U.S. banking regulators accelerate changes to capital treatment of derivatives

Amendments take effect immediately and are intended to "improve market liquidity"

27 March 2020


On March 27, U.S. banking regulators announced an accelerated timetable for implementing amendments to certain provisions of their capital requirements that apply to derivatives. The amendments, which address several long-standing industry concerns about the impact of these capital requirements on client clearing, will take effect immediately and are intended to "improve market liquidity" in response to the disruptions related to the spread of the coronavirus. 

The amendments cover five areas:

1)  an acceleration of the timetable for allowing banks to adopt the SA-CCR methodology for measuring derivatives exposures. The banking regulators had already agreed to allow banks to use this methodology starting in the second quarter of this year, but in light of recent volatility in financial markets, they moved up the optional implementation to the first quarter and provided banks with the flexibility to implement on a "best efforts" basis. 

"By allowing early adoption of the SA-CCR rule, the notice allows banking organizations to implement the SA-CCR methodology’s more risk-sensitive measurement of the exposure amounts of derivative contracts one quarter earlier than the SA-CCR rule provided," the regulators said. 

The regulators noted that a banking organization that elects to adopt the SA-CCR methodology must adopt the SA-CCR methodology for all derivative contracts; it cannot implement the SA-CCR methodology for a subset of its derivative contracts. 

2) an accelerated timetable for four related amendments to the capital rules. These amendments were due to take effect in the second quarter. In the March 27 notice, the regulators said banks can now implement these rules "on a best efforts basis immediately."

  • A 2% or a 4% risk-weight for cash collateral posted to a qualifying central counterparty (QCCP) subject to certain requirements
  • The ability of a clearing member banking organization to recognize client collateral posted to a central counterparty (CCP) under certain circumstances
  • A zero percent risk-weight for the CCP-facing portion of a transaction where a clearing member banking organization does not guarantee the performance of the CCP to the clearing member’s client
  • The ability of a clearing member banking organization to apply a 5-day holding period for collateral associated with client-facing derivatives for purposes of the collateral haircut approach

The regulators noted a banking organization may adopt these amendments regardless of whether it chooses to early adopt the SA-CCR methodology.

Read the full announcement. 

  • FIA
  • Capital