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Special Alert: U.S. banking regulators propose SA-CCR methodology for calculating derivatives exposures

Special Alert: U.S. banking regulators propose SA-CCR methodology for calculating derivatives exposures

2 November 2018 11:30am EDT

On Oct. 30, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued a rulemaking proposal seeking comment on an alternative approach to calculating capital requirements for derivatives. The proposal, if adopted, would permit banks to use the "standardized approach for measuring counterparty credit risk", also known as SA-CCR, as an alternative to the current CEM methodology for calculating derivatives exposure under U.S. regulatory capital rules.

As stated by the three agencies in their release, the SA-CCR methodology "better reflects the current derivatives market and would provide important improvements to risk sensitivity, resulting in more appropriate capital requirements for derivative contracts exposure." It should be noted, however, that the proposal is 245 pages long and many of its provisions are highly technical. FIA will be working with capital experts from member firms as well as outside counsel to assess the proposal and its potential impact on the capital requirements of FIA member firms.

In addition, it should be noted that the proposal would affect the calculation of derivatives exposure in the supplemental leverage ratio, but it does not recommend any changes to the treatment of collateral provided by clients for cleared derivatives. Instead the agencies state that they are "sensitive to impediments" to the willingness and the ability of banks to provide client clearing services, and they invite comment on the consequences of not recognizing this collateral. This is an important issue for clearing firms and FIA expects to address this issue in our response to the proposal.

The three agencies have provided 60 days for interested parties to submit comments on the proposal. If adopted in its present form, banks would have a transition period until July 2020 to implement SA-CCR, although banks could voluntarily adopt this methodology as soon as the final rule becomes effective.

In recent years, FIA has invested heavily in advocating for changes in capital requirements for cleared derivatives. FIA officials and member representatives have met with officials from central banks, market regulators and finance ministries in multiple countries and explained that the current treatment works against the G20 mandate for central clearing by creating an economic disincentive for banks to provide clearing services to their clients. This announcement from the U.S. banking regulators demonstrates a willingness to recalibrate the capital requirements for derivatives, and that is a welcome development, but it is only one step among many that need to be taken to ensure the health of the clearing ecosystem. In particular, FIA will continue to advocate for various changes to the SA-CCR methodology, including recognizing client collateral as exposure-reducing for cleared derivatives. As we said in our testimony before the U.S. Congress in February, the current approach unnecessarily inflates the cost of client clearing, limits the amount of clearing that banks will conduct, and discourages companies in the real economy from using cleared derivatives to hedge their risks.

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