Banking agencies propose new standards for measuring counterparty credit risk in derivative contracts

Updated standards for financial firms to use in measuring counterparty credit risk posed by derivative contracts under regulatory capital rules were proposed by the three federal banking agencies Tuesday.

According to the agencies, the proposed updates are designed to “better reflect the current derivatives market and incorporate risks observed during the 2007-2008 financial crisis.”

The standards – jointly proposed by the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC) – would provide the “standardized approach for measuring counterparty credit risk” (also known as “SA-CCR”) as an alternative approach to the agencies’ current exposure methodology (CEM) for calculating derivative exposure under the agencies’ regulatory capital rules, according to a joint release by the agencies.

The agencies said SA-CCR “better reflects the current derivatives market and would provide important improvements to risk sensitivity, resulting in more appropriate capital requirements for derivative contracts exposure.”

Firms that have $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure (known as “advanced approaches” banking organizations) would be required to use SA-CCR for purposes of calculating both standardized total risk-weighted assets and the supplementary leverage ratio, the agencies said.

Non- “advanced approaches” banking organizations would be allowed to use either CEM or SA-CCR to determine the exposure amount for derivative contracts.

The proposal will be issued for a 60-day comment period.

Agencies propose rule to update calculation of derivative contract exposure amounts under regulatory capital rules

FDIC Financial Institution Letter FIL-67-2018 Regulatory Capital Rule: New Standardized Approach for Calculating the Exposure Amount of Derivative Contracts