision's restriction on bank leverage, which forces lenders to have capital against billions of dollars in collateralized trades done by clients and settled at clearinghouses.

The International Organization of Securities Commissionscalled on its members, who regulate more than 95 per cent of the world's securities markets, to "help shift this debate" by telling the Basel Committee exactly what they think, according to Paul Andrews, the group's secretary general. IOSCO itself has made the case to the Basel Committee for how the leverage ratio requirement could hurt the clearing industry.

"We will engage further with the Basel Committee if appropriate depending upon what the evidence is showing," Mr Andrews said in a speech in London this week. "If we need to step in, it's our intention that we'll try to step in and do what we can to sort of get this along the right track."

The industry lobbying is tied to one aspect of how banks must meet the leverage ratio requirement, designed to discourage banks from piling on assets.

As currently written, the rule forces derivatives dealers to consider the collateral they receive from clients, and which is held in segregated accounts, when adding up their total assets. As a result, banks must have more capital to handle the transactions. When US regulators completed their version of the leverage rule in 2014, they rejected industry pleas to exclude this collateral from the calculation.

Since then, the Futures Industry Association, which represents banks such as Goldman Sachs Group Inc, Barclays Plc and Credit Suisse Group AG, has fought for a change in the regulation and is working with consultants to prepare data about the scope of the rule's impact. Executives from the world's biggest clearinghouses, including those owned by CME Group Inc and London Stock Exchange Group Plc, also have pushed for a change, alongside lobbying groups for mutual funds and large agricultural and energy traders.

Clearing Broker Simon Puleston Jones, FIA's head of Europe, said traditional buyers of derivatives need to maintain access to many banks that are members of clearinghouses.

"From time to time, clearing brokers do go into default, and so not only do we need to ensure there is access to clearing, but we need to ensure that in the event one of the clearing brokers falls over, that there is another clearing broker standing to ensure that post-default porting is viable," Puleston Jones said at the same industry conference in London.

Mr Andrews said the leverage rule could make it more difficult to transfer client accounts between banks at times of stress because fewer lenders would be willing to take on the additional risk and cost. That view was echoed this week by Timothy Massad, chairman of the US Commodity Futures Trading Commission, the top US derivatives regulator.

The comments show regulators' growing willingness to revise conflicting rules put in place following the 2008 credit crisis that the industry argues that could harm the economy. Global regulators moved after the crisis to have more derivatives traded at central clearinghouses as a way to prevent risk from spreading through the financial system. Meanwhile, they put in tougher capital rules, including the leverage ratio, to ensure banks can withstand shocks.