On July 27 of this year, the regulatory bodies responsible for the stability of the US financial system (The Feds, OCC and FDIC) published a notice of proposed rulemaking (NPR) that would incorporate into regulation the latest updates to the international standards published by the Basel Committee of Banking Supervision in 2017.
The proposal would considerably revise the capital requirements for large institutions (those with US$100 billion or more in total consolidated assets). In particular, it would impose more advanced risk-based approaches on “Category III and IV” banking organizations (those with between US$100 and US$700 billion in assets).
For counterparty credit risk this would mean that Category III and IV banks would be mandated by the 2025 deadline to implement the SA-CCR approach that was introduced for larger banks back in January 2022.
In summary, SA-CCR (BCBS replacement for the CEM method) is intended to be more risk-sensitive without introducing undue complexity. It is an approach that, unlike CEM, differentiates between margined and un-margined trades, and further recognizes the benefits of netting, and thus should grant exposure relief for those types of mitigants. On the other hand, it increases the risk weights for some asset classes and does not introduce a risk-sensitive treatment of the initial margin. It is also a more convoluted calculation than CEM, with additional input and output requirements.
In terms of Risk-Weighted Assets (RWA), the impact of SA-CCR will vary depending on the nature of the portfolio and of the counterparty as the relief in certain exposure types will be offset with the introduction of an alpha scalar of 1.4 with non-commercial end-users (CEUs). All and all, SA-CCR is expected to cause an increase in RWA requirements (5% estimated by the agencies, but notably, 30% by the industry).
Thus, overall, it seems that the movement for the agencies will have a negative impact both in terms of RWA and marginally in terms of implementation and maintenance for banks. So, one can ask if there is any potential benefit expected from this rule change.
We believe there is. SA-CCR is a far superior method for capturing risk dynamics than CEM, and its deficiencies/shortcomings are easy to bypass. SA-CCR can easily be tweaked to become an efficient risk management tool—one that is far easier and less costly to implement than a full simulation approach. For a bank with aspirations to a full simulation approach for their risk management framework, SA-CCR is a perfect stepping-stone and fallback approach.
SS&C Algorithmics CCR solution provides such a framework and includes features such as:
It propagates SA-CCR to a time variant profile until maturity of the transaction.
It incorporates some trade-type-specific profile features not considered in SA-CCR.
It includes a dynamic initial margin framework.
It provides EPE and PFE profiles.
It allows users the ability to stress exposures, either via changing the risk weights or by consuming scenario-dependent valuations.
It can be combined with a simulated approach, incorporating various mitigant allocation rules.
It provides full real-time limit monitoring and workflow management.
It includes trade-level allocation of exposures and full analysis framework.
It complies with various SA-CCR jurisdictional tweaks.
It provides all additional detailed data as required for regulatory submission.
Many banks will look to technology partners to provide a cost-effective solution, balancing strong data management, analytics, decision support and reporting capabilities with low overall cost of ownership and the agility to respond to changing requirements. Choosing the right partner is critical to avoid being saddled with a “black box” solution where every tweak to regulation is costly and requires a lengthy lead time to implementation.
SS&C Algorithmics has partnered with banks around the world to address a multitude of risk and regulatory challenges, including SA-CCR.
Complete solution: The SS&C Algorithmics CCR solution provides an end-to-end solution that’s strong in data management, analytics, decision support and reporting.
Modular: The solution architecture is modular, so you don’t have to replace what is currently working well. You can choose individual components to augment your existing infrastructure.
Speed to market: Our experienced team of experts has managed a significant number of SA-CCR implementations across major jurisdictions and regulatory regimes. Our proven methodology and expertise deliver a fast-to-market solution for banks.
Agility: It's important to have a solution with the agility to respond quickly to changes. The SS&C Algorithmics CCR solution is designed to be configurable and extendible, making it easy to adapt to updates to the rules.
Flexible deployment: Implement on-premises or on the cloud with 24/7 monitoring and support from our team of SA-CCR experts. It’s your choice.
Advanced decision support: Banks need a solution that goes beyond producing numbers. You need insight into your capital. The SS&C Algorithmics CCR solution offers banks a solution with advanced drill-down decision support capabilities so you can understand your risk.