Banks Win Again As Proposed "Toughened" Basel Derivatives Rule "Seems To Have Evaporated"

Tyler Durden's picture

Overnight, Bloomberg released its analysis of a Basel derivatives rule proposed last year according to which banks would be required to set aside more money in the event swaps making up the $693 trillion swaps market go bad. "And not just a little bit more -- as much as 92 times, or 9,100 percent, more, according to calculations by three banks shared with Bloomberg News. The higher costs in turn may cause market participants to flee rather than take advantage of the clearinghouses, making it more difficult for those third-party guarantors."

The toughened standards, hatched five years ago after derivative losses almost crashed the global economy, are meant to safeguard trades and bring more openness to a market whose secrecy and sheer size overwhelmed regulators in 2008. Where swaps had been one-on-one deals before, now they would be backstopped by third parties in clearinghouses that ensure everyone can pay, with the aim of avoiding emergency bailouts and panic.

Basically, all that was proposed was to increase the margin requirements on what many consider, accurately, to be the biggest ticking leverage time bomb, one where the failure of one counterparty would reverberate across the collateral chain with consequences far more dire than what happened to various shadow banking conduits after the Lehman collapse. Of course, even increasing the required capital would be powerless to halt a complete transmission freeze but at least it would give the optical impression that the derivatives market is more "stable."

This was promptly met with screams of terror from a financial sector which, despite all the rhetoric, is as undercapitalized as ever when taking into account the trillions in "off the books" shadow liabilities.

Bank advocates including the International Swaps and Derivatives Association Inc., a group representing the world’s largest banks, argued in a September letter to the Basel committee that its proposal was overkill and unfairly cost them too much money. The committee’s plan would “result in capital requirements that make clearing uneconomical,” the groups said.

Well, it should come as no surprise to anyone, that the banks won. As always. Moments ago Bloomberg released the follow up:

In a victory for banks, global financial regulators backed away from earlier guidelines that the firms had warned would destabilize the $693 trillion derivatives market.

 

The Basel Committee on Banking Supervision’s final rule, released today, will require banks that broker swaps trades to set aside much less money to protect against a default versus a proposal published last year. The plan now applies a minimum 20 percent risk weighting to money deposited at clearinghouses, which are third-party guarantors that back the transactions, down from 1,250 percent in the original proposal. The change takes effect on Jan. 1, 2017.

The punchline:

“They really had people spending a year thinking about it, and they reversed it. The banks should be very happy,” said Chris Cononico, president of GCSA LLC, a New York-based underwriter that’s seeking to insure derivatives clearinghouses. The proposed rule “seems to have evaporated,” he said.

Who are the winners:

The world’s largest derivatives brokers at the end of 2013 were owned by Goldman Sachs Group Inc., JPMorgan Chase & Co. (JPM), Newedge Group SA, Deutsche Bank AG (DBK), Morgan Stanley (MS) and the Merrill Lynch division of Bank of America Corp. (BAC), according to the U.S. Commodity Futures Trading Commission.

So from MF Global's "vaporized" commingled client assets to Basel's "evaporated" toughened derivatives rules, the banks are indeed "very happy."

And now back to perpetuation the illusion that the system is stable.