CFTC Commissioners Criticize the Supplemental Leverage Ratio

At a CFTC Energy and Environmental Markets Advisory Committee meeting, members debated the impact that the Supplemental Leverage Ratio ("SLR") imposed by prudential regulators may have on the "provision of clearing services for energy derivatives transactions."

CFTC Chair J. Christopher Giancarlo criticized application of the SLR (a capital requirement for banks) to swap clearing customer margin, arguing that it "reflects a flawed understanding" of central counterparty clearing. He added that the implementation of the SLR is "biased against derivatives," as it does not take into consideration that outstanding derivatives in a portfolio "can offset each other and thus reduce the potential risk exposure." Conversely, Mr. Giancarlo applauded the role that energy derivatives have played in allowing the industry and its financial backers to price hedge during times of price squeezes fostered by Russia and OPEC.

CFTC Commissioner Brian Quintenz echoed Mr. Giancarlo's criticism of the SLR ratio and faulted a proposal by banking regulators to modify the calculation "without reducing this exposure by the amount of segregated margin posted by the client." In particular, Mr. Quintenz claimed that the current implementation of the SLR is constraining clients' access to clearing and further promoting futures commission merchants' consolidation.