An important rule around how large banks measure counter-party credit risk for derivatives contracts has changed.
The Federal Deposit Insurance Corporation, the Federal Reserve Board and the Office of the Comptroller of the Currency have published a final rule to update regulations initially adopted in 1989.
With this update, banks must adhere to a new standard for measuring counterparty credit risk (SA-CCR) exposure with respect to derivative contracts. Compliance will be mandatory for advanced banking organisations and optional for other ones.
The new rule improves risk-sensitivity and is said to more accurately reflect actual risks associated with this type of trade.
It is hardly surprising to anyone to hear the financial crisis brought on multiple regulatory changes. This update aims to align regulatory capital treatment of derivative contracts with congressional and other rules set up to reduce the damage from the great recession.
The update removes the alpha factor of 1.4 for derivative contracts with commercial end-users that use such contracts to hedge or mitigate commercial risks, making it easier to calibrate SA-CCR.
It also recognizes the risk-reducing effect of client collateral and maintains strong capital requirements.
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