The WFE responds to US agencies on proposed standardised approach for calculating the exposure amount of derivative contracts

By: The WFE Focus Team Mar 2019

The WFE has responded to three US federal banking agencies on a proposed rule to update their standards for how firms measure counterparty credit risk posed by derivative contracts.

The proposed rule, jointly issued by the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), would update the way US authorities measure derivatives counterparty risk along the lines of the Basel Committee’s SA-CCR approach.

The WFE responded to the consultation as follows:

  • The WFE supports a policy framework that allows for accessible, competitive and vibrant derivatives markets - and one that also ensures the soundness of banks (including the prevention of excessive leverage);
  • The WFE has long advocated for the recognition of client margin offsets, and encourages international proposals to address the leverage ratio treatment of a segregated client margin; and
  • The WFE supports the US authorities’ efforts towards the implementation of the standardised approach for measuring counterparty credit risk (SA-CCR); this should be done in a manner that incorporates margin offsets.

Addressing the leverage ratio treatment of segregated client initial margin has been a long-standing policy priority for the WFE, with the below list forming a selection of the WFE’s most recent responses:

  • In August 2015, the WFE - alongside counterpart stakeholder organisations - co-signed a letter a letter to the Financial Times on the ‘Leverage ratio threat to the cleared derivatives ecosystem’.
  • In November 2016, the WFE co-signed a letter to the Basel Committee on Banking Supervision (BCBS) and Financial Stability Board (FSB) concerning the leverage ratio’s unintended consequence of increased fragility in the financial system.
  • In September 2018, the WFE responded to an international standards setters’ consultation concerning incentives to clear with a call for concerted action to resolve the persistent issues with the way the leverage ratio treats segregated client initial margin.
  • In January 2019, the WFE published a response to the BCBS consultation on the leverage ratio treatment of client cleared derivatives, reiterating its position on the issue of the treatment of segregated client margin.

The WFE's full response is available here.