An interesting article in Risk magazine, highlighting the continuing uncertainty over Basel III implementation and its integration with concurrent regulatory reforms.
The European version of Basel III, the Capital Requirements Regulation (CRR), contains a carve-out to the requirement under Basel III to levy a Credit Valuation Adjustment (CVA) charge in relation to the counterparty risk associated with derivative transactions. The carve-out applies to corporates (hedging) and sovereigns and also offers time-limited relief for pension funds. This Pillar I safe harbour reflects similar exemptions in EMIR with respect to clearing requirements. Quoting Germany’s Bafin, the article raises the widely-anticipated possibility that national regulators (including the UK’s PRA) may re-instate the CVA charge via their Pillar II powers of intervention.
While specific national intervention is likely to result in European disjunction, it also complicates the prospect for international regulatory equivalence. The global picture will remain unclear until the U.S. publishes its own Basel III interpretation – expected in the next fortnight.Contact Us