Leverage ratio and client clearing
During the Basel Committee’s consultation on the revised leverage ratio standard, launched in April 2016, the industry highlighted possible adverse effects on the ability of clearing members to continue offering clearing services to third parties through a central counterparty clearing house (CCP). The main point underlined was that, as a non-risk based measure, the leverage ratio, ignores the risk-reducing effect of initial margins received by banks from their clients in derivatives transactions conducted through clearing houses. Consequently, several responses to the consultation called for, inter alia, deduction of initial margins from the denominator of the leverage ratio.
In the finalised Basel III agreement, which was published in December 2017,1 the Committee left the leverage ratio’s treatment of derivatives transactions unchanged, but included a review clause stating that it would further analyse the impact of the ratio on client clearing and conclude on any possible changes to the rule before January 2019. The possible disincentives generated by the ratio could conflict with the central clearing obligation for standardised derivatives set by the G20 Pittsburgh summit in September 2009 and implemented in Europe by EMIR and in the United States by the Dodd-Frank Act.
While the lack of recognition of the risk-reducing effect of initial margins (“IM offset”) for leverage ratio purposes is consistent with the objective of supplementing the solvency ratio with a non-risk based measure, the penalisation of client clearing activities may entail risks to financial stability that need to be assessed. Indeed, the withdrawal of some client clearers from the market would result in a higher concentration of activities among a limited number of clearing members, which would make it harder for clearing members to take on the positions of another member in the event of the latter’s default (portability). Moreover, there is renewed pressure to provide non-bank actors with some form of direct access to CCPs, raising questions about compliance with prudential regulations and about the potential impact on the risk profile of CCPs. In any case, an extension of CCP membership – limited to certain regulated entities – would only be possible if it were accompanied by an adequate framework for managing and controlling risks.
The purpose of this discussion paper is to initiate debate on the potential impact on client clearing of the leverage ratio’s non-recognition of initial margins received by clearing members from their clients in derivatives transactions. It opens the way for a possible revision of the leverage ratio, to allow for IM offset in the calculation of exposures.
Download the discussion paper
Updated on the 21st of March 2025