On April 28, FIA President and CEO Walt Lukken warned members of Congress that the capital required to meet the new leverage ratio requirements will make it more difficult for banks to provide clearing services to end-users.
“New capital requirements are lessening clearing options for end-user customers who use futures and cleared swaps to manage their business risks,” Lukken said at a hearing held by a subcommittee of the House Agriculture Committee. “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.”
“New capital requirements are lessening clearing options for end-user customers who use futures and cleared swaps to manage their business risks.” Walt Lukken
Lukken noted that while FIA generally supports efforts to appropriately enhance capital requirements, the 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.”
Walt Lukken, President and CEO of FIA, testifies before the House Agriculture Subcommittee on Commodity Exchanges, Energy and Credit about the impact of margin and capital requirements on end-users. This video is an excerpt of questions and answers during the hearing that was held on April 28, 2016.