29  28  and is now being applied to several of the post-crisis  The Basel Committee has started a programme of evaluating the reforms to banking regulation. 30  The Bank is playing an active part in these exercises. An evaluation is a rigorous assessment of the effects a regulation is having on the financial system and wider economy. An evaluation should consider whether a regulation is achieving its aims and whether it is having any unintended effects. To do a proper evaluation a policy needs to be in force so one can observe the policy’s effects. As the post-crisis reforms are still being implemented, evaluation is going to be a multi-year project. One evaluation that is underway already relates to the G20’s reforms to over-the-counter (OTC) derivatives markets. This is examining whether or not the post-crisis reforms are supporting incentives to clear OTC derivatives via a central counterparty, a G20 aim. For instance, it is considering whether the leverage ratio requirement on banks is weakening incentives to provide clearing services. Bank staff have researched the effect the leverage ratio is having on client clearing (Acosta-Smith, Ferrara, Rodriguez-Tous (2018)). The results suggest that the leverage ratio may be deterring banks that are most affected by this regulation from clearing OTC derivatives trades on behalf of clients. Box 1 discusses this  28  http://www.fsb.org/wp-content/uploads/P030717-4.pdf. See the letter from the Financial Stability Board chair to G20 Finance Ministers and Central Bank Governors, 18 March 2018, http://www.fsb.org/wp-content/uploads/P180318.pdf.

13  All speeches are available online at www.bankofengland.co.uk/speeches  13  Box 1:The effect of the leverage ratio on over-the-counter derivatives  As part of the evaluation of the effects of post-crisis reforms on incentives to centrally clear over-thecounter (OTC) derivatives, Bank staff have undertaken research on the impact of the leverage ratio on client cleared derivatives (Acosta-Smith, Ferrara, Rodriguez-Tous (2018)). 32  Following the Global Financial Crisis, the Basel Committee introduced a leverage ratio requirement: a bank’s Tier 1 capital to total exposures cannot be less than 3%. The UK introduced a minimum requirement in January 2016 for the largest seven deposit-takers in the UK. At the same time, with the aim to reduce systemic risk, regulators also supported a shift towards central clearing in derivative markets, where central clearing refers to the clearing and settlement of OTC derivative trades through a central counterparty (CCP). To support this shift, mandatory clearing for the most liquid forms of OTC derivatives was introduced. This meant an entity engaging in these trades and subject to the mandatory clearing requirement would need either to become a clearing member of a CCP or form a clearing relationship with a clearing member. In the latter case, the clearing member would then clear the derivative transaction through a CCP on behalf of its client – hence the term ‘client clearing’. The number of clients clearing OTC derivatives has increased significantly in recent years, as Chart A illustrates. The interaction between client clearing and the leverage ratio arises in two ways.