TLAC, sovereign risk and clearing for small firms

The week on, December 17–December 23

TLAC burdens US banks

CLEARING ACCESS eludes buy-side

FACTOR INVESTORS – looking for value

Commentary: Splitting the difference

Are the EU and US heading in opposite directions on prudential regulation? US rules just keep getting tougher. The Federal Reserve has eased the transition process for total loss-absorbing capacity (TLAC) buffers by allowing banks to grandfather existing long-term debt and make it eligible until it matures. But some banks will still have to raise an awful lot of new TLAC-eligible debt, with retail banking specialist Wells Fargo possibly topping the list.

The zealotry of US regulators is beginning to grate with the authorities elsewhere. Asian regulators submitted a joint response this week to plans by the US Commodity Futures Trading Commission to force registration on foreign swap dealers – something had earlier predicted.

By contrast, the European Commission is prompting complaints of a return to the era of light-touch regulation. The EC unveiled its new bank rules mega-package, the second capital requirements regulation, in November. German policymakers are already expressing concern that the EC has gone soft on sovereign risk – the ultimate live rail in the eurozone.

Clearing crunch 

Elsewhere, the week saw the shortest day of the year in the northern hemisphere – December 21 – preceded by its darkest and longest night. Fortunately, it turned out not to be a sleepless one for Europe's largest fund managers, who became subject to the second phase of the EU's mandatory clearing regime that day. Banks and their clients, many of whom have been clearing on a voluntary basis for some time, say deadline day was business as usual.

Their smaller peers, however, may not be so lucky come next June when – unless there is a delay – they become subject to the regime too. Many category three firms claim banks have so far shown little interest in extending clearing services to them, and that, where clearing agreements have been inked, they are subject to cancellation at short notice. Banks counter that such agreements reflect the cost of providing clearing under the crippling impact of the Basel III leverage ratio. Absent a fix to change the basis of the ratio's calculation and a further tweak to allow client margin to offset derivatives exposures, OTC clearing will remain unprofitable, they say.

Stat of the week:

Australian bank ANZ swallowed a $122 million loss after a change in its accounting methodology for credit valuation adjustments. The loss is equivalent to 15% of the total annual profit at the bank's institutional division, and other second-tier banks in Europe, the US, Japan, Asia and South Africa may have to follow suit as new Basel rules on CVA enter into force.

Quote of the week:

"Emir provided an incentive to clear and put trades on exchange, but Mifid II reverses this incentive. I don't think [the previous growth in clearing] will carry on" – Richard Field, Baringa Partners

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