We appreciate the opportunity to submit this comment letter on the joint agency proposal regarding the Supplementary Leverage Ratio (SLR). We support SLR reform that would increase the likelihood that the SLR functions as a backstop rather than as the primary capital standard for banks and bank holding companies. Because the SLR by design is not risk-weighted, it is unduly restrictive for low-risk activities such as Treasury market intermediation when it is binding. We provide analysis that expanded central clearing of Treasury repo creates significant balance sheet netting benefits, but recalibrating the SLR can also help to improve intermediation while safeguarding the soundness of U.S. banking firms and the stability of U.S. financial markets.

1. Central clearing of Treasury repo can substantially reduce the Total Leverage Exposure for the SLR and increase capacity for Treasury market intermediation

Our analysis, attached to this letter, indicates that greater central clearing of Treasury repo transactions is creating significant netting benefits for dealers’ balance sheets, reducing the total leverage exposure (TLE) for the SLR. These netting benefits create greater dealer capacity for Treasury market intermediation. Material netting benefits, up to $900 billion based on data in April 2025, are already being achieved through the central clearing of dealer-to-customer repo transactions by utilizing the sponsored repo service of the Fixed Income Clearing Corporation. Data on repo and reverse repo positions at primary dealers in April 2025 reveal additional potential netting benefits of $700 billion, which can be realized as the central clearing of Treasury repo transactions continues to expand organically and as the central clearing rule is implemented. These benefits are sizable, nearly double the primary dealers’ total net position in Treasury securities of $384 billion in April 2025.

These findings have important implications for proposed reforms to the SLR. In considering revisions, banking regulators face the tradeoff that a higher SLR could restrict intermediation capacity for Treasury markets and other low-risk activities, whereas a lower SLR could lead to higher risks in the banking system. Central clearing improves that tradeoff because it expands intermediation capacity without increasing risks for banking firms. In fact, central clearing can reduce risks through multilateral netting and more standardized risk management practices. By reducing the TLE for the SLR, central clearing of Treasury repo already helps relax the constraint associated with SLR.

2. Recalibrating the e-SLR surcharge is better capital policy given current capital levels

We support the proposed recalibration of the e-SLR surcharge for GSIBs, as specified in the proposal, that would lead to a reduction in the surcharge. The current level of the surcharge—2% at the holding company and 3% at depository institution subsidiaries—increases the likelihood that the e-SLR rather than the risk-based capital requirement would be the binding capital constraint. This unintended result could lead to perverse risk-taking incentives.  Moreover, with current risk-based capital requirements and current levels of capital, a moderate reduction in the e-SLR surcharge would not lead to a meaningful reduction of required capital in dollar terms at the holding company.

Another option not included in the proposal would be to make the e-SLR surcharge countercyclical; that is, allow for a temporarily lower SLR in periods of market stress. This option could make the capital buffer available to absorb losses and expand capacity in periods when Treasury market intermediation is needed the most.

3. It is too risky to allow banks to exclude all Treasury securities from TLE, but excluding Treasury securities in the trading book could improve intermediation

We do not, however, support an outright exclusion of all Treasury securities from the TLE used to calculate the SLR requirement, as formulated in the “broader exclusion” alternative of the proposal. Because sovereign debt issued in domestic currencies has a risk weight of zero under the Basel standard (including the current capital rules in the U.S.), the outright exclusion of Treasury securities from TLE would lead to a complete absence of a capital charge for the interest rate risk of Treasury securities held in the banking book. The safety and soundness of the banking system requires the recognition of interest rate risks on banking books. For this purpose, the SLR is still a critical, and the only, backstop. Indeed, the failures of two mid-sized banks in March 2023 and stresses on many others serve as a painful reminder that interest rate risks can be substantial and must not be ignored.

That said, we would support an option to exclude Treasury securities held in the trading account because these securities are marked-to-market and receive a market risk capital charge. This narrow exclusion could make Treasury intermediation more flexible and elastic, for example, by allowing dealers to purchase Treasury securities in the trading account during a market selloff without triggering the SLR. However, such an exclusion would not be consistent with Basel III.

4. It is reasonable to consider exempting reserves from TLE

We also support further exploration of exempting reserves from the TLE for two reasons. First, the aggregate amount of reserves is controlled by the central bank, not the banks. The exclusion of reserves in TLE would also avoid any unintended interference with monetary policy implementation. Second, central bank reserves are the ultimate safe asset, and their exclusion from TLE would not create additional market risk or credit risk for the banking system and could increase Treasury market intermediation.