Banks to Face Basel Capital Rules for Derivatives Trades

Banks will be forced to put more capital behind derivatives trades in a push by global regulators to bolster market stability and reinforce clearinghouses.

The Basel Committee on Banking Supervision said an amount equal to 2 percent of a bank’s trades through clearinghouses should be added to the risk-weighted assets used to determine the lender’s total capital requirements.

The interim rules are “one of the final pieces” in overhauling bank capital requirements in the wake of the 2008 financial crisis, the Basel group said in a statement on its website today. “Further work in this area is planned for 2013,” it said. The group also published provisional rules on standing funds that are tapped when a bank can’t complete a trade.

Global regulators have sought tougher rules for derivatives since the 2008 collapse of Lehman Brothers Holdings Inc. and the government rescue of American International Group Inc. (AIG), two of the largest traders in credit-default swaps. The plans include pushing more transactions through clearinghouses in a bid to cut complexity and risk.

Regulators have in turn called for tougher safeguards for these platforms because of the increased threat that their collapse could damage the global financial system.

The 2 percent rule will apply to trades with clearinghouses that meet international standards, the Basel group said. Transactions that take place with less well regulated clearers would face tougher rules, linked to the platform’s credit rating. The measures will take effect in January 2013.

Threat Reduction

Clearinghouses such as LCH.Clearnet Group Ltd. and Deutsche Boerse AG’s Eurex Clearing operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the threat from a trader’s default.

The Basel committee last year published capital rules for trades that don’t pass through clearing platforms.

Michel Barnier, the European Union’s financial services chief, has called for greater competition between clearinghouses to counter the risk that trades are concentrated on a small number of platforms, making them too-big-to-fail.

Legislators in the European Parliament are at loggerheads over the plan, with some warning that fragmenting the market may also harm stability.

Separately, Basel regulators today published rules to end an accounting anomaly that may allow lenders to boost their capital if the market value of their derivatives contracts falls.

Any gains from this so-called debit-valuation adjustment should “be fully derecognized from the calculation” of a bank’s core reserves, the Basel group said. “Conservatism should drive the policy framework in this area.”

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net.

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.