A group of financial trade associations would like to see changes made to a proposed rule that would establish a new method for calculating the exposure amount of derivative contracts under U.S. capital rules.
The International Swaps and Derivatives Association, the Securities Industry and Financial Markets Association, the American Bankers Association, the Bank Policy Institute and the Futures Industry Association submitted a comment letter Monday offering suggestions to federal regulators on a proposal to implement the standardized approach for counterparty credit risk as a replacement for the current exposure method.
In October, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency proposed the rule. It would require "an advanced approaches banking organization" — those with more than $250 billion in total consolidated assets — to use SA-CCR to calculate its standardized total risk-weighted assets. Smaller firms could elect to use either CEM or SA-CCR for calculating its standardized total risk-weighted assets.
While the associations said they're supportive of a move to a more risk-based measure such as SA-CCR from CEM, they do have concerns with the current proposal, specifically on equity and commodity derivatives. With respect to commodities, the trade groups said the proposal would result in a higher capital charge than the global standards set by the Basel Committee on Banking Supervision, creating an uneven playing field for market participants across jurisdictions and impacting the ability of commercial end users to hedge risk.
"The proposed rule-making 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."
Among the changes the associations suggested was a call to reconsider the calibration for commodity and equity derivatives by tweaking the proposal's supervisory factors. The proposed 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, according to data collected by the associations. If recalibration is not feasible, the associations urged the regulators to revert to the supervisory factors for commodity derivatives in the Basel Committee standards.