January 15, 2019
Comments on the Consultative Document
Leverage ratio treatment of client cleared derivatives
Japanese Bankers Association
We, the Japanese Bankers Association (JBA), would like to express our gratitude
for this opportunity to comment on the Consultative Document Leverage ratio treatmentof client cleared derivatives published on October 18, 2018 by the Basel Committee on
Banking Supervision (BCBS).
We respectfully expect that the following comments will contribute to yourfurther discussion.
<<General Comments>>
We would like to pay our respect to the efforts undertaken by the BCBS,
Financial Stability Board (FSB) and other standard-setting bodies concerning the impactof the margin treatment in the leverage ratio on client cleared derivatives, which include
continuous monitoring, analyses based on quantitative/qualitative survey results, anddiscussions with market, etc. We support the BCBS’s proposal to review the leverage
ratio treatment of client cleared derivatives.
Under the current leverage ratio framework, margin’s risk mitigation effects are
not taken into account for client clearing service providers (CCSPs). Therefore, anincrease in transaction volumes leads to adverse effects on the leverage ratio, and as aconsequence, it disincentivises entities to provide the client clearing service. FSB andother standard-setting bodies noted this point in their report titled Incentives to centrally
clear over-the-counter (OTC) derivatives published on November 19, 2018 (“FSB, etc.
Report”). 1 If CCSPs constrain their client clearing business, transaction costs may
increase across the entire financial institutions. This may lead to adverse effects,including a decline in financial institutions’ risk-based capital adequacy ratio.
Revisions to the leverage ratio treatment will not only reduce the disincentive forfinancial institutions to offer client clearing services, but also reduce burdens of thosefinancial institutions who act as a clearing broker in central clearing business, and it
would ultimately improve the environment to promote central clearing.
1

FSB and standard-setting bodies publish final report on effects of reforms on incentives tocentrally clear over-the-counter derivatives
http://www.fsb.org/2018/11/incentives-to-centrally-clear-over-the-counter-otc-derivatives-2/

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From the above viewpoint, of the three options proposed in the ConsultativeDocument, we support the following two options: Option 2 which allows amounts ofcash and non-cash initial margin that are received from the client to offset the potential
future exposure of derivatives centrally cleared on the client’s behalf, or Option 3 which
permits both cash and non-cash forms of initial margin and variation margin received
from the client to offset replacement cost and potential future exposure for client cleared
derivatives only.
<<Specific Comments>>(Questions)
1. Is there concrete and robust empirical evidence that would warrant a revision to theleverage ratio treatment of client cleared derivatives?
2. To what extent would the two potential revisions discussed in this consultative
document adequately meet the G20 Leaders’ policy objectives of strengthening theresilience of the banking system by preventing excessive leverage and promoting
central clearing of standardised derivative contracts?
3. What are the potential forward-looking behavioural dynamics of the client clearing
industry that could occur as a result of possible changes to the leverage ratio
treatment of client cleared derivatives?
(Our response)
In general, the following two regulations are raised as major constraints on
CCSPs in central clearing of derivatives as well as factors that ultimately undermine thepromotion of central clearing: (i) capital charge treatment for clearing funds; and (ii) theleverage ratio treatment. We welcome the proposed revisions by the BCBS in the viewthat it will contribute to reducing such constraints described in (ii) of the above.
As indicated in the FSB, etc. Report, in the leverage ratio framework, expanding
the client clearing service leads to adverse effects on the leverage ratio of CCSPs
themselves, and thus it is a disincentive for them to offer such a service.
Given the following points in addition to the above, the disincentive for CCSPs toprovide client clearing services may further increase in the future.
・An increase in the needs to backload existing non-centrally cleared transactions toCentral Counter Parties (CCPs) as a result of the expansion of the margin rules(that cover non-centrally cleared OTC derivatives)
・Introduction and expansion of mandatory central clearing in some jurisdictions, such2

as Singapore 2 and Hong Kong (AUD swaps) 3
The above points are factors that increase centrally cleared transactions and manyof the increased transactions would be centrally cleared via client clearing provided by
CCSPs. However, under the circumstance the current leverage ratio framework is beinga disincentive for client clearing, we are concerned that central clearing will not bepromoted as expected.
Moreover, the disincentive will further aggravate the issues raised in the FSB, etc.
Report, including concentration of CCSPs and increasing costs, and could undermine
the initial policy objectives of strengthening the resilience of the banking system bypromoting central clearing.
It is assumed that solvency of CCSPs themselves can be achieved sufficiently
under the current Basel III framework, and the revisions to the leverage ratio treatment
proposed in this consultative document would expand the incentive for client clearing
service provision and increase centrally cleared transactions, ensuring the solvency ofCCSPs. In order to achieve this purpose, we believe it would be appropriate to adopt theproposed Option 2 or Option 3.
In addition, if, a CCSP does not deposit all of margin received from its clients to aCCP, and reinvests a portion of margin without segregating them, such practice should
not considered to be the appropriate management of clients’ assets. Therefore, in such acase, the offsetting should not be unconditionally permitted for either option.

2MAS Requires OTC Derivatives to be Centrally Cleared to Mitigate Systemic Risk
http://www.mas.gov.sg/News-and-Publications/Media-Releases/2018/MAS-Requires-OTC-Deriva
tives-to-be-Centrally-Cleared-to-Mitigate-Systemic-Risk.aspx
3Regulators conclude consultation on further enhancements to the OTC derivatives regulatoryregime
https://www.hkma.gov.hk/eng/key-information/press-releases/2018/20180627-4.shtml

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