ISDA CEO Urges Further Refinement of Basel III Framework

ISDA CEO Scott O’Malia described the revised Basel III endgame proposal as a "major improvement" that enhances clarity and risk sensitivity, but emphasized that key issues remain.

In comments on ISDA’s derivatiViews blog, Mr. O’Malia credited U.S. policymakers for improving the framework’s risk sensitivity. He highlighted changes to the Fundamental Review of the Trading Book, including "the removal of the output floor" and adjustments to model testing requirements, which enhance the viability of internal models for market risk. However, he cautioned that further refinements are needed to achieve a fully appropriate framework.

Mr. O'Malia welcomed the removal of disproportionate capital charges affecting client clearing at U.S. global systemically important banks ("G-SIBs"), including the exclusion of the client-facing leg of cleared trades from the credit valuation adjustment framework. Combined with changes to the G-SIB surcharge, he said these revisions avoid a potential capital increase of more than 80% that could have constrained clearing capacity.

Mr. O'Malia acknowledged the proposal's recognition of cross-product netting, which allows banks to offset risks between different types of trades, such as non-cleared derivatives and repos. He warned, however, that the current calculation method is too "blunt" and "conservative," potentially resulting in capital requirements that do not reflect true economic risks He said ISDA plans to recommend a more sensitive approach to ensure banks can continue providing essential market liquidity. 

Mr. O’Malia urged market participants to use the consultation period, open until June 18, to rigorously assess the proposal and help shape a more risk-sensitive capital framework that supports market liquidity and stability.