The U.S. Securities Industry Association asked banking regulators to reconsider aspects of new capital requirements for global banks, known as Basel II, relating to the trading book and unsettled trades, and provided suggestions to better align capital requirements and risk.

An Ad Hoc Committee, comprised of representatives of five large investment banks, filed a response with the Basel Committee on Banking Supervision of the Bank for International Settlements and the International Organization of Securities Commissions on a consultative document seeking input on these trading issues.

“While there is much in the [document] with which we agree, significant revisions to the proposed capital requirements for both credit risk in the trading book and unsettled trades are warranted,” says chairman of the SIA’s Risk Management Committee and senior director of Bear Stearns & Co., Inc. Michael Alix, who signed the letter on behalf of the committee.

“Managing trading risk is absolutely key for investment banks. Consequently, the Ad Hoc Committee believes it essential that the provisions governing the trading book ‘get it right’ so that regulatory capital is proportional to risk, and firms have appropriate incentives to continually improve their risk management practices,” Alix adds.

The committee recommends regulators consult with investment banks and banks to determine whether their Value-at-Risk models effectively capture the material risks of their business. In addition it says if a regulator determines that a VaR model does not adequately capture default risk, an “Incremental Default Risk Capital” charge should be developed, grounded in risk-based principles.

It also warns, “the proposal to increase what are already inappropriately conservative standardized risk charges is a mistake. The concept of standardized risk weights should be rethought to ensure that any such charges are appropriately risk-sensitive.”

It continues to say, “The proposals for the treatment of unsettled transactions would create a very significant operational burden, and result in punitive capital charges for risks that — in the experience of investment banks — have not been material.”

“We look forward to further discussions with IOSCO and the Basel Committee on these important issues, and appreciate the opportunities we have had to engage in a dialogue with regulators on Basel II and its impact upon investment banks,” said Alix.