Investment Operations

SIFMA, FIA Comment on Basel III Operational Risk Proposals

Corporate Actions Risk Management

SIFMA and Futures Industry Association (FIA) has submitted a comment letter to the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation on proposed modifications to operational risk capital requirements under the Basel III Proposal, specifically changes that would adversely affect bank provided fee-based business activities that are critical to the functioning of the U.S. capital markets.

As the letter notes, these adverse effects would arise primarily because the proposal would require banking organizations to hold capital against fee and commission-based activities – such as retail brokerage, investment advisory services, custody, and client clearing – effectively without limit. The treatment of fee-based income under the proposal could have adverse effects on the U.S. capital markets by over-calibrating capital requirements for relatively low-risk services, potentially impacting U.S. banking organizations’ future engagement in these activities and raising costs for both retail and institutional investors. It would also contravene longstanding U.S. financial services policy that has encouraged banks to diversify their business models. The letter endorses a range of industry recommendations for revising this treatment. The letter also calls for the banking agencies to revise the treatment of inter-company payments that would penalize foreign banking organizations operating capital markets businesses in the United States.

More generally, the letter recommends that the banking agencies address other drivers of the broad over-calibration of operational risk capital requirements, including by modifying its approach to stress testing of operational risk and through other adjustments to the proposed operational risk framework.

Finally, the letter urges the banking agencies to “proceed cautiously, after making an in-depth analysis available to the public, in considering changes to the framework as significant as those contained in the proposal.” It goes on to state that “given the serious analytical gaps in the proposal, including as highlighted in this letter, the Agencies must make available its economic analysis justifying the proposed requirements and re-propose the rule in full with a new 120-day comment period. The re-proposal should explicitly define the specific capital problems that need to be addressed and how a proposed solution would address them. Consistent with the Agencies’ legal obligations under the Administrative Procedures Act, the re-proposal should also contain a robust economic analysis that convincingly demonstrates the net social benefit of the proposed changes in a data-based and transparent fashion.”

The full comment letter expands on these issues in more detail and can be found here.