Stepping up to SA-CCR: five things to get right
17 April 2019
The latest update to the EU capital rules for banks – or CRR2 – is expected imminently. So, firms in the EU must finally get to grips with SA-CCR, the new standardised approach to counterparty credit risk. The new approach should be familiar to most by now. It has undergone numerous rounds of discussion at the Basel committee level. Indeed, for firms with an international footprint, it is likely to have already been implemented in one or more jurisdictions. But implementation across the EU is still likely to be a significant lift, both for firms and regulators. Firms must be weaned off the far simpler legacy calculation: the mark to market approach or ‘CEM’.
With the clock now ticking to implementation, there are five things you should make sure you get right to be sure your project is successful.
Data is key to SA-CCR
Its additional complexity means the calculation of SA-CCR is much more data hungry than the legacy calculations which it replaces. These data requirements are aligned not only to the individual trades themselves (clearing, margin held, and so on), but also the supporting documentation (for example netting set allocations). At the outset, you should establish a workstream to assure all the correct data is being captured and can be made readily available for the calculation.
Selecting a calculator for SA-CCR
Firms in the EU have the significant advantage of being later to implement SA-CCR than many other jurisdictions. As such, calculation solutions for SA-CCR are now widely available, including from most vendors of back office software. Engaging early with your existing vendors to see what solutions they can offer ‘out-of-the-box’ is recommended. If they can’t meet your needs, a range of other vendor options are likely available to firms who would rather avoid a costly self-build.
Aim for maximum efficiency
Many of the studies quantifying the impact of SA-CCR point to a net increase in the level of capital that will be required. This is despite SA-CCR being designed as a more ‘risk sensitive’ methodology. To minimise the impact of SA-CCR on your capital requirements, you should take steps now to make sure your business is set up to achieve maximum efficiency. Clearing, margining and netting/hedging set structures all drive the final output of SA-CCR. The optimum balance should be sought between holding capital and applying these additional risk mitigation techniques that are recognised by SA-CCR.
Consider the downstream impacts
Since the SA-CCR rules were finalised by the Basel committee, they have gradually fanned out to underpin a range of additional measures. The SA-CCR calculation, or variations thereof, now underpin the leverage ratio, CVA, large exposures, capital floors and Pillar 3 disclosures. When designing the technology and operating environment for the SA-CCR calculation, these linked and downstream impacts should be considered, to ensure the over-arching framework is complete and downstream calculations accurate.
Connect the dots
Implementing SA-CCR will be a complex task. For most firms it will mean a comprehensive redesign of IT infrastructure, data flows and operational processes. Workstreams on data readiness, mapping to the calculation module, and utilising the outputs will need to be carefully coordinated. The level of complexity will rise further if internal models are being used alongside SA-CCR for certain asset classes. Global implementation with different jurisdictions implementing to different timelines will also be more complex. A strong programme management approach, good governance and clear accountability will be needed to ensure success.