SA-CCR: Key considerations to tackle new Basel rules

By Nicola Hortin, Head of RegulatoryAnalysis Team, EMEA, AxiomSL

As part of its overhaul of the Baselcapital adequacy framework, the Bank for International Settlements (BIS) hasdeveloped a new methodology for calculating how much capital banks need inorder to mitigate their exposure to credit risk. Banks are eager to understandhow they will be impacted by the new Standardised Approach for MeasuringCounterparty Credit Risk Exposures (SA-CCR) - which will be mandatory for allover-the-counter (OTC) derivatives, exchange-traded derivatives (ETDs) andlong-settlement transactions not treated under an internal model approach.However, in order to do so and to implement the new requirements optimally,banks must overcome a number of challenges.

SA-CCR uses a lot of the same terminologyas the existing credit risk calculations. However, despite the superficialsimilarities, the new calculations are completely different from what has gonebefore. They are significantly more complex and include different calculationsfor individual asset classes and rules regarding the treatment of particularproduct sets. As a result, rather than tweaking what they already have, banksneed to implement a totally new set of calculations.

The SA-CCR calculations bring with them newdata requirements. While there is an overlap with the data used in theincumbent credit risk calculations, banks will also need to source many newattributes. For example, they will need information about margin agreementswith counterparties, including threshold amounts and minimum transfer amounts,and the ability to link this information to their trade and collateral data. Aswell as the maturity date for derivatives, they will now also need the maturitydate for the underlying products. 

Banks are likely to have most of therequired data somewhere within their infrastructure. However, due to thecomplicated system structures that exist at most large banks, sourcing the datawill be one of the most challenging aspects of implementing SA-CCR. In manycases it will involve changing not only the systems that directly feed theregulatory capital calculation platform, but also other upstream systems. Toexpedite the data sourcing process, many banks are likely to work with a thirdparty who has already identified which additional data attributes are required. 

All of these changes will inevitably alterbanks’ capital requirements. Historically, some banks have relied onspreadsheets to manually calculate how they will be impacted by new capitaladequacy rules. However, this is a very cumbersome approach. It means that whenthe requirements come into force, in order to automate the calculations, banksneed to spend months reconfiguring their capital calculation engines based onthe changes they have worked out on paper.

Banks can avoid this situation by doingtheir impact analysis work within their regulatory calculation tool, runningthe new SA-CCR calculations in parallel with their incumbent credit riskcalculations. This approach makes it easier for banks to run the calculationsover an extended period in order to get a more complete understanding of theimpact. It also gives banks more confidence in the accuracy of the resultsbecause they are based on production data. And when the requirements come intoforce, the banks will already have the calculations set up within theirregulatory compliance infrastructure and will be ready to go.

It is important to note that at presentbanks are working from the SA-CCR rules that have been defined by the BIS.These rules will inevitably be tweaked and changed when they are incorporatedinto European Union (EU) law. Banks will be able to implement these changesmore easily and quickly if they do their impact analysis work within theirregulatory calculation platform.

When preparing for SA-CCR, it is alsoimportant that banks consider the wider context in which the requirements arebeing introduced. SA-CCR is just one element in a package of new capitaladequacy requirements, which are being introduced as part of what some people arereferring to as ‘Basel IV’. Other new calculations include the FundamentalReview of the Trading Book (FRTB), which replaces the current standardisedmarket risk calculations, and the potential introduction of a new capitalrequirement to cover Interest Rate Risk in the Banking Book (IRRBB).

There is a significant overlap between thedata that banks will need to run all of the different calculations and many ofthe calculations are also interdependent. Therefore, rather than using separatesystems to run each of the calculations, banks can achieve greater efficiencyand higher levels of accuracy and consistency by managing SA-CCR on the sameregulatory calculation platform as all of the other ‘Basel IV’ requirements.

SA-CCR is a major change to the way bankscalculate their credit risk capital requirements. By planning carefully,focusing on the data sourcing challenges and doing parallel running of the newcalculations, banks can assess how they will be impacted by SA-CCR and ensurethey are well prepared when the requirements come into force.