In soccer, own goals do occasionally occur, when a defending player accidentally hits the ball into his or her own net, usually under intense pressure from the opposing team. In fact, the current FIFA World Cup looks set to break the record for own goals, with 12 conceded in the group stage of the tournament alone. Unfortunately, US financial regulators are in danger of chalking up one of their own if they don’t correct a serious calibration mistake in the standardized approach for counterparty credit risk (SA-CCR), a key component of the Basel III endgame framework. This is an own goal that is entirely unforced and threatens to jeopardize liquidity and risk management in the US Treasury market. The good news is that they still have the chance to deflect the ball and implement a more appropriate SA-CCR methodology that supports the efficiency and resilience of US Treasuries.

Once Basel III come into force in the US, SA-CRR will be the only way banks can calculate capital for counterparty credit risk. Under the original endgame proposal in 2023, they would have had to capitalize their derivatives and repos on a product-by-product basis without being able to net exposures at the portfolio level. The issue is particularly problematic given the development of a cross-margining arrangement by the Fixed Income Clearing Corporation and CME Group, which delivers margin efficiencies for clients by recognizing offsets in a portfolio of cash, futures and repo transactions. The resulting lower margin posted by clients would significantly increase bank capital requirements, creating a disconnect between regulatory capital and the underlying risk. That would cause serious problems for banks, constraining their capacity to provide liquidity in the US Treasury market.

In the revised Basel III proposal, published on March 19, US policymakers permitted cross-product netting under SA-CCR for certain repo and derivatives trades, including those between clearing members and their clients. This was an important step forward, but the proposed methodology is overly blunt and would still lead to disproportionately high capital requirements that don’t accurately reflect the economic risk of well-hedged portfolios.

Revising the SA-CCR methodology must be an urgent priority. In less than six months’ time, regulations requiring clearing of US Treasuries will come into effect, starting with cash transactions at the end of 2026 and followed by repos six months later. The objective of clearing is to reduce risk, but its success depends on banks being able to clear on behalf of other market participants – something they will struggle with if they face disproportionate capital requirements.

In our response to the US Basel III consultation last month, ISDA recommended that a hedge coverage ratio should be incorporated into SA-CCR. This would calibrate the netting benefit according to how well the repos in a portfolio actually hedge the derivatives, leading to a more risk-appropriate treatment that aligns capital for a portfolio of futures and repos with actual risk.

We have an opportunity to implement US Treasury clearing efficiently by allowing banks to recognize risk offsets in a portfolio of repo and derivatives when calculating capital, mirroring the margin efficiencies that clients will realize through clearing house cross-margining arrangements. This will free up bank balance sheets to support this transformational change in market structure. The alternative is a capital framework that hinders rather than supports clearing. Like this year’s World Cup, Basel III is now advancing towards the crunch stage, and this is an own goal that simply must be avoided. Let’s work together to shoot the ball in the right direction.