June 26, 2019

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CFTC Commissioners Propose a Standardized Approach for Measuring Counterparty Credit Risk

On February 15, four members of the Commodity Futures Trading Commission (Commissioner Stump recused herself) filed a comment letter regarding the standardized approach for calculating the exposure amount of derivative contracts proposed by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (the Agencies). In 2018, the Agencies proposed a standardized approach for measuring counterparty credit risk (SA-CCR), which would replace the current exposure methodology (CEM) as an alternative method for calculations under the Agencies’ capital rules.

Under the proposed rules, large banking organizations (i.e., firms with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure) would be required to use SA-CCR to calculate both standardized total risk-weighted assets and the supplementary leverage ratio (SLR). Smaller banking organizations could elect to use either CEM or SA-CCR to determine exposure for derivative contracts.

In their comment letter, the Commissioners explained that bank capital standards, when implemented appropriately, should not deter central clearing for swaps. However, the Commissioners believe that the existing capital standards (and in particular the SLR) are counterproductive, “limiting access to derivatives risk management strategies and discouraging the central clearing of standardized swap products.” Further, imposing an SLR without also permitting an offset for the initial margin that clearing members hold on behalf of clients (as proposed) could have a substantial adverse impact on clearing members. Without changes to the SA-CCR, therefore, clearing members could curtail the provision of clearing services or exit the clearing business altogether.

The comment letter is available here.

©2019 Katten Muchin Rosenman LLP


About this Author

Kevin M. Foley, Finance Lawyer, Katten Llaw Firm

Kevin M. Foley has extensive experience in commodities law and advises a wide range of clients, both in the United States and abroad, on compliance with the Commodity Exchange Act and the rules of the Commodity Futures Trading Commission (CFTC) affecting traditional exchange-traded products, as well as the over-the-counter markets involving swaps and other derivative instruments. His clients include futures commission merchants, derivatives clearing organizations, designated contract markets, foreign boards of trade and an industry trade association.


Laura Krcmaric, Financial Services Attorney, Katten Law Firm

Laura Krcmaric represents clients in the financial services industry, focusing on regulatory and compliance work. Prior to joining Katten, Laura served as counsel for Credit Suisse, where she provided advice to the private banking and wealth management division. She also was an honors intern with the Securities and Exchange Commission.

While in law school, Laura served as a staff member and symposium editor for the North Carolina Law Review. She also was a member of the Community Development Law Clinic, representing nonprofit organizations.