Pimco Urges Basel to Fix Rules Before Swaps Market Disruption

Pacific Investment Management Co. is urging regulators to rethink bank-capital requirements because they threaten market stability.

The capital requirements in question were released last year by the Basel Committee on Banking Supervision. Banks hold collateral from their customers in derivatives trades that are backed by clearinghouses to protect against losses. The regulators, however, didn’t allow this margin to be treated as a buffer that reduces a bank’s overall risk.

“Should these rules not change, in our view the cost of transacting in the markets will continue to increase and risks will become more concentrated in the hands of fewer market participants, creating a more interlinked and fragile market system that is more vulnerable to dislocations,” Pimco executives Libby Cantrill, William De Leon, Tracey Jordal and Courtney Walker wrote in a paper published yesterday. The firm manages $1.59 trillion.

Pimco is not the only firm to argue against the Basel rules. CME Group Inc., one of the world’s largest derivatives exchanges, last month proposed making drastic changes to how it backs swap and futures trades with its clearinghouses.

Under the CME proposal being discussed with the U.S. Commodity Futures Trading Commission, banks would not have to count the collateral -- cash and securities -- as part of their own assets, a person familiar with the matter said at the time. As a result, banks wouldn’t need capital to back those assets.

Biggest Shift

If CME’s proposal gets adopted, it would be one of the biggest shifts in how the derivatives market operates since futures were created in 1865.

Pimco said regulators know what the capital rules would do to derivatives markets and may be ready to reassess them.

“I’m very concerned that this could have a significant negative effect on clearing,” Timothy Massad, chairman of the CFTC, the main U.S. derivatives regulator, said at a Feb. 12 hearing of the House Committee on Agriculture.

Clearinghouses, which seek to reduce risk by accepting collateral from buyers and sellers, are a key part of the international effort to make markets safer in the wake of the 2008 financial crisis. Swaps had little oversight and regulators struggled to determine banks’ trading exposures in the run-up to that crisis. Most swaps must now be cleared by law in the U.S.

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