Over 80% of senior derivatives executives from global banks are concerned that differing approaches to the implementation of the Standardised Approach for measuring Counterparty Credit Risk (SA-CCR) will create an unlevel playing field, according to a study by Acuiti on behalf of multilateral optimisation provider, Quantile.
The survey which was based on a survey and series of interviews with over 40 banks and financial intermediaries assesses the impact of the SA-CCR, the new framework for assessing capital requirements relating to counterparty risk for banks with derivatives exposures.
It will replace the existing non-internal model approaches – the Current Exposure Method (CEM) and the Standardised Method (SM) – and is designed to be a more risk-sensitive framework for measuring capital exposures relating to derivatives trades.
SA-CCR is now live in several jurisdictions including the European Union where it came into force last month. The US and UK will follow in January 2022, although in the US firms have the option of adopting it prior to that date.
The survey found that banks were split on whether SA-CCR will benefit or hinder their derivatives business with clearing businesses generally, but not universally, expecting benefits
There were also key concerns over the “alpha factor”, an add-on to capital charges for all trades, as well as the treatment of initial margin, which under SA-CCR moves to a non-linear calculation and away from the dollar-for-dollar risk reduction methodology under the CEM.
In addition, the Acuiti study found that SA-CCR will result in large increases in capital requirements for bank portfolios with corporates, pension funds and asset managers.
Portfolios with options trading firms and hedge funds, on the other hand, will see significant reductions in capital exposures relating to their derivatives books.
In response, US regulators have effectively eliminated the alpha factor for derivatives trades with commercial end-users.
However, European, and Asian regulators to date have not followed suit, raising the concerns over a fragmented landscape.
Other major hurdle highlighted by most firms include agreeing an approach, gathering the data, and developing technology.
Going forward, the study said that all respondents intended to actively manage SA-CCR, with the majority doing so internally via bilateral discussions, the use of multilateral optimisation services via a third-party, backloading positions to clearing and actively managing client portfolios to reduce their capital impact.
Tobias Becker, Head of Risk Capital Optimisation of Quantile, said, “While the study identifies some of the challenges of common models such as SA-CCR, it also cements the need for the market to adopt multilateral optimisation services that are beneficial and find efficiencies for all participants.”
Will Mitting, founder and managing director of Acuiti, said, “SA-CCR certainly addresses many of the criticisms levelled at the Current Exposure Method, but it also introduces new challenges,” says
He added, “Small changes to how SA-CCR is implemented can have a disproportionate impact on banks’ ability to service certain clients or asset classes. While there are some areas of the new rules that will need to be tweaked to ensure stable and functioning markets, it is essential that these changes are made at a global level to ensure a level playing field for all.”
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