Capitalisation of bank exposures to central counterparties

The Basel Committee issued today interim rules for the capitalisation of bank exposures to central counterparties (CCPs).

Since 2009, the Basel Committee has been working to give effect to the G20 Leaders' goal of creating incentives for banks to increase their use of central counterparties (CCPs), while at the same time ensuring that banks' exposures to CCPs are adequately capitalised. After two rounds of public consultation, and discussions with the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO), the Basel Committee has issued today, as part of Basel III, interim rules for capitalising exposures to CCPs that are intended to come into effect as of January 2013.

The Committee's framework for capitalising exposures to CCPs builds on the new CPSS-IOSCO Principles for Financial Market Infrastructures (PFMIs), which are designed to enhance the robustness of the essential infrastructure - including CCPs - supporting global financial markets. Where a CCP is supervised in a manner consistent with these principles, exposures to such CCPs will receive a preferential capital treatment. In particular, trade exposures will receive a nominal risk-weight of 2%. In addition, the interim rules published today allow banks to choose from one of two approaches for determining the capital required for exposures to default funds: (i) a risk sensitive approach on which the Committee has consulted twice over the past years, or (ii) a simplified method under which default fund exposures will be subject to a 1250% risk weight subject to an overall cap based on the volume of a bank's trade exposures.

In developing these rules, the Committee has been cognisant of the need to create incentives to increase the use of central counterparties, even where this is done via indirect clearing. The interim rules therefore include provisions on indirect clearing that allow clients to benefit from the preferential treatment for central clearing.

The Committee intends that the interim rules will allow for a full implementation of Basel III, while still recognising that additional work is needed to develop an improved capital framework. Further work in this area is planned for 2013. Mr Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank, noted that "capital requirements for bank exposures to CCPs is one of the final pieces of the Basel III capital framework, and we are pleased to have the interim rules established. The Committee recognises, however, that all components of the G20 reform agenda in relation to OTC derivatives are yet to be finalised. We will therefore continue to actively monitor the capital requirements in this area, and their interaction with other policy initiatives, to ensure they remain both robust and consistent with the broader G20 objectives."

The Committee wishes to thank those who provided feedback and comments to the previous consultations in December 2010 and November 2011, and encourages market participants to stay engaged in future impact studies and consultations during the development of enhanced rules for capitalising exposures to CCPs.