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Banks Fear Unlevel Playing Field Over SA-CCR Implementation - Acuiti Study Finds Capital Costs For Corporates, Pension Funds And Some Asset Managers Set To Soar Under New Derivatives Capital Rules

Date 22/07/2021

Over 80% of senior derivatives executives from global banks are concerned that differing approaches to the implementation of SA-CCR will create an unlevel playing field, a study by Acuiti has found.

The study, which was commissioned by multilateral optimisation provider, Quantile, was based on a survey and series of interviews with over 40 banks and financial intermediaries, and found that 82% of respondents, including all of those based in the EU, were concerned about the different timelines and approaches from regulators when it came to implementing SA-CCR.

SA-CCR, or the Standardised Approach for measuring Counterparty Credit Risk, is the new framework for assessing capital requirements relating to counterparty risk for banks with derivatives exposures.

The new framework will replace the existing non-internal model approaches – the Current Exposure Method (CEM) and the Standardised Method (SM) - and is designed to be a more risk-sensitive framework for measuring capital exposures relating to derivatives trades.

SA-CCR is now live in several jurisdictions including the EU, where it came into force last month. The US and UK will bring in SA-CCR in January 2022, although in the US firms have the option of adopting it prior to that date.

Respondents to the Acuiti study generally welcomed the move to a more risk sensitive methodology. However, key concerns were raised over the “alpha factor”, an add-on to capital charges for all trades, and the treatment of initial margin, which under SA-CCR moves to a non-linear calculation and away from the dollar-for-dollar risk reduction methodology under CEM.

In addition, the Acuiti study found that SA-CCR will result in large increases in capital requirements for bank portfolios with corporates, pension funds and asset managers. Portfolios with options trading firms and hedge funds on the other hand will see significant reductions in capital exposures relating to their derivatives books.

In response to these concerns, US regulators have effectively eliminated the alpha factor for derivatives trades with commercial end-users. However, European and Asian regulators to date have not followed suit, raising the concerns over an unlevel playing field.

Other findings in the study were:

  • Banks are split on whether SA-CCR will benefit or hinder their derivatives business with clearing businesses generally, but not universally, expecting benefits
  • FX and commodities face significant increases in capital requirements under SA-CCR
  • Benefits of clearing are more pronounced, so rates and FX are expected to be the main beneficiaries
  • Some US banks may still shift to SA-CCR ahead of regulatory implementation
  • Agreeing approach, gathering the data and developing technology have been the major hurdles for banks
  • SA-CCR will increase incentives for active risk and portfolio management

Tobias Becker, Head of Risk Capital Optimisation of Quantile, said, “Now more than ever it is essential that participants proactively optimise their portfolios to reduce the consumption of critical financial resources. At Quantile, we are working closely with market participants to help them navigate the new SA-CCR framework and improve their capital efficiency.”

He continued, “While the study identifies some of the challenges of common models such as SA-CCR, it also cements the need for the market to adopt multilateral optimisation services that are beneficial and find efficiencies for all participants.”

“SA-CCR certainly addresses many of the criticisms levelled at the Current Exposure Method but it also introduces new challenges,” says Will Mitting, founder and managing director of Acuiti.

“Small changes to how SA-CCR is implemented can have a disproportionate impact on banks’ ability to service certain clients or asset classes. While there are some areas of the new rules that will need to be tweaked to ensure stable and functioning markets, it is essential that these changes are made at a global level to ensure a level playing field for all.”

To download the full report, visit