Regulators propose new formula for estimating derivative exposures
WASHINGTON — The federal bank regulators have proposed to update the methodology banks use to calculate their derivative exposures when determining capital requirements.
Large banks typically use an approach known as the "current exposure methodology" to calculate the amounts they owe or are owed in swaps, futures or options contracts.
But in the proposal issued Tuesday by the Federal Reserve Board, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, that methodology would be replaced by the "standardized approach for calculating credit risk." The change would apply to large banking organizations that have opted to use internal models to calculate their capital requirements rather than standardized Fed models.
Under the proposal, the new approach — known as SA-CCR — would establish a floor below which derivative exposures could not fall. Large banks have to date been using both CEM and internal model methodologies to calculate derivatives-related risks, with CEM acting as a floor.
The primary difference between CEM and SA-CCR is that the former does not appropriately consider the risk-reducing effect of collateral that banks put up as part of a derivatives contract, thus requiring the firms to hold more capital against their failure than is necessary, the agencies said.
“The agencies intend for the proposed implementation of SA-CCR to respond to these concerns, and to be substantially consistent with international standards issued by the Basel Committee on Banking Supervision,” the proposal said.
The agencies will accept comment on the proposed rule for 60 days after its publication in the Federal Register. The rule will then be phased in on July 1, 2020.