The standardised approach for measuring counterparty credit risk exposures (SA-CCR) is only one of the new Basel measures scheduled to be introduced shortly. Some would say it is the first part of “Basel
IV”, or at least a key part of the next phase of Basel III
BCBS describes it as:
“A comprehensive, non-modelled approach for measuring counterparty credit risk associated with OTC derivatives, exchange-traded derivatives (ETDs), and long settlement transactions. The new standardised approach (SA-CCR) replaces both the Current Exposure
Method (CEM) and the Standardised Method (SM) in the capital adequacy framework. In addition, the IMM shortcut method will be eliminated from the framework once the SA-CCR takes effect”.
SA-CCR is scheduled for 1 January 2017.
Understanding the impact
Businesses with counterparty credit risk in OTC derivatives, ETDs and long settlement transactions need to prepare for SA-CCR. Firms not only have to get the new computations right, but also the right input data granularity.
Depending on the range and spread of asset classes traded, SA-CCR could result in some firms seeing a reduction in credit risk exposure, while others may see an increase. Some firms may even want to change their business models.
What to consider
SA-CCR will need careful implementation in order to both meet the increased data requirements, but also to put in place a process of managing the more complex computation. Firms should consider:
- Level of impact – what new exposures levels will arise from affected asset classes, and what does this mean for the business’ portfolio?
- Data requirements – can the firm’s current regulatory reporting solution correctly integrate the additional data and provide support for the more complex calculation?
- Reporting – what internal reports should a firm specify which will optimise transparency into the SA-CCR computation?
- Automation – how to avoid a manual solution for gathering data and reporting it? Firms should ensure they gear up with a solution that provides other advantages beyond SA-CCR, enabling them to adapt to futures changes, as the rest of “Basel” IV
Financial institutions face a growing number of regulatory demands with the frequency, complexity and granularity of reporting increasing.
Regulatory reporting is a priority: it is imperative that financial institutions stay up-to-date with what is on the regulatory horizon, how it might impact them and what they need to do. So, to meet requirements efficiently and cost-effectively, firms
need a strategic approach. Without this, costly workarounds and temporary mechanisms built into multiple overlapping processes will become an institutionalised norm.
By re-engineering their approach to regulatory reporting, firms can move towards agile solutions which are flexible and support maximum automation. SA-CCR, as the first piece of Basel IV, coupled with around three more years of changes to come, seems like
a pretty good place to start.