ISDA, Securities Industry and Financial Markets Association (SIFMA), American Bankers Association (ABA), Bank Policy Institute (BPI), and Futures Industry Association (FIA) submitted comments regarding the proposed rule issued by US Agencies (FDIC, FED, and OCC) to implement the standardized approach for counterparty credit risk (SA-CCR) as a replacement for the current exposure method (CEM) in the U.S. capital rules. The Associations generally support the move from CEM to a more risk-based measure and believe that an appropriately calibrated version of SA-CCR would be a major improvement.
The comment letter, however, expresses concerns with the impact of the proposal on the derivatives market, particularly equity and commodity derivatives. In the case of commodities, the proposal goes beyond the global standards set by BCBS and would result in a higher capital charge. This would create an uneven playing field for market participants across jurisdictions and adversely impact the ability of commercial end-users to hedge risk. Data collected by the Associations indicate the proposal would result in a 50% increase in risk-weighted assets for transactions with commercial end users when compared to CEM.
As laid out in the comment letter, the Associations’ data diverges significantly from the data used and cited by the US Agencies in the proposed rule. However, the Associations’ data show that exposure at default would remain flat and counterparty credit risk default risk-weighted assets would increase by 30% when compared to CEM. In their letter, the Associations note that this divergence warrants further analysis to avoid negative impact on the liquidity and functioning of capital markets. Based on the new data, the Associations specifically urge the US Agencies to:
- Reconsider the calibration for commodity and equity derivatives by recalibrating the supervisory factors of the proposal. Based on data collected by the Associations, supervisory factors of the proposal would result in a 70% increase in risk-weighted assets for commodity derivatives and a 75% increase in risk-weighted assets for equity derivatives when compared to CEM. If recalibration is not feasible, the Associations urge the US Agencies to, at a minimum, revert to the supervisory factors for commodity derivatives in the BCBS standards.
- Provide a more risk-sensitive treatment of initial margin that accounts for initial margin as a mitigant to counterparty credit exposure.
- Reconsider the application and calibration of the alpha factor to avoid overstating the risk of derivatives.
- Avoid any disproportional impact on the cost of doing business for commercial end-users that may result from reduced hedging.
- Allow for netting of all transactions covered by an agreement that satisfies the requirements for qualifying master netting agreements under the existing U.S. capital rules.
- Ensure SA-CCR does not negatively impact client clearing.
The Associations have raised a number of these concerns in connection with the BCBS standards for SA-CCR and in response to the implementation of SA-CCR outside the U.S. The comment letter urges the US Agencies to address these issues in their final rulemaking and coordinate with their non-U.S. counterparts at the Basel level to ensure global consistency.
Keywords: International, Americas, US, Banking, Securities, Basel III, SA-CCR, Risk-Weighted Assets, CEM, Standardized Approach, Regulatory Capital, OTC Derivative, US Agencies, ISDA
Previous ArticleFINMA Consults on Ordinance and Circular on Accounting for Banks
BCBS is consulting on two technical amendments to the rules on minimum haircut floors for securities financing transactions, or SFTs.
BIS launched a EUR-denominated, open-ended fund for green bond investments by central banks and official institutions, following the launch of the first BIS green bond fund denominated in USD in September 2019.
EBA announced that it will launch the 2021 EU-wide stress test exercise, with the publication of the macroeconomic scenarios on January 29, 2021.
BoE announced that the reporting entities are no longer required to report Form CX after the fourth quarter of 2020 reference period, with the last collection on January 29, 2021.
ECB published a letter in which the President Christine Lagarde answered questions, from a Member of the European Parliament, on the application of the EU taxonomy on sustainable finance.
PRA published a direction for modification by consent of 5.1 to 5.3 and 5.5 of the Capital Buffers Part of the PRA Rulebook.
BIS Innovation Hub published the work program for 2021, with focus on suptech and regtech, next-generation financial market infrastructure, central bank digital currencies, open finance, green finance, and cyber security.
In an article published by SRB, Mairead McGuinness, the European Commissioner for Financial Services, Financial Stability, and Capital Markets Union, discussed the progress and next steps toward completion of the Banking Union.
EBA finalized the two sets of draft regulatory technical standards on the identification of material risk-takers and on the classes of instruments used for remuneration under the Investment Firms Directive (IFD).
EC published, in the Official Journal of the European Union, a notification that the European Court of Auditors (ECA) has published a special report on resolution planning in the Single Resolution Mechanism.