New derivatives rules may up banks’ capital commitment

Tim Wallace
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DERIVATIVES volatility is set to rise and dealing houses’ capital requirements may triple under new derivatives regulations, according to a report out today from Ernst & Young.

Basel III introduces a credit valuation adjustment volatility charge which seeks to cover potential changes in the value of a firm’s value at risk, which the report warns could boost the capital a bank needs to set aside against a bank’s derivatives unit.

“Determining the fair value of derivatives contracts continues to be one of the key issues for the banking sector in 2012,” added Ernst & Young’s Frank De Jonghe. “The crossover between the more volatile accounting measurement introduced by IFRS 13 and Basel III may significantly hike up dealing houses’ capital requirements and also introduce significant volatility.”