Washington, D.C. — FIA President and CEO Walt Lukken testified today at a hearing on the impact of capital and margin requirements on end-users, held by the House Agriculture Subcommittee on Commodity Exchanges, Energy, and Credit.
“New capital requirements are lessening clearing options for end-user customers who use futures and cleared swaps to manage their business risks,” Lukken said. “This harms farmers seeking to manage commodity price fluctuations, commercial companies wishing to lock in prices as they distribute their goods, and pension funds using derivatives to enhance workers’ retirement benefits. The negative impacts to the real economy are significant.”
FIA has been active on this issue, working with regulators and industry members to address the impact of bank capital requirements on those who support and utilize the derivatives clearing system.
Lukken noted that while FIA generally supports efforts to appropriately enhance capital requirements, the Basel leverage ratio has failed to properly consider the exposure-reducing effect of customer margin.
“An end-user that utilizes the futures market to hedge its business risks is required to clear transactions through a clearinghouse, and to do so it must offset its exposure by posting margin through a clearing member,” he explained. “These are customer funds, provided specifically to offset the bank-affiliated clearing member’s exposure in their obligation to pay the clearinghouse on behalf of the customer. Such customer margin should therefore be considered an offset in determining the bank’s exposure.”
Following the Basel Committee's recent consultation on proposed revisions to the leverage ratio, FIA pledged to work with industry members to facilitate efforts to gather and analyze data on the impact of capital requirements.
