Wall Street groups have urged U.S. regulators to revise their plans for implementing the final phase of global bank capital requirements, known as the "Basel Endgame," warning that the current proposals could reduce liquidity in the $29 trillion U.S. Treasury market. The appeals come as the Federal Reserve and other regulatory agencies prepare to finalize updated rules intended to strengthen financial stability in response to vulnerabilities exposed during the 2008 financial crisis.

Under existing proposals, banks face new capital requirements designed to better capture risks associated with trading activities, including those linked to U.S. Treasury securities and repurchase agreements (repos). However, major financial trade bodies—the International Swaps and Derivatives Association (ISDA), the Securities Industry and Financial Markets Association (SIFMA), and the Institute of International Finance (IIF)—contend these revisions could inadvertently hinder market functioning.

In a joint letter addressed to the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), the organizations cited estimates from eight leading U.S. banks showing that capital requirements for trading activities tied to the Treasury market could increase by between 30 and 89 percent. They argued that several elements of the proposals are not sufficiently aligned with the economic risks they aim to measure.

A central concern highlighted in the letter is the upcoming mandatory shift to central clearing for U.S. Treasury and repo trading, expected to take effect next year. This transition is designed to reduce systemic risk by requiring trades to be cleared through central counterparties, allowing market participants to post lower collateral or margin. However, banks warn that the Basel framework would raise capital charges for counterparty credit risk in reaction to the reduced collateral, potentially offsetting the benefits of central clearing and discouraging liquidity provision.

Scott O’Malia, chief executive of ISDA, emphasized the potential market impact, stating that if regulators do not address these issues, liquidity providers in the Treasury market could face significantly higher capital costs as the clearing mandate comes into force.

The Federal Reserve declined to comment directly on the trade bodies’ letter. Sources familiar with the regulators’ thinking suggested there is skepticism regarding the claims that the new capital rules will harm market liquidity. Notably, regulators had already scaled back initial Basel proposals following earlier industry pushback. This reduction of capital requirements represents one of the most substantial lobbying outcomes for banks since the 2008 crisis, with Goldman Sachs CEO David Solomon expressing support for the Fed’s approach to the reforms earlier this year.

As the implementation of the Basel Endgame rules progresses, U.S. regulators face the complex challenge of balancing the objectives of enhancing financial resilience while preserving the depth and efficiency of key markets such as Treasuries. The ongoing dialogue between regulators and industry participants underscores the tension in calibrating capital standards that adequately capture true risk without stifling critical market functions.