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CME Group Executive Chairman and President Terry Duffy will appear before the House Financial Services Subcommittees on Financial Institutions and Consumer Credit, and Insurance, Housing and Community Opportunity, Thursday, November 29, to discuss "Examining the Impact of the Proposed Rules to Implement Basel III Capital Standards."
"CME Group's concern is that Basel III's 'one size fits all' rules for capital charges based on the risk of cleared derivatives is at odds with the objectives of Dodd-Frank and the G-20 mandates, which aim to reduce systemic risk and increase transparency," said Duffy in prepared testimony before the House subcommittees. "If clearing houses properly set margins for liquid derivatives to cover one or two day risk while banking regulators impose a capital charge based on five days, banks and ultimately their customers will be burdened with increased costs from unwarranted capital requirements. This may eliminate an incentive to trade liquid exchange-traded derivatives instead of other derivatives products with higher risk profiles."
"The capital rules should be replaced with an approach consistent with standards recognizing that margin levels will differ based on the liquidity, transparency and other risk-reducing characteristics of each product," Duffy added.
CME Group also joined the World Federation of Exchanges (WFE) and 11 other exchanges in submitting letters to international regulators calling for them to modify capital standards for exchange traded derivatives to appropriately reflect the liquidity and efficiency of exchange traded derivative markets. In the letters the exchanges said that the BCBS Interim Capital Framework should be amended to modify the 5-day capital charge for clearing members using exchange-traded derivatives and replace it with a standard consistent with IOSCO's Principles for Financial Market Infrastructures (PFMI) which are based on the risk profile, transparency and other characteristics of the product. Any alternative could result in inconsistent national outcomes and work against the G-20 objectives to promote adherence to international accords and further international harmonization.
The House Financial Services joint subcommittee hearing is scheduled for 10 a.m. Eastern time in the Rayburn House Office Building. Duffy's written testimony is available on www.cmegroup.com.
