In July 2023, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation proposed capital rules known as the US Basel III ‘endgame’ based on the global minimum regulatory capital standards developed by the Basel Committee on Banking Supervision (BCBS). If finalized as currently drafted, the US Basel III proposal will have a significant negative impact on trading activity and the liquidity and vibrancy of the US capital markets, with adverse effects on derivatives end users, investors, businesses and consumers.
In response to the proposal, ISDA and the Securities Industry and Financial Markets Association (SIFMA) conducted a quantitative impact study (QIS) that showed that the market risk portion of the proposal, known as the Fundamental Review of the Trading Book, will result in a substantial increase in market risk capital of between 73% and 101%, depending on the extent to which banks use internal models. This matters because trading and capital markets activities play a crucial role in the ability of US businesses to raise funds and perform risk management functions, with debt capital markets in the US representing 75% of total financing. By requiring banks to hold additional capital that is misaligned with levels of risk, the proposal would significantly reduce capital market access for US end users and businesses, restrict the ability of businesses to hedge exposures to changes in commodity prices, and increase the cost of everyday consumer goods, including food and gasoline.
Based in Basel, Switzerland, the BCBS develops global minimum regulatory capital and liquidity standards through a multi-year process involving regulators from participating countries around the world. Given the BCBS has no enforcing powers, each jurisdiction transposes those standards into local law or regulation, as applicable. Although jurisdictions participating in the Basel process generally follow these standards, they may deviate to reflect philosophical differences and national priorities on local markets and economies. However, the US Basel III proposal would impose more stringent requirements than those embodied in the global framework in several areas.
This note summarizes key findings based on the results of the ISDA/SIFMA QIS.
Click on the attached PDF to read the full paper.
Documents (1) for US Basel III Endgame: Trading and Capital Markets Impact
Latest
Response on Commodity Derivatives Markets
On April 22, ISDA and FIA submitted a joint response to the European Commission’s (EC) consultation on the functioning of commodity derivatives markets and certain aspects relating to spot energy markets. In addition to questions on position management, reporting and...
Episode 50: The Value of Derivatives
A new report from ISDA shows that companies all over the world use derivatives to alleviate uncertainty, transfer risk and enhance profitability. ISDA discusses the findings with Boston Consulting Group’s Roy Choudhury. Please view this page via Chrome to access...
ISDA/IIF Response to EC Market Risk Consultation
On February 22, ISDA and the Institute of International Finance (IIF) submitted a joint response to the European Commission’s (EC) consultation on the application of the market risk prudential framework. The associations believe the capital framework should be risk-appropriate and...
ISDA Submits Letter on Environmental Credits
On April 15, ISDA submitted a response to the Financial Accounting Standards Board’s (FASB) consultation on environmental credits and environmental credit obligations. The response supports the FASB’s overall proposals to establish clear and consistent accounting guidance for environmental credits, but...