Washington, DC, March 18, 2019 – The International Swaps and Derivatives Association, Inc.  (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 Associations generally support the move from CEM to a more risk-based measure and believe that an appropriately calibrated version of SA-CCR would be a major improvement. The letter, however, expresses concerns with the impacts of the proposal on the derivatives market, including equity and commodity derivatives in particular. In the case of commodities, the proposal goes beyond, and would result in a higher capital charge, than the global standards set by the Basel Committee, creating an uneven playing field for market participants across jurisdictions and adversely impact the ability of commercial end users to hedge risk.

Data collected by the Associations[1] indicate that the proposal would result in a 50% increase in risk-weighted assets for transactions with commercial end users as compared to CEM.

“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, who 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.”

As laid out in the comment letter, the Associations’ data diverges significantly from the data used and cited by the US regulators in the proposed rulemaking. For example, data cited in the proposal indicated an expected 7% decrease in “exposure at default” and a 5% increase in “counterparty credit risk default risk-weighted assets” under SA-CCR as proposed when compared to CEM. However, the Associations’ data shows that “exposure at default” would remain flat and “counterparty credit risk default risk-weighted assets” would increase by 30% when compared to CEM.  In their letter, the Associations note that this divergence warrants further analysis to avoid negative impacts on liquidity and functioning of capital markets.

Based on the new data, the Associations specifically urged 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 as compared to CEM. If recalibration is not feasible, the Associations urged 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 as 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.

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.  The comment letter urges the US regulators to address these issues in their final rulemaking and coordinate with their non-US counterparts at the Basel level to ensure global consistency.

The full comment letter is available here.

For Press Queries, Please Contact:

Nick Sawyer, ISDA London, +44 203 808 9740, [email protected]

Lauren Dobbs, ISDA New York, +1 212 901 6019, [email protected]

Amanda Leung, ISDA Hong Kong, +852 2200 5911, [email protected]

Lindsay Gilbride, SIFMA, + 1 202 936 7390, [email protected]

Jeff Sigmund, ABA, +1 202 663 5439, [email protected]

Sean Oblack, BPI, + 1 202-589-2456, [email protected]

Steve Adamske, FIA, +1 202.772.3008, [email protected]

[1] To inform the comments regarding the anticipated impact of the proposal, the Associations conducted in-depth research with input from nine financial institutions, accounting for 96% of total derivatives notional outstanding at top 25 bank holding companies