Flat Risk Weight of 800% – FINMA Clarifies Prudential Consequences of Cryptoassets Trading by Swiss Banks and Securities Dealers

December 06

Up to now, the Swiss Financial Market Supervisory Authority (FINMA) has taken no official position on how to consider cryptoassets for the Basel III capital requirements or liquidity ratios for banks and securities dealers. According to current media reports, however, FINMA is said to have revealed its practice on the issue in a confidential letter sent to EXPERTsuisse, an association representing Swiss trustees and accountants, on October 15, 2018. The following is a summary of FINMA’s views as reported in the media.

First, it advises financial services providers to assign a flat risk weight of 800% to cryptoassets to cover market and credit risks, regardless of whether the positions are held in the banking or trading book, until the Basel Committee on Banking Supervision (BCBS) has issued global recommendations. Such risk weighting of 800% is at the high end of the range, putting cryptoasset trading at the same level as hedge fund activity. This indicates that FINMA (a) is assuming that the asset class is generally highly volatile, even though price fluctuations in various cryptocurrencies such as Bitcoin have decreased in recent months, or (b) wants to treat the issue with particular caution until the official BCBS recommendations are issued. Nevertheless, FINMA comments that other countries take an even tougher line with risk weighting cryptocurrencies.

Second, FINMA puts a cap on cryptoasset trading activities in the amount of 4% of total capital, including both long and short positions. Once this limit has been reached, the respective institution is obliged to report to FINMA.

Last, but not least, FINMA states that cryptocurrencies cannot be regarded as highly liquid assets when determining liquidity ratios.

These three new guidelines affect not only the traditional institutions, but are also of interest to the growing number of new crypto-banks setting up in Switzerland. However, it is rather unlikely that FINMA will issue an official statement on the topic before global regulations have been set.

The above serves only as a brief summary of how FINMA is treating cryptoassets under Swiss banking and securities law according to current media reports. If you are interested in discussing the topic in more detail, please contact our Swiss Crypto-Finance team.

Yves Mauchle is an associate in the Corporate Finance practice area in Zurich. He focuses on debt and equity capital markets as well as financial services regulation. Yves regularly represents financial intermediaries and other clients on regulatory matters and advises on the particular challenges posed by fintech business models, including ICOs.