OCC reaffirms leverage ratio objections 15 August 2016Chicago Reporter: Mark Dugdale
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The leverage ratio’s current exposure method could move liquidity away from the listed and centrally cleared markets back to the opaque bilateral over-the-counter markets, according to Options Clearing Corporation’s (OCC) financial risk management chief.
John Fennell reaffirmed OCC’s objections to the proposed current exposure method in a blog post on 11 August.
The central clearer added its signature to a letter, backed by another 30 market participants, that was sent to the Basel Committee on Banking Supervision (BCBS) last month, which strongly opposed the proposed leverage ratio framework.
The currently proposed CEM “neglects to recognise the risk limiting effects associated with being long and short options of different strikes on the same underlying instrument”, Fennell wrote.
“Hedging option risk using other options is the most effective and relied upon way option market makers mitigate the risks assumed as they fulfil their vital role of providing committed liquidity to the cleared markets.”
“The leverage ratio creates the real potential to move liquidity away from the listed and centrally cleared markets and ultimately back to the opaque bilateral over-the-counter markets. This is counter to the global mandate by regulators to bring more OTC volume into centrally cleared solutions mitigating systemic risk.”
OCC and its co-signatories want the BCBS to adopt the standardised approach for counterparty credit risk (SA-CCR) method is within the leverage ratio. Otherwise, Fennell wrote, “market makers, who serve to provide deep liquidity to the listed options market, will be significantly diminished”.
The BCBS’s proposed final leverage ratio framework is due by the end of 2016.
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