World Federation of Exchanges seeks risk-based calibration of EU Bank Capital for national equity markets

The World Federation of Exchanges (The WFE), a global industry group for exchanges and CCPs, has published its response to the European Banking Authority (EBA) concerning recognition of developed equity markets.  

In responding to the EBA, the WFE is seeking to promote market-based finance globally, by advocating for proportionate and predictable capital treatment for equity-market risk. 

The WFE proposes that the favourable designation of ‘advanced-economy’ equity market in the draft EBA Regulatory Technical Standards be linked to objective criteria that are relevant to positions in the ‘trading book’. For example, it may be desirable to use a metric comparing the liquidity and volatility of a particular country to a global index. This is important for all firms not using internal models, as the standardised approach should avoid introducing distortions through arbitrary bucketing of countries.

Adding more countries to the advanced economy list, subject to their meeting appropriate criteria, would mean that brokers with operations in any given country will better be able to serve the needs of investors outside that country, allowing those investors to benefit from its economic growth and to diversify portfolios.

Nandini Sukumar, Chief Executive Officer of the WFE, says: “The list of countries included in the Basel approach does not appear to have a clear, risk-based methodology behind it. We hope the EBA will take this opportunity to implement the bank capital regime in the EU in such a way that all countries can understand the yardstick against which they are being judged for these purposes.”