Leverage,

The leverage ratio specifies the minimum amount of core capital a bank must hold as a proportion of its total assets, regardless of how risky they are. The ratio is binding from 2018 across the world and banks must report their ratio from this year.

But the collateral banks must hold on behalf of clients to meet clearing house requirements has to be included in their leverage ratio calculation, putting a squeeze on their balance sheet. As a result, banks are shying away from putting derivatives trades through clearing houses on behalf of customers.

Phyllis Dietz, an acting director for supervision at the US Commodity Futures Trading Commission, which regulates derivatives in the United States, said the leverage ratio had become an issue for the market. “The concern really is that the leverage ratio does not undermine the motivation to clear. There needs to be a balance. We are concerned that we are working at cross purposes.”

David Bailey, director of financial market infrastructure at the Bank of England, which regulates banks in Britain, said there was a lot of noise about the leverage ratio.

“It’s something that we are actively considering, but we need to do it in a thoughtful way,” Bailey told the IDX derivatives conference. “We just can’t have a kneejerk reaction to concerns raised.”

Bailey declined to elaborate on what regulators were doing. —