SA-CCR and FX: Opportunity Knocks

Insight
05/25/2021

Although SA-CCR (the Standardized Approach for Counterparty Credit Risk) will not impact every financial institution active in the FX markets, the roll out by the Basel Committee highlights the opportunity for all banks to streamline their use of capital, no matter what calculation methodology they use.

With SA-CCR’s roll out a staggered affair around the globe, market participants in some jurisdictions are fully au fait with the requirements while it is newly on the radar for others. Regardless of your level of awareness or preparedness, you should be focused on some basic questions:

  • How much capital are the various parts of my business consuming?
  • What can my business do to reduce consumption levels?

These questions are relevant not just under SA-CCR but across all capital requirement regulations and mechanisms. Even with SA-CCR replacing the Current Exposure Method (CEM) and the Standardized Method (SM) for banks, some larger banks will be able to continue using the Internal Models Method (IMM). Regardless of the regime or model, however, institutions of all sizes should be looking to optimize how they consume and allocate capital. Capital costs affect everyone, even when SA-CCR does not, so it’s crucial to access solutions and processes that allow for optimization.

If you are not already thinking about how you can flatten delta positions and reduce currency pair exposures, you should be. With the SA-CCR implementation clock already ticking, this lets you leverage opportunities under both SA-CCR and IMM.

To achieve optimum capital efficiency in FX markets, a level of flexibility and dynamism is required. With SA-CCR enabling currency pair netting, no matter the tenor of the exposures, the opportunity to compress and reduce capital consumption arises much more dynamically than before.

Accessing these opportunities requires having dedicated technology that can provide that up-to-the-minute view of a bank’s risk positions and counterparty exposures. Just as important, the technology needs to have a broad reach and offer multiple solutions to the same problem – capital efficiency – while meeting the needs of a range of institutions, all of which are potentially taking a different path to achieve the same end result.

To fully benefit from a range of solutions, however, the network effect has to play a key role. The more participants use the same service, analyze the same data, and access the same solutions, the more they can take advantage of opportunities – even before critical mass is achieved. Having access to the right information in a timely manner is critical to any institution seeking to reduce their capital footprint.

The right technology, data, and analytics democratizes capital optimization: it enables banks outside the very top group to streamline their Markets businesses without negatively impacting their position in the industry, or, importantly, the level of service they can provide to customers. Achieving this, though, means bringing a lot of moving parts together and embedding SA-CCR across the business:

  • Individual traders need to be aware of the potential cost of each new trade and, critically, where potential capital exposures can be reduced.
  • The trading manager should be looking at SA-CCR exposures in the pre-trade environment, working out where and with whom netting opportunities exist.
  • The front office sales and relationship team needs to be armed with the appropriate data to approach specific counterparties.
  • At a more senior level, managers need to understand how they can reduce capital consumption without negatively impacting business operation, by either eliminating or moving positions.

If nothing else, managers at all levels of the business should be able to better understand how their valuable capital resources are consumed and measure individual units against this critical metric. Increasingly, business units are being judged against a metric of capital consumption rather than just top-level performance. Particularly under SA-CCR, every dollar saved offers value.

Written by:
Gil Mandelzis
CEO & Founder
Contact

Related Insights