ISDA Urges Risk-Sensitive Recalibration as Basel III Endgame Nears Finalization

The International Swaps and Derivatives Association (ISDA) has renewed its call for a recalibrated approach to the US Basel III endgame, warning that the original proposal would have imposed disproportionate capital increases on trading book activities and risked undermining market liquidity and stability.

In its latest derivatiViews commentary, ISDA said the initial US proposal would have forced banks to make “hard choices about their participation in certain businesses,” with implications for market-making, client clearing, and the availability of hedging answers. later than more than two years of consultation and industry feedback, a revised proposal is now expected, raising hopes of a framework that better balances securety, soundness, and market efficiency.

ISDA said it has “advocated relentlessly for calibration changes to achieve a robust, more risk-sensitive framework,” adding that the forthcoming revision could mark a turning point if it effectively aligns regulatory objectives with the realities of risk management in .

Internal Models and the Future of Market Risk Capital

A central concern highlighted by ISDA is the future viability of internal models under the Basel III market risk framework, known as the Fundamental Review of the Trading Book (FRTB). While the FRTB intentionally raises standards for the use of internal models, ISDA argues that the proposed US implementation is so complex and operationally burdensome that it could all but eliminate their use.

ISDA warned that this outcome would represent a significant departure from the Basel Committee’s original intent. “This would be a major change that we don’t think is in line with the Basel Committee’s intentions,” the association said, stressing that internal models remain essential for achieving genuine risk capital requirements.

To address this, ISDA has proposed targeted adjustments, including reducing the stringency of the and resolving long-standing issues around the treatment of non-modellable risk factors. According to ISDA, these changes would “ensure the continued viability of internal models under the FRTB” while maintaining robust supervisory standards.

Takeaway

Netting, Clearing, and Constraints on Balance Sheets

Another key issue raised by ISDA relates to the standardized approach for counterparty credit risk and its failure to recognize the risk-reducing benefits of netting across products such as repos and futures. ISDA said this omission could have serious consequences as mandatory clearing of certain US Treasury securities comes into force.

With cash Treasury clearing scheduled to begin at the end of this year, followed by repos in mid-2026, ISDA warned that the lack of cross-product netting recognition would “constrain banks’ balance sheets and limit their ability to offer client clearing.” This, it said, could undermine the smooth implementation of the Treasury clearing mandate.

ISDA has urged policymakers to amend the standardized approach so it better reflects the economic reality of netted exposures across cleared products. Without such changes, banks may be forced to pull back from at a time when regulators are actively viewking to expand clearing participation to reduce systemic risk.

Takeaway

G-SIB Surcharges and the Cost of Client Clearing

ISDA also highlighted the combined impact of the Basel III endgame and the capital surcharge applied to global systemically significant banks (G-SIBs). According to ISDA’s analysis, the interaction of these requirements would increase capital for US G-SIB client clearing businesses by more than 80%.

Such an increase, ISDA said, is “completely at odds with the policy objective to promote and incentivize clearing” and could have unintended consequences for market stability. Higher capital costs could discourage banks from offering clearing services, reducing access for end-users and concentrating risk in fewer clearing members.

ISDA believes this outcome can be avoided through targeted adjustments, including removing the client-facing leg of cleared derivatives from the Basel III credit valuation adjustment framework and recalibrating the G-SIB surcharge. These steps, it said, would reduce what it described as a “disproportionate tax on clearing” while preserving prudential secureguards.

Takeaway

ISDA emphasized that its advocacy on Basel III recalibration extends beyond the US, noting that risk-appropriate capital rules are essential in every jurisdiction. “If capital requirements are disproportionate to the underlying risk, companies and governments that rely on banks for financing would face reduced support,” the association said, alongside fewer hedging options and greater exposure to external shocks.

Once the revised US proposal is published, ISDA said attention will shift to finalization and implementation. The association plans to test the recalibrated framework to ensure it delivers the intended risk sensitivity and to work with members to address operational challenges during implementation.

Ultimately, ISDA said its goal remains clear: “a robust, risk-sensitive trading book capital framework that stands the test of time,” supporting both and vibrant, well-functioning markets.