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    US Agencies Propose to Update Derivative Contract Exposure Calculation

    October 30, 2018

    US Agencies (FED, FDIC, and OCC) jointly proposed to update the standard on how firms measure counterparty credit risk posed by derivative contracts under the regulatory capital rules. The proposal would provide the standardized approach for measuring counterparty credit risk (SA-CCR) as an alternative approach to the agencies' current exposure methodology (CEM), for calculating derivative exposure under the agencies' regulatory capital rules. Comments will be accepted for 60 days after publication in the Federal Register.

    The "advanced approaches" banking organizations—firms that have USD 250 billion or more in total consolidated assets or USD 10 billion or more in on-balance sheet foreign exposure—would be required to begin using SA-CCR by July 01, 2020. The proposal would modify other aspects of the capital rule to account for the proposed implementation of SA-CCR. It would require an advanced approaches banking organization to use SA-CCR with some adjustments to determine the exposure amount of derivative contracts for calculating total leverage exposure (the denominator of the supplementary leverage ratio). The proposal would also incorporate SA-CCR into the cleared transactions framework and would make other amendments, generally with respect to cleared transactions. The proposed introduction of SA-CCR would indirectly affect the FED's single counterparty credit limit rule, along with other rules. OCC is also proposing to update cross-references to CEM and add SA-CCR as an option for determining exposure amounts for derivative contracts in its lending limit rules.

    However, non-advanced approaches banking organizations would be allowed to use either CEM or SA-CCR to determine the exposure amount for derivative contracts. SA-CCR better reflects the current derivatives market and would provide important improvements to risk sensitivity, resulting in more appropriate capital requirements for derivative contracts exposure. The proposed changes are designed to better reflect the current derivatives market and incorporate risks observed during the 2007-2008 financial crisis.

     

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    Comment Due Date: FR + 60 Days

    Keywords: Americas, US, Banking, Basel III, SA-CCR, Advanced Approaches, Derivatives, Regulatory Capital, US Agencies

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