19 March 2019

ISDA, SIFMA, ABA, BPI and FIA comment on proposed standardized approach for calculating exposure amount of derivatives

The Associations have raised a number of these concerns in connection with the Basel Committee standards for SA-CCR and in response to implementation of SA-CCR outside the United States.

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) today submitted comments regarding the proposed rule issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency to implement the standardized approach for counterparty credit risk (SA-CCR) as a replacement for the current exposure method (CEM) in the US capital rules.

“The proposed rulemaking could have a significant negative impact on liquidity in the derivatives market and hinder the development of capital markets,” the Associations wrote in the letter. “We are particularly concerned about the potential cost implications for commercial end users, which benefit from using derivatives for hedging purposes. Any requirements that constrain the use of derivatives may affect the ability of commercial end users 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.”

Based on the new data, the Associations specifically urge the US regulators to:

Reconsider the calibration for commodity and equity derivatives by recalibrating the proposal’s supervisory factors. Based on the data collected by the Associations, the proposal’s supervisory factors 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 regulators to, at a minimum, revert to the supervisory factors for commodity derivatives in the Basel Committee standards. The proposal deviates from the Basel Committee supervisory factors for oil/gas commodities, which results in a 37% increase in risk-weighted assets when compared to CEM for these products.

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 existing US capital rules.

Ensure SA-CCR does not negatively impact client clearing.

Full letter

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