OCC chief Donohue latest to warn over Basel rules

The head of US derivatives clearing firm OCC has become the latest to add his voice to the growing chorus of opposition to the Basel Committee’s proposed capital charges, arguing they will impact liquidity which could jeopardise the integrity of the market.

Craig Donohue, executive chairman and chief executive officer of Chicago-based OCC, the US equity derivatives clearing firm, said the various Basel II capital reforms, set to take effect internationally in stages over the next two years, are poorly drafted.

He told FOW: “From the industry’s perspective, the most concerning issue is the capital pressure on bank affiliates and clearing member firms, which is having a trickle-down effect on market-makers and liquidity providers.”

Basel III, which is the latest round of capital reforms aimed at banks, is made up of various new charges based on complex calculations such as risk-based capital, liquidity coverage ratio, leverage ratio or the net stable funding ratio.

Individual countries’ regulators are implementing the different requirements at different speeds which is problematic for international firms.

Donohue said: “The risk-weighted assets calculation under Basel as implemented by the US banking regulators have caused a dramatic increase in the amount of capital to be held by bank-affiliated member firms in relation to their proprietary trading and market-maker customers. In some cases, they are as much as six to eight times what they used to be.”

Donohue, who was chief executive of CME Group for eight years until leaving the Chicago-based exchange in 2012, said the capital charges are already increasing the systemic risk in the market-place.

“It’s not currently having an effect on liquidity or the ability to trade but the lack of liquidity is our number one concern and could become a problem at a time of market stress or significant volatility,” he said.

US exchanges, clearing houses and trade bodies have made much of the reduction in the number of US clearing brokers, a trend that could be further exaggerated by the Basel rules.

Donohue said: “The consolidation and shrinkage among clearing members is concerning. We currently have a fraction of the clearing members we had in 2008 which means the business has become more concentrated, which is a problem.”

But Donohue said the pressure is not limited to brokers: “Market-makers are consolidating also due to the low volatility environment, which limits trading opportunities, and the increased cost across the industry. This trend is concerning because of its overall impact on all participants in the market.”