WFE letter on BCBS 227 Interim Capital Framework - 28 May 2013

Mr. Stefan Ingves

Chairman, Basel Committee on Banking Supervision


Mr. Mark Carney

Chairman, Financial Stability Board


Mr. Paul Tucker

Chairman, Committee on Payment and Settlement Systems


Mr. Greg Medcraft

Chairman, International Organization of Securities Commissions


RE:     BCBS 227 Interim Capital Framework



                                                                                                               Paris, 28 May 2013


Dear Sirs:


As you know, on 27 November 2012, the World Federation of Exchanges (WFE) and the International Options Markets Association (IOMA) wrote to express our concerns with the provision within the Basel III Interim Capital Framework which would apply a 5-day margin period of risk (MPOR) capital standard to highly liquid and transparent exchange traded derivatives (ETDs).[1]  Our organizations remain concerned that this 5-day MPOR standard, if finalized by the BCBS and adopted by national regulators, will increase the costs for exchange end-users that depend on the highly transparent and liquid ETD markets to hedge risks.  Such an outcome would likely undermine the commitments made by the G20 finance ministers to move derivatives to transparent platforms and central clearing systems.   


We appreciate your willingness to consider an alternative standard for capitalizing clearing member exposures to clients engaged in centrally cleared transactions.  On behalf of the 57 publicly regulated stock, futures, options exchanges, and central clearing houses that comprise WFE and IOMA’s membership, we encourage you to consider an alternative that takes into account the transparency and liquidity profiles of derivative products when determining clearing member exposures.  These principles were reflected in the 26 April 2013 letter signed by leaders of 12 derivatives exchanges—most of which are members of WFE and IOMA (the 26 April 2013 letter is enclosed for your reference). 


The alternative standard that was proposed in the letter by the 12 exchanges, and supported by WFE and IOMA members globally, recognizes well established industry risk management standards and sets forth criteria for ensuring that: 1) the liquidation period is closely compatible with the liquidity profile of the product; 2) the product is marked to market on a daily basis; 3) the product has a sufficient turnover rate; and 4) there is broad market participation in the product as measured by open interest.   


We believe that this proposed approach is relatively straightforward while also flexible enough to enable market innovation.  Moreover, we believe that this alternative is complementary to the goals of the G-20 derivative market reform commitments which WFE and IOMA have consistently supported through a number of policy statements and through the direct actions of our members to advance derivative markets transparency and sound credit risk management through centralized clearing. 


This proposed alternative will ensure that the costs of liquid ETDs are not unnecessarily increased and it will also establish a framework that, in the future, could also be applicable to highly liquid and transparent OTC products.  G20 OTC reform commitments will continue to take shape and be implemented.  As more OTC products are cleared and OTC markets become more transparent, the liquidity and transparency attributes of many OTC products may become comparable to the ETD products.  As a result, many OTC products with comparable liquidity and transparency profiles to ETD products may warrant a MPOR capital standard that is comparable to that of many ETDs.


We recognize that an acceptable alternative standard must be workable for markets in all geographies and in varying stages of development.  Given the breadth and diversity of our membership and the extensive ETD data we possess, WFE and IOMA are uniquely positioned to assist you in evaluating the proposed alternative.    


WFE and IOMA appreciate your consideration and stand ready to lend our expertise to this discussion. 


Cordially yours,


Huseyin Erkan                                                                      Jorge Alegria Formoso

Chief Executive Officer                                                       Chairman, IOMA

Word Federation of Exchanges                                            Chief Executive Officer, MexDer

[1] WFE is the global association representing the interests of 57 publicly regulated stock, futures, and options exchanges, as well as the central clearing houses that many of these exchanges operate.  Collectively, WFE members represent the vast majority of the global exchange-traded equities and derivatives markets.  IOMA is the WFE’s global association of options and futures exchange leaders.  The member list of WFE is included in the annex to this letter.



Report Date: 
Fri, 06/07/2013