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Regulatory Watch

What Multinationals Need to Know Now About SA-CCR

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June 03, 2019

Changing how banks measure counterparty credit risk exposure may raise hedging costs for corporates. 

Banking 209Last December, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation commenced the comment period for a proposed rule updating how banks calibrate counterparty credit exposure for their derivative contracts. The proposal provides a “standardized approach for measuring counterparty credit risk” and is known by market participants as “SA-CCR” (pronounced “soccer”). It would replace the current exposure method (CEM). 

Why corporates should care. At the April meeting of the Assistant Treasurers Group of Thirty, experts from host and sponsor Chatham Financial highlighted how SA-CCR could effectively increase the capital requirements for banks when entering into commercial hedging transactions with corporates by increasing the counterparty credit risk exposure of these transactions. Under Basel III, if derivative transactions under SA-CCR are deemed riskier than under CEM, the result will be an increase in risk-weighted assets (RWA) for banks. So it’s logical to assume that banks would need to increase their profit margins to generate acceptable returns on their capital—most likely at the expense of corporate clients.

Unintended consequences. Chatham noted that several unintended consequences could result if SA-CCR is enacted. Banks might need to widen their bid-ask spreads to generate higher revenues, resulting in higher hedging costs for corporates. Corporates might also experience lower liquidity levels if banks choose to either exit or simply reduce their commitment to the market. One participant at the meeting noted that a “second order” consequence could be banks reducing their balance sheet commitments in other areas such as letters of credit or revolving credit facilities to rationalize the increased capital requirements under SA-CCR.

State of play. The comment period deadline was extended from February 15th to March 18th following a significant volume of reactions from market participants. Among those groups that supplied comments to regulators were Chatham Financial and the Coalition for Derivatives End-Users. The International Swaps and Derivatives Association, the American Bankers Association, the Bank Policy Institute, the Securities Industry and Financial Markets Association, and the Futures Industry Association responded jointly. 

At this point, the market awaits an update from the prudential regulators. Most market participants would agree that the CEM needs revision but are concerned that however well-intended SA-CCR is designed to be, it may have some significantly negative consequences for corporates.

 

 

 

 

 

 

 

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