The Basel Committee has finalized a proposed exemption from the leverage ratio (LR) denominator for certain client-cleared derivatives. This is a considerably more generous treatment than that afforded central-bank deposits, which may only be exempted in stress scenarios under broader Basel LR revisions. Global regulators decided to do so despite misgivings about risk variations in the LR due to strong pressure from global securities regulators and G20 efforts to transition the over-the-counter (OTC) derivatives market to a centrally-cleared one. The change will significantly reduce the cost of holding client margin accounts for eligible transactions, perhaps increasing the role of banks in this arena to provide additional market capacity for central clearing and thus reduced capital-markets risk. However, more central clearing increases the critical importance of central counterparties (CCPs) as financial market utilities, heightening concern about CCP resolvability and risk in stress scenarios.
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