Economics · Financial Regulations and Derivatives

The global financial crisis of 2008 highlighted the systemic risks posed by unregulated over-the-counter derivatives, leading to significant reforms like the Basel III framework. Consider the following observations on the regulation of derivatives: Statement 1: The introduction of the 'Leverage Ratio' under Basel III is intended to restrict the build-up of excessive on- and off-balance sheet leverage in the banking sector by providing a non-risk-based backstop to the risk-based capital requirements. Statement 2: A 'Total Return Swap' (TRS) is a derivative contract in which one party receives the total economic performance of a reference asset in exchange for paying a regular floating interest rate, which can lead to 'shadow banking' concerns if unmonitored. Statement 3: Exotic derivatives like 'Barrier Options' are simpler and less risky than plain vanilla options because they only activate if the underlying asset hits a pre-defined price level. Which of the following statements is/are correct?