The Basel Committee on Banking Supervision proposed changes to banks’ leverage-ratio calculations to better differentiate between margined and non-margined derivatives trades. (The leverage ratio refers to the amount of shareholder equity and disclosed reserves a bank maintains divided by its total exposures. Under Basel III, banks are expected to maintain a leverage ratio of 3 percent while the Board of Governors of the Federal Reserve System expects most insured bank holding companies to maintain a leverage ratio of 5 percent and systematically important financial institutions 8 percent.) However, the Basel Committee did not at this time propose to amend such calculations to better account for initial margin posted by clients in connection with cleared derivatives transactions. Currently, under banks’ leverage-ratio calculations, a measure of potential futures exposure in connection with derivatives transactions is not reduced by the amount of initial margin posted by a client. As a result, banks must maintain a greater amount of capital in connection with cleared derivatives business than if offsets were permitted. Industry organizations have argued that this is unfair and is inconsistent with the objectives of the G-20 to promote the clearing of derivatives transactions. (Click here for details of this argument in the article, “Industry Organizations Request Basel Committee Reconsider Proposed Treatment of Segregated Customer Margin” in the November 23, 2014 edition of Bridging the Week.) However, the Basel Committee agreed to collect further evidence and data to “assess the effects of the Basel III leverage ratio on the client clearing business model and the need for banks to have adequate capital to support their clearing activities.” The Basel Committee will accept comments on its proposals through July 6, 2016.