The Global Markets Advisory Committee (GMAC) of the U.S. Commodity Futures Trading Commission (CFTC) has released a report addressing the potential adverse effects of recent bank regulatory proposals on cleared derivatives markets. The report also offered recommendations to improve the efficiency of variation margin processes in non-cleared derivatives markets.

The GMAC report, titled “The Impact of the US Bank Capital Proposals on End-Users that Rely on Cleared Derivatives Markets,” scrutinises two federal bank regulatory proposals targeting global systemically important bank holding companies (GSIBs): the Basel III endgame proposal and a Federal Reserve proposal to adjust the GSIB surcharge calculation.

The report highlights significant concerns, including a projected reduction in U.S. banks’ capacity to provide derivatives market access, decreased market liquidity, increased hedging costs for end-users, disproportionate harm to smaller entities and non-public companies, and heightened systemic risk.


Increase capital requirements

Data from leading derivatives market trade associations estimate these proposals could result in an US$7.21 billion net increase (80.5 per cent) in capital requirements for the six largest U.S. banks’ derivatives clearing activities. The report supports its findings with comments from a diverse array of industry participants, including agriculture, energy, insurance, pension funds, derivatives exchanges, and clearinghouses.

Additionally, the GMAC’s Technical Issues Subcommittee (TIS) made recommendations to streamline variation margin processes in non-centrally cleared derivatives markets. The TIS advises the CFTC to back recent suggestions from the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO).


Key recommendations include addressing operational and legal challenges during stress periods, providing flexibility in collateral forms, standardising and automating margin processes, and evaluating internal versus third-party collateral management resources.