In a Final Report, the Financial Stability Board ("FSB"), along with a group of other international financial regulatory bodies, evaluated how post-financial crisis reforms affect incentives for the central clearing of derivatives. The findings follow a consultative document published in August 2018 (see previous coverage) and initial findings published in 2014.
The authors found that:
- changes in OTC derivatives markets are consistent with the G20 objectives to promote central clearing;
- post-crisis reforms - particularly in capital, margin and clearing - have incentivized "dealers and larger and more active clients" to clear derivatives;
- market liquidity, counterparty credit risk management and netting efficiencies were factors in the decision to centrally clear;
- certain clients (in particular, smaller clients) may have "less strong" incentives to utilize central clearing, and may also have less access to central clearing, with the cost of clearing being a key factor;
- the provision of client clearing services is concentrated in a small number of firms, with five bank-affiliated firms accounting for over 80% of all client margin for cleared rate swaps in the United States, the United Kingdom and Japan; and
- certain aspects of regulatory reform may not incentivize the provision of client clearing services.
The report cites the treatment of initial margin in cleared transactions under leverage ratios applicable to certain banks and their affiliates as an area that "may merit consideration by the relevant [standard-setting bodies]." Based on the data and market outreach, the authors suggest that these requirements can be a disincentive for clearing service providers.
The study was produced by the FSB, the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructure, and the International Organization of Securities Commissions.
Commentary / Nihal Patel
The authors conclude that treatment of client initial margin in bank leverage ratios "may merit further consideration." Even those that dissent as to whether a change is required would have a hard time arguing that the issue has not been studied enough. (See, e.g., here, here, here, here, and here.) In the United States, a bill to amend the leverage ratio passed through committee with broad bipartisan support.
"There's a time to think, and a time to act. And this, gentlemen, is no time to think."
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