Banks are increasingly optimistic that a revised proposal of the Basel III endgame rules, expected to be released next week by US banking regulators, will allow for cross-product netting when calculating capital requirements for cleared portfolios that include US Treasury repos alongside other interest rate products.
An earlier draft of the capital rules, published in July 2023, threatened to prevent banks from netting exposures across different cleared products. This would have significantly increased capital costs for clearing US Treasury repos, a critical component of the financial system. Industry participants have been lobbying regulators to reconsider this aspect of the rules, arguing it could disrupt market functioning and increase the cost of financing for the US government.
The potential shift in approach comes as regulators continue to grapple with the fallout from the Silicon Valley Bank (SVB) collapse and broader concerns about interest rate risk. The Federal Deposit Insurance Corporation (FDIC) faced scrutiny following its decision to cover all SVB deposits, a move that raised questions about systemic risk and the application of existing regulations.
Alongside the Basel III revisions, the industry is also calling for a broader rethink of the rules themselves. Concerns have been raised about the complexity and potential unintended consequences of the Basel III endgame, with some arguing that the rules could stifle lending and economic growth.
Separately, the Commodity Futures Trading Commission (CFTC) is continuing to revise its trade reporting rules, facing ongoing challenges in finalizing a comprehensive and effective framework. The Bank of England (BoE) is also taking a firm stance on “skin in the game” requirements for central counterparties (CCPs), signaling a desire for greater resilience in the financial system. These developments highlight the ongoing regulatory efforts to address vulnerabilities and enhance stability in the wake of recent market events.
The revised Basel III proposal is expected to be a key focus for the banking industry in the coming weeks, as firms assess the potential impact on their capital planning and risk management strategies.
