Leverage ratio: the impact on securities financing transactions

Last month's Basel Committee publication of final rules on the leverage ratio was hailed as a victory for the industry. A number of amendments to the calculation of the 'exposure measure' will result in banks reporting higher leverage ratios - and thus appearing more resilient - than under the Committee's draft proposals of June 2013. But despite these favourable adjustments, the leverage ratio may still challenge the economic viability of some lines of business.

In Leverage ratio: the impact on securities financing transactions, we consider the potential impact of the leverage ratio on the multi-trillion dollar repo and securities financing markets. These markets play an important role in the efficient distribution of liquidity and collateral around the financial system. They have traditionally attracted minimal capital requirements due to the use of high quality collateral. But the leverage ratio ignores the risk-reducing benefits of collateral, resulting in some cases in substantially higher capital requirements for what is typically low-margin business.

Market participants will need to consider carefully the impact of the leverage ratio on both their business model and those of their key counterparties. The structure, collateralisation and pricing of securities financing transactions may all need to adjust to achieve capital efficiency relative to both risk-weighted and leverage-driven regulatory capital requirements.