July 18, 2022

ISDA CEO Calls for Appropriate Calibration of Crypto Capital Charges

ISDA CEO Scott D. O'Malia welcomed the latest consultation on the prudential treatment of banks' crypto-asset exposures published by the Basel Committee, highlighting its "conservative approach" to risk, "rather than simply imposing onerous capital requirements."

In informal comments on ISDA's derivatiViews blog, Mr. O'Malia commended regulators for transitioning away from a "deliberately blunt, conservative capital requirement," arguing that "capital should be risk-sensitive, even if this requires a more complex methodology to effectively capture the risks in a relatively new market."

Mr. O'Malia reviewed a number of elements of the consultation, expressing concern that the framework proposed to limit exposure to digital assets to 1 percent of tier 1 capital. That framework, said Mr. O'Malia, might ultimately dissuade banks from participating in the digital asset market on the basis that the size of the investment may not be worth the effort. He warned that "while the new proposal gives banks the leeway to hold risk-appropriate levels of capital and respond to client demand for intermediation in crypto assets, the exposure limit threatens to choke off that capacity by allowing only limited participation." He argued that the design and calibration of the exposure limit should be reconsidered.

Mr. O'Malia promised that ISDA would continue to work with members and policymakers on a comprehensive regulatory framework.

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