MFA Submits Final Letter to BCBS Regarding Concerns with Basel III Leverage Ratio for Cleared Derivatives (with Lofchie Comment and Music Selection)
MFA submitted comments to the Basel Committee on Banking Supervision ("BCBS") regarding the treatment of segregated initial margin under the supplementary leverage ratio ("SLR") set out in the BCBS document titled: "Basel III Leverage Ratio Framework and Disclosure Requirements."
MFA stated that it is "very concerned" that the SLR does not account for the fact that segregated customer initial margin for centrally cleared derivatives cannot be used to leverage the customer's clearing member firm. According to MFA, customers post initial margin to their clearing firms for the benefits of central counterparties ("CCPs") to secure customer performance under cleared derivative transactions. Therefore, customer initial margin reduces the clearing firm's exposure in order to guarantee the customer's performance to the CCP, and clearing firms may not use these funds for any other purpose.
MFA added, however, that without any capital recognition for such reduced exposure, clearing firms may face unnecessarily high capital costs that do not reflect their exposure reduction appropriately from segregated customer initial margin for cleared derivatives.
According to MFA, buy-side market participants, including MFA members, worry that unnecessarily high capital requirements are not commercially sustainable for clearing firms, and that they likely will be passed onto clearing customers in the form of higher clearing fees or other charges.
Lofchie Comment: MFA's comments reflect a common complaint regarding Dodd-Frank: the overregulation of swap dealers imposes real costs on both the sell side and the buy side. As MFA explains, costs must be passed through to the buy side, which includes funds that may be members of MFA, energy companies and other commercial enterprises.
See: MFA Comment Letter.