ABA: SA-CCR Proposal Could Lead to Higher Costs for Commercial End-Users

The federal banking regulators’ standardized approach for counterparty credit risk proposal, or SA-CCR, could have unintended consequences for commercial end users—such as corn producers or beverage manufacturers—who rely heavily on financial derivatives, ABA VP Ananda Radhakrishnan wrote in an American Banker op-ed Friday. Under the proposed SA-CCR approach, these nonbank entities could find themselves having to pay more to hedge risk, he noted.

When determining risk for commodities contracts, the SA-CCR proposal relies “upon the more volatile spot market—the price of the immediate delivery of a product,” Radhakrisknan noted. In addition, “U.S. regulators have added higher standards, known as gold-plating for energy commodities,” which can cause an overstatement of risk in the SA-CCR capital calculation, leading to higher costs for commercial end-users.

“Fortunately, U.S. regulators still have time to amend the rule they jointly proposed in October 2018 before they finalize it,” he added. “The agencies should adjust SA-CCR to recognize companies’ employment of the risk-management practices. This could include longer-dated forward contracts, which are less volatile and would more accurately reflect how companies use derivatives to hedge their exposure to swings in commodity prices. That would be a regulatory win-win for agencies and the economy, a policy outcome everyone should want.”