FOR IMMEDIATE RELEASE
CONTACT: Julia Lawless, (202) 457-8766
WASHINGTON, D.C. – The proposed methodology for calculating capital requirements related to derivatives contracts should be improved to increase efficiency and avoid unnecessary costs for customers, which include commercial end-users like state and local governments, hospitals and other not-for-profit corporations and cooperatives, the Financial Services Forum said today.
The recommendation came in response to a request for comment from the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency regarding the standardized approach for measuring counterparty credit risk (SA-CCR), an alternative to the Current Exposure Method (CEM), the formula used to determine derivative exposures under the U.S. capital regulatory framework.
Forum member institutions are a leading source of lending and investment for American consumers, businesses, investors and communities,” said Forum President and CEO Kevin Fromer. “It’s imperative that the U.S. regulatory framework strike the appropriate balance between costs and benefits. The proposal, if implemented effectively, has the potential to produce an efficient, risk-sensitive methodology that will not only lead to the proper allocation of capital, but ensure that customers have access to affordable and liquid markets.”
Derivatives are financial contracts that base payments on an underlying asset. Derivative contracts, which include futures, options, and swaps, among others, help businesses, both large and small, reduce risks associated with day-to-day operations by providing predictable financing to stay in the black.
Unless the current SA-CCR proposal is further streamlined, the unnecessary high capital requirements from the new methodology would increase transactions costs for derivative contracts, which have a direct impact on the price of routine services or goods paid by consumers.
An analysis by Forum institutions found SA-CCR would result in significant increases in exposure amounts for unmargined swaps, which commercial clients typically use to hedge risks arising in their businesses.
According to the analysis, the exposure amount for a typical unmargined commodity derivative that one Forum institution might enter into with an electricity cooperative, for example, would increase by over 550 percent compared to CEM. This could result in an increase in household electricity bills.
Recognizing the potential adverse impact on consumers, the Forum urged the agencies to conduct a comprehensive impact study to analyze how the SA-CCR proposal fits within the broader capital framework and impacts customers, including commercial end-users.
The Forum asked regulators to delay the mandatory adoption of SA-CCR until this assessment is complete and further outlined recommendations to improve the overall framework to better reflect congressional intent and consistency throughout the agencies’ prudential standards. A copy of the letter, which was submitted to the agencies on March 18, can be found here.
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The Financial Services Forum is an economic policy and advocacy organization whose members are the chief executive officers of the eight largest and most diversified financial institutions headquartered in the United States. Forum member institutions are a leading source of lending and investment in the United States and serve millions of consumers, businesses, investors, and communities throughout the country. The Forum promotes policies that support savings and investment, deep and liquid capital markets, a competitive global marketplace, and a sound financial system.
Visit our website: fsforum.com