ISDA CEO Calls for Recognition of Cross-Product Netting in Capital Rules
Commentary by Steven Lofchie
ISDA CEO Scott O’Malia highlighted the need for further adjustments to US capital requirements to ensure banks can continue to provide vital intermediation services.
In ISDA's derivatiViews blog, Mr. O’Malia welcomed proposals to refine the supplementary leverage ratio but stressed the need to revise the standardized approach for counterparty credit risk ("SA-CCR") to account for the risk-reducing benefits of cross-product netting. He noted that such agreements allow banks to offset exposures across derivatives and securities financing transactions, which reduce credit risk and improving funding efficiency. He cautioned that without this recognition, capital requirements remain misaligned with actual risk, straining bank balance sheets and potentially limiting liquidity as Treasury issuance grows, and the SEC’s clearing mandate expands the demand for client clearing.
Mr. O’Malia pointed out that central counterparties are introducing cross-margining programs to align margin requirements with the true risk of portfolios, but he cautioned that the advantages of these initiatives could be undermined if capital rules are not similarly modified. He highlighted that ISDA’s documentation framework already enables firms to combine derivatives and securities financing under a single enforceable master agreement, reducing credit risk and expanding netting sets.
Mr. O’Malia urged regulators to use the Basel III endgame re-proposal as an opportunity to make SA-CCR more risk sensitive, thereby enhancing liquidity, improving efficiency, and strengthening markets during periods of stress.
Commentary
This is not just a bank issue. It is a US government issue. If US capital regulations applicable to banks make it unduly expensive for banks to hold positions in US governments, or to finance customer positions in US governments, that makes it more expensive to transact in US governments. In turn, that means that the US government must pay a higher interest rate to induce investors to hold its securities, which drives up the cost of financing the US government's very substantial debt.