January 16, 2024

Ann E. Misback
Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue N.W.
Washington, D.C. 20551

James P. Sheesley
Assistant Executive Secretary
Attention: Comments/Legal OES (RIN 3064-AF29)
Federal Deposit Insurance Corporation
550 17th Street N.W.
Washington, D.C. 20429

Chief Counsel’s Office
Attention: Comment Processing
Office of the Comptroller of the Currency
400 7th Street S.W.
Suite 3E-218
Washington, D.C. 20219

Re: Regulatory capital rule: Amendments applicable to large banking organizations and to banking organizations with significant trading activity Federal Reserve: Docket No. R-1813, RIN 7100-AG64 FDIC: RIN 3064-AF29 OCC: Docket ID OCC-2023-0008

Dear Sir/Madam,

The International Swaps and Derivatives Association, Inc. (“ISDA”) and the Securities Industry and Financial Markets Association (“SIFMA” and, together with ISDA, the “Associations”) welcome the opportunity to comment on the proposal referenced above (the “Proposal”) issued by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”) and the Office of the Comptroller of the Currency (the “OCC” and, collectively with the FDIC and the Federal Reserve, the “Agencies”).

This letter highlights issues arising from the Fundamental Review of the Trading Book (“FRTB” or “market risk”), credit valuation adjustment (“CVA”) risk and, with respect to counterparty credit risk (“CCR”), aspects of the Proposal relating to securities financing transactions (“SFTs”) and derivatives. These aspects of the Proposal and the Proposal more generally—in conjunction with the Federal Reserve’s stress testing regime and the capital surcharge imposed on U.S. global systemically important banking organizations (“GSIBs” and the “GSIB Surcharge”)1—would, collectively, impose excessive capital requirements that are not aligned with underlying risk, and negatively affect companies, consumers and savers who benefit directly or indirectly from bank involvement in U.S. capital markets.2

While we appreciate the revisions to the Basel Committee standards for FRTB and CVA risk that the Agencies have proposed, we continue to be very concerned that the proposed 129 percent increase in FRTB and CVA capital requirements is not supported by any detailed analysis from the Agencies.3 In fact, the Agencies note that “the overall effect of higher capital requirements on market making activity and market liquidity remains a research question needing further study.”4 This underscores the necessity of further careful analyses of the impact on end-users of all types prior to finalization. Federal Reserve Chair Powell rightly acknowledged the risks of substantial increases in capital requirements for trading activities, noting that, as a result of the proposed risk-weighted assets (“RWA”) increases for market risk, large U.S. banking organizations “could reduce their activities in this area, threatening a decline in liquidity in critical markets and a movement of some of these activities into the shadow banking sector.”5

The results of our QIS show that there is a significant increase in RWA impact for capital markets when comparing the current standardized approach to the ERBA.

To inform our comments on the potential effects of the Proposal, the Associations conducted an in-depth quantitative impact study (“QIS”) with input from the eight U.S. GSIBs.

1 12 C.F.R. Part 217, Subpart H.

2 The Agencies estimate that “the increase in RWA associated with trading activity (market risk RWA, CVA risk RWA, and attributable operational risk RWA) would be around $880 billion for large holding companies,” which represents a 157 percent increase in RWAs for trading activities. 88 Fed. Reg. at 64,170. This 157 percent increase is relative to the current standardized approach, which does not include CVA risk RWAs or operational risk RWAs and is calculated as the quotient of the estimated $880 billion increase in RWAs associated with trading activity over the $560 billion in RWAs for market risk under the current standardized approach identified in the Proposal.

3 Under the current U.S capital rules, the U.S. standardized approach generally is the binding capital constraint for large banking organizations. It includes capital requirements for market risk and credit risk. The proposed expanded risk-based approach (“ERBA”) under the Proposal would include capital requirements for CVA risk and operational risk in addition to market risk and credit risk. The ERBA, as opposed to the standardized approach, is generally expected to be the binding capital constraint going forward. Table 1 demonstrates that the total market risk and CVA risk RWA under the current standardized approach and ERBA, respectively, equals $383 billion and $877 billion – an increase of 129 percent.

4 FDIC, Federal Reserve, OCC, Regulatory Capital Rule: Large Banking Organizations and Banking
Organizations with Significant Trading Activity, 88 Fed. Reg. 64,028, 64,170-71 (Sept. 18, 2023).

5 Statement by Chair Jerome H. Powell, July 27, 2023, available at
https://www.federalreserve.gov/newsevents/pressreleases/powell-statement-20230727.htm.