Associations Call for SA-CCR Re-Think
Posted by Colin Lambert. Last updated: April 22, 2022
The International Swaps and Derivatives Association (ISDA), the Institute of International Finance (IIF), and the Global Financial Markets Association (GFMA) have submitted a letter to the Basel Committee on Banking Supervision (BCBS) asking it to reconsider the 2014 standardised approach for measuring counterparty credit risk exposures (SA-CCR).
The letter intends to notify the BCBS of the financial market industry’s concerns regarding the SA-CCR standard. “While the SA-CCR standard is a more risk sensitive approach for calculating exposure at default for counterparty credit risk compared to the Current Exposure Method (CEM),” the letter states. “There remain aspects of the standard that result in excessive risk exposures with associated impact on capital and end-user costs. This deficiency is largely due in part to the timing of the finalisation of the standard, April 2014, which ultimately results in a lack of reflection of structural changes in the derivatives market and the overall regulatory framework since 2014, as well as a calibration of SA-CCR that lacks risk sensitivity.
“Furthermore, this is becoming more evident as firms implement the revised Basel III standards and as a result the standard needs to be revisited to recognise market developments,” it adds.
The associations observe that in certain cases, supervisors have indicated that they shared some of the industry’s concerns and as a result, they proposed certain modifications to SA-CCR not related to local specificities. “While this is necessary to lessen the impact of SA-CCR on the derivatives market, any such modifications that have been implemented or proposed have been limited,” the associations write. “The Industry believes a more holistic review of SA-CCR in the broader context of the Basel III implementation is crucial and if done at the Basel level, would result in a more consistent implementation across jurisdictions.”
The associations also highlight that a “significant” increase in collateralisation via Initial Margin under the Uncleared Margin Rules (UMR) – another Basel regulation. “Given the increased IM in the financial system, it is important this is properly accounted for as a key risk mitigant in the SA-CCR standard,” the letter states.
The emergence of digital assets also highlights the need for a re-design of SA-CCR, the associations add, in order that it can accommodate the nascent asset class. They also argue that the current framework does not provide guidance on an exposure calculation across secured financing transactions and derivatives which are covered under a new ISDA master netting agreement.
The letter also points to changes in the global regulatory framework, noting that since it was finalised, SA-CCR’s importance has “significantly increased”. It explains that SA-CCR impacts risk-weighted assets for CCR, credit valuation adjustment risk, large exposures, leverage ratio, the global systemically important banks surcharge and the risk-weighted assets output floor. “Therefore, an overly conservative calibration results in disproportionate impacts on markets activity which ultimately increases hedging costs for end-users,” the associations argue. “SA-CCR was the first of the new standardised approaches to be finalised and subsequent standardised approaches (market risk and CVA risk) have more reliance on firms’ pricing models.”
The letter also points to “a wealth of quantitative impact study data” produced since the publication of SA-CCR, noting it was proposed and implemented with just one consultation and quantitative impact study. The compressed timeframe to implement was driven by the need to have a more risk sensitive calculation of exposures for central counterparties, it adds.
“We believe there is a need for global coordination to revisit SA-CCR at the Basel level for the above stated reasons,” the letter states. “Therefore, we respectfully request that the BCBS act in line with the stated goal of promoting global consistency in the application of SA-CCR. Appropriate revisions to the SA-CCR standard will serve to bridge the gaps across regions and reduce the need for jurisdictions to offer their own solutions to mitigate the impact of the current global SA-CCR standards.
“The industry strongly believes the reasons identified above warrant a review of SA-CCR in order to improve the effectiveness and risk sensitivity and to help ensure a level playing field in the CCR space via a consistent transposition into regional and national laws,” it continues. “The industry is currently developing a technical paper to present specific considerations for the SA-CCR standards that will serve to address the issues noted above.”