The Perfect Storm: BASEL III and Dodd-Frank


Deriv Alert summaries the dangerous intersection that banks are approaching, with Dodd-Frank, various bank regulatory rules and Basel III all come together.

  • For cleared trades, banks will be at a slight disadvantage to non-banks, because banks will have a small capital charge against their cleared position (as well as a capital charge for the CCP’s default fund, which shouldn’t change because of position changes) while non-banks would not.
  • In closing open positions, banks will have a higher incentive to clear at the CCP holding the open position because, in addition to freeing up IM, the trade would also free up capital.
  • In uncleared trades with low-risk counterparties, banks will have a decided advantage over non-banks, since the banking regulations have much lower IM and VM requirements than DFA does.
  • In deciding whether to do EUE trades bilaterally or insist on clearing, banks will have to weigh the lower IM and VM requirements of the uncleared trade against the higher capital requirements, a calculation that non-banks won’t have to make.
  • For banks, the interplay of capital and margin requirements will occur on every trade, and will be too complicated to attempt manually, so risk management systems will have to be beefed up to handle these calculations in real time.

~ by mdavey on June 19, 2012.

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