Industry Response to Standardized Approach for Counterparty Credit Risk (SA-CCR)

ISDA, the Securities Industry and Financial Markets Association (SIFMA), the American Bankers Association (ABA), the Bank Policy Institute (BPI), and the Futures Industry Association (FIA) appreciate the opportunity to comment on the proposed rulemaking from the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (OCC) (together, the Agencies).

SA-CCR is a significant development that will have multiple implications for the US capital framework as it replaces the current exposure method (CEM). In addition to replacing CEM for calculating counterparty credit risk (CCR) default standardized risk weighted assets (RWA), the proposed rulemaking addresses changes to the cleared transaction framework and includes a proposal for the OCC to amend its lending limit rule to use SA-CCR. The proposed rulemaking is also relevant for the use of SA-CCR in the Credit Valuation Adjustment risk capital framework and as the exposure amount for derivatives in the output floor. We thank the Agencies for their continued engagement with the Associations and our members to understand the various implications of SA-CCR and required data analysis. We generally support the move from CEM to a more risk-based measure and believe that an appropriately revised version of SA-CCR would be a major improvement over the current framework. However, there are elements of the proposed rulemaking that could have a significantly negative impact on liquidity in the derivatives market and hinder the development of capital markets. We are particularly concerned about the potential cost implications for commercial end-users (CEUs), who benefit from using derivatives for hedging purposes. Any requirements that constrain the use of derivatives may affect the ability of CEUs to hedge their funding, currency, commercial and day-to-day risks, which would in turn weaken their balance sheets and make them less attractive from an investment perspective.

In order to inform our comments regarding the anticipated impact of the proposed rulemaking, the Associations have conducted an in-depth Quantitative Impact study (QIS) to demonstrate the impact of the proposed rulemaking, with input from nine financial institutions which account for 96% of total derivatives notional outstanding at the top 25 bank holding companies. The QIS results show that exposure at default (EAD) would remain flat, whereas CCR default standardized RWA would increase by 30% as compared to CEM. The QIS results also indicate a three basis points decrease in the overall SLR across the participating banks; the impact is much greater at the derivatives business level. This data clearly demonstrates the need for changes to the proposed rulemaking to ensure that SA-CCR more accurately reflects risk in the derivatives market.

In Section VI. of the preamble of the proposed rulemaking, the Agencies note the results of previous data provided by advanced approaches banking organizations, which indicate a 7% decrease in EAD and a 5% increase in CCR default standardized RWA. We believe the divergence between the Agencies’ results and the Associations’ data collection warrant further analysis to fully understand the main drivers of the proposed rulemaking and to avoid any negative impact on the liquidity and smooth operation of capital markets.

Given the impact that SA-CCR will have on derivatives markets, we strongly urge the Agencies to consider and act upon the targeted feedback in this response so that they avoid any unintended consequences while still achieving their regulatory objectives. As discussed in greater detail below, we specifically urge the Agencies to:

  • Reconsider the supervisory factors for the commodity and equity asset classes set by the Basel Committee standards. At a minimum, recalibrate the supervisory factors for the commodities asset class so that they do not exceed the levels in the Basel Committee standards.
  • Provide a more risk-sensitive treatment of initial margin for calculating RWA.
  • Reconsider the application and calibration of the alpha factor.
  • Avoid any disproportionate impact on the cost of doing business for CEUs that may result from reduced hedging.
  • Allow for netting of all transactions covered by a qualifying master netting agreement.
  • Ensure SA-CCR does not negatively impact client clearing.

From a timing perspective, the Associations believe that banks should be permitted to adopt SA-CCR as soon as the Agencies issue the final rules, but the formal compliance deadline should be aligned with the mandatory compliance date for the various other components of the Basel III reform package in the United States. This would ensure consistent implementation of SA-CCR and the changes in the Basel III reform package that have a direct impact on SA-CCR, which include the fundamental review of the trading book and revised credit risk weights. Piecemeal implementation of SA-CCR followed by further changes to the U.S. capital framework would be disruptive, burdensome and inefficient. The Basel package projects a January 2022 compliance date for relevant reforms.

In addition, we request the Agencies to provide clear guidance that banks will not have to incorporate SA-CCR into their Comprehensive Capital Analysis and Review (CCAR) projections until they have actually implemented SA-CCR into their spot capital ratios given the operational complexity and burden of projecting nine quarters prior to adoption, as required by CCAR. We request that the Agencies provide this guidance as soon as possible and prior to the release of the 2020 CCAR instructions to avoid uncertainty in the planning process for 2020 CCAR.

Click on the PDF below to read the full comment letter.

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