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Foreign Exchange

FX: SA-CCR pushes up capital charges

The standardized approach for counterparty credit risk has not yet proved to be the catalyst for greater use of clearing in the FX market that some expected.

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SA-CCR has forced many market participants to re-evaluate their FX portfolios. Illustration: iStock

Regulatory changes under the standardized approach for counterparty credit risk (SA-CCR) have imposed stricter capital requirements on banks for bilateral over-the-counter (OTC) derivative trades since the start of 2022, forcing market participants to re-evaluate their FX portfolios from a capital cost perspective.

Many FX market users – especially corporates – either do not post collateral or rely on non-cash collateral to margin positions, something that can be punitive under SA-CCR. For instance, sell-side banks that trade with corporates, pension funds and long-only asset managers that trade long-dated instruments with directional positions, face some big increases in capital requirements.

SA-CCR does not recognise the diversification benefits across hedging sets within an asset class, which results in multiple exposure values being calculated across multiple currency pairs.

“Therefore, the overall FX risk-weighted assets under SAC-CCR tend to be quite conservative and risk-insensitive, which ultimately results in a significant increase in the capital charge,” explains Kishore Ramakrishnan, managing director of capital markets advisory at Treliant Capital Markets.

The right mix

The precise impact of moving to SA-CCR depends on the exact book of FX positions in question.