From 1 January 2013 an amount equal to 2% of a
bank's derivatives exposure to certain central clearing
counterparties will be added to the total risk-weighted assets of
that bank for regulatory capital purposes.
Capital requirements for bank exposures to central clearing
counterparties (CCPs) are recognised as one of the
final pieces of the incoming Basel III capital framework for banks,
and are part of the broader G20 derivatives reform agenda aimed at
reducing systemic risk in global banking.
As part of the reform process, the Basel Committee on Banking
Supervision (Basel Committee) last week released
interim rules for
the risk-weighting of exposures to CCPs. The rules are designed to
create a financial incentive for banks to clear standardised
over-the-counter (OTC) derivatives through CCPs,
while at the same time ensuring that banks' exposures to CCPs
are adequately capitalised.
The decision to publish the rules on an interim basis suggests
that the Basel Committee will monitor the capital effect of the new
rules and make further changes if necessary.
2% Capital Charge
From 1 January 2013, an amount equal to 2% of a bank's
derivatives exposure to "qualifying" CCPs will be added
to its total risk-weighted assets for regulatory capital purposes.
A "qualifying" CCP is a CCP that meets the new "Principles for
Financial Market Infrastructures" published by the
Committee on Payment and Settlement Systems and the International
Organization of Securities Commissions.
Importantly, the paper clarifies that the 2% risk-weight will be
calculated on the basis of a member's cleared exposures, rather
than to trade exposures it has cleared on behalf of clients, unless
the member has also guaranteed the trade against CCP default
losses. This clarification has been welcomed by the dealer
community and means that banks offering clearing services as
intermediaries for non-members will not need to hold capital
against non-guaranteed customer trades as though they were the
bank's own positions.
This contrasts with the capital charges that will apply to
non-CCP cleared trades. Exposures under non-cleared trades will be
assigned a risk-weight in accordance with the Basel III rules for bilateral
counterparty credit risk published in June last year, which is
likely to result in a more onerous risk-weight for the affected
CCP Default Fund Charge
Basel III will also impose a capital charge on a bank's
exposure to a CCP's default fund. CCP default funds consist of
contributions made by clearing members which are designed to
protect the relevant CCP from losses caused by the default of a
clearing member. Banks will have the option of applying a 1,250%
risk-weighting to this exposure (effectively treating the exposure
as a deduction from capital) or, in the case of a qualifying CCP,
employing a risk-sensitive approach detailed in the interim rules
that the Basel Committee has previously consulted on. For
qualifying CCPs, the risk-weight of 1,250% will be capped at 20% of
the total trade exposures to the relevant CCP.
The cap is another welcome development and was introduced in
response to dealer concerns that earlier versions of the rules
would generate a capital cost at levels that would discourage banks
from providing intermediary clearing services to other derivatives
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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