Does the leverage ratio have an adverse impact on client clearing?
Bulletin n°218, article. In the wake of the 2008 global financial crisis, the members of the G20 agreed to increase incentives for central clearing in order to mitigate counterparty risk in the financial system. In the past few years, however, tensions have started to appear in the client clearing market. One reason often cited for this is the introduction of the leverage ratio, as the measure does not take into account the initial margins collected by clearing members from their clients as part of derivative transactions. While this failure to recognise initial margins is consistent with the objective of the leverage ratio – to provide a non-risk based measure as a backstop to the solvency ratio – penalising client clearing activities poses risks to financial stability that warrant further analysis.
1. The Basel Committee is conducting a review of the impact of the leverage ratio on client clearing
Under the current leverage ratio framework (see Box 1), clearing members offering client clearing services for derivatives are not allowed to deduct the initial margins collected from clients from the denominator of their ratio (see Box 2). This is consistent with the logic behind the ratio, which is that it should provide a non-risk based measure of exposure and should not therefore take into account banks’ credit risk mitigation techniques (including initial margin requirements).
In April 2016, the Basel Committee launched a consultation on the proposed revisions to the leverage ratio framework. Respondents stressed that the measure could undermine clearing members’ ability to continue offering client clearing services. Their main contention was that the leverage ratio ignores the exposure-reducing effect of initial margins.
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