Wall Street May Get Capital Break in New Approach to Derivatives

(Bloomberg) -- The biggest U.S. banks may be on their way to a new capital standard for derivatives trading that addresses industry complaints that Wall Street’s risk-taking has been overestimated.

The Federal Reserve and two other agencies on Tuesday proposed a new approach meant to answer concerns that existing requirements ignore risk-reducing collateral and didn’t allow enough netting of derivatives contracts with similar risks. The change would free up some of the bank capital demanded after the 2008 financial crisis.

  • The new calculation, known as the “standardized approach for counterparty credit risk,” or SA-CCR, would be used in key capital measures, including how banks determine how much they need to offset risks and how close they’re getting to regulators’ leverage limits.
  • The Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. say they’re trying to fix a system that doesn’t fit with today’s markets and regulatory demands -- and that hasn’t been adjusted since the crisis.
  • “This can result in a significant mismatch between the risk posed by these portfolios and the regulatory capital that the banking organization must hold against them,” the agencies said in their 248-page proposal.
  • Companies required to have the new method in place by July 1, 2020, are giant, global lenders identified as “advanced approaches” banks under capital rules -- including JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc. That category is expected to be significantly narrowed in a separate regulatory plan set to be released this week, people familiar with that effort have said.
  • A Treasury Department report released last year encouraged regulators to adopt the SA-CCR, which could save the industry a tremendous amount of capital that the biggest banks now maintain against derivatives contracts.
  • The proposal released for a 60-day public comment period also represents the U.S. answer to a global agreement at the Basel Committee on Banking Supervision in 2014, where the approach was first established.

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