The Standardised Approach for Counterparty Credit Risk (SA-CCR) and Uncleared Margin Rule (UMR) applies to over-the-counter (OTC) derivatives affect the use of and therefore decision making around swaps and exchange-traded derivatives, by adding capital costs to account for risk taking and standardising approaches to risk mitigation including margining.
The effect of these regulations on derivatives trading was effectively highlighted at TradeTech FX in Paris today at the panel ‘SA-CCR, UMR, Clearing & Optimisation Panel’ as market participants discussed how rules designed to encourage market resilience also added burdens to the desk.
“We see FX as an asset class,” said Juliette Pianko, chief risk officer for H20 Asset Management, a global macro asset manager running relative value strategies. “We had one fund falling into scope of UMR Phase Six last year. The impact so far has mainly been a lot of operational and contractual work. Opening accounts with our custodian, negotiating all the contracts with our bank. It takes a lot of time, necessarily you want to try to stay under the threshold for not posting initial margin (IM), so it’s constantly juggling, where you’re going to roll your position and with which bank to not to reach that threshold. When you’re ready to pledge, you have to pledge bonds so you have to buy duration to post collateral. In a way it has standardised practice where before it was bilateral discussion. So, it makes things easier to reconcile and monitor, but the impact managing a fund is important.”
Ben Tobin, head of Europe and portfolio optimisation at Capitolis said, “The way Juliette’s talking about how she manages her UMR risk, it’s actually affecting her trading, because she’s not trading freely on the best price where she wants to trade. She’s worried about collateral, and for SA-CCR, for UMR, for GSIB for any of these measurements, it does affect the bank’s relationship with the client. The thing with UMR is that she’s feeling the effect because she’s actually having to put the collateral down as well. But in things like G-SIB, for gross notional optimisation, or SA-CCR, it doesn’t affect the buy side, but it does affect the relationship between the bank and the client. And in a lot of cases, when performing we’re hoping to do optimization with hedge funds or asset managers where it’s not really getting the buy side any benefit other than the relationship with the bank.”
One method of managing these issues is the intelligent use of both listed and over the counter (OTC) derivatives to express risk and ideas into the market.
Paul Houston, global head of FX products at CME Group said, “It’s very difficult to balance the capital pressures with the margin pressures of clearing, we do clear deliverable FX. We’ve been focused on making our markets more accessible, allowing buy-side participants to trade in an OTC manner but still clear at the CME, in a complementary way.”
Loic Moreau, global head of risk and operations at clearing house ForexClear, part of LCH, said, “We recommend to clear using a central counterparty (CCP) of course.”
He said that creates clear margin efficiency, “Netting off your portfolio will be more efficient from a margin perspective and everything facing a clearing house will be outside of UMR calculation.”
Tobin said, “More and more, optimisation with the buy side and the bank is going to become critical to the amount of trading capacity and the amount of regulatory capital that the bank is expected to pay.”
The bad news he said is that the process is nowhere near over.
“SA-CCR is prevalent throughout the US banks, and we hear a lot about it. Most of Europe is still under seeing an internal model methodology. Japan is technically under SA-CCR but they’ve still got two years to do it,” Tobin said. “With the current Basel regulation advice, the thresholds within the banks of the internal margin methodology (IMM) are changing. But I just don’t see the whole world being under SA-CCR until the late 2020s to be absolutely honest.”
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