SA-CCR: Key considerations to tackle new Basel rules
By Nicola Hortin, Head of Regulatory Analysis Team, EMEA, AxiomSL
As part of its overhaul of the Basel
capital adequacy framework, the Bank for International Settlements (BIS) has
developed a new methodology for calculating how much capital banks need in
order to mitigate their exposure to credit risk. Banks are eager to understand
how they will be impacted by the new Standardised Approach for Measuring
Counterparty Credit Risk Exposures (SA-CCR) - which will be mandatory for all
over-the-counter (OTC) derivatives, exchange-traded derivatives (ETDs) and
long-settlement transactions not treated under an internal model approach.
However, in order to do so and to implement the new requirements optimally,
banks must overcome a number of challenges.
SA-CCR uses a lot of the same terminology
as the existing credit risk calculations. However, despite the superficial
similarities, the new calculations are completely different from what has gone
before. They are significantly more complex and include different calculations
for individual asset classes and rules regarding the treatment of particular
product sets. As a result, rather than tweaking what they already have, banks
need to implement a totally new set of calculations.
The SA-CCR calculations bring with them new
data requirements. While there is an overlap with the data used in the
incumbent credit risk calculations, banks will also need to source many new
attributes. For example, they will need information about margin agreements
with counterparties, including threshold amounts and minimum transfer amounts,
and the ability to link this information to their trade and collateral data. As
well as the maturity date for derivatives, they will now also need the maturity
date for the underlying products.
Banks are likely to have most of the
required data somewhere within their infrastructure. However, due to the
complicated system structures that exist at most large banks, sourcing the data
will be one of the most challenging aspects of implementing SA-CCR. In many
cases it will involve changing not only the systems that directly feed the
regulatory capital calculation platform, but also other upstream systems. To
expedite the data sourcing process, many banks are likely to work with a third
party who has already identified which additional data attributes are required.
All of these changes will inevitably alter
banks’ capital requirements. Historically, some banks have relied on
spreadsheets to manually calculate how they will be impacted by new capital
adequacy rules. However, this is a very cumbersome approach. It means that when
the requirements come into force, in order to automate the calculations, banks
need to spend months reconfiguring their capital calculation engines based on
the changes they have worked out on paper.
Banks can avoid this situation by doing
their impact analysis work within their regulatory calculation tool, running
the new SA-CCR calculations in parallel with their incumbent credit risk
calculations. This approach makes it easier for banks to run the calculations
over an extended period in order to get a more complete understanding of the
impact. It also gives banks more confidence in the accuracy of the results
because they are based on production data. And when the requirements come into
force, the banks will already have the calculations set up within their
regulatory compliance infrastructure and will be ready to go.
It is important to note that at present
banks are working from the SA-CCR rules that have been defined by the BIS.
These rules will inevitably be tweaked and changed when they are incorporated
into European Union (EU) law. Banks will be able to implement these changes
more easily and quickly if they do their impact analysis work within their
regulatory calculation platform.
When preparing for SA-CCR, it is also
important that banks consider the wider context in which the requirements are
being introduced. SA-CCR is just one element in a package of new capital
adequacy requirements, which are being introduced as part of what some people are
referring to as ‘Basel IV’. Other new calculations include the Fundamental
Review of the Trading Book (FRTB), which replaces the current standardised
market risk calculations, and the potential introduction of a new capital
requirement to cover Interest Rate Risk in the Banking Book (IRRBB).
There is a significant overlap between the
data that banks will need to run all of the different calculations and many of
the calculations are also interdependent. Therefore, rather than using separate
systems to run each of the calculations, banks can achieve greater efficiency
and higher levels of accuracy and consistency by managing SA-CCR on the same
regulatory calculation platform as all of the other ‘Basel IV’ requirements.
SA-CCR is a major change to the way banks
calculate their credit risk capital requirements. By planning carefully,
focusing on the data sourcing challenges and doing parallel running of the new
calculations, banks can assess how they will be impacted by SA-CCR and ensure
they are well prepared when the requirements come into force.
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