Trade Groups Raise Concern About Proposed Approach to Calculating Counterparty Credit Risk

The American Bankers Association today joined four other financial trade organizations in a comment letter to the financial regulatory agencies offering feedback on a proposal establishing a new approach for calculating the exposure amount of derivative contracts under the regulatory capital rule.

While the groups offered general support from moving from the current exposure method to a more risk-based measure, they warned that as proposed, the standardized approach for counterparty credit risk, or SA-CCR, could have significant effects on the derivatives market. Specifically, they warned that it could result in a higher capital charge, which could in turn greatly restrict the ability of commercial end users to hedge risk.

“The proposed rulemaking could have a significant negative impact on liquidity in the derivatives market and hinder the development of capital markets,” the groups said. “Any requirements that constrain the use of derivatives may affect the ability of commercial 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.”

The associations made several recommendations for improving SA-CCR, including calling on the agencies to recalibrate the proposal’s supervisory factors. They added that if recalibration is unfeasible, they should revert back to the supervisory factors for commodity derivatives set by the Basel Committee on Banking Supervision.