Living with SA-CCR, one year on

With most major rule changes there tends to come a time when the shock begins to wear off and people understand how things will work from now on. For the new counterparty credit capital rules that came into effect for US and UK banks in January 2022, initial thoughts were that its impact wouldn’t be felt by end-clients until the end of the first quarter. As it turns out, it was much sooner than that.

The standardised approach to counterparty credit risk (SA-CCR) had an immediate effect on the status quo for banks and the cost of dealing in foreign exchange forwards and swaps. According to data from transaction cost analysis firm BestX, the difference between US and European bid/offer spreads for G10 forwards jumped by 0.2 basis points between January and March.

This forced a shake-up in FX Markets’ Counterparty Radar dealer rankings for US mutual funds as Citi dramatically fell out of favour with clients, and banks such as HSBC took the helm – for a time. But it didn’t affect all US banks equally – Morgan Stanley, for instance, hit the top spot for FX forwards at the end of the third quarter last year.

Privately, some US banks say they have had to take a tactical step back and give up market share

Simply passing the full capital costs that come with SA-CCR on to end-clients is largely considered unthinkable – any bank that tried to do so would instantly be dropped from a client’s roster of liquidity providers.

Privately, some US banks say they have had to take a tactical step back and give up market share while they sort out the business’s capital position.

In some cases, they have had to start the difficult conversation with large users of balance sheet about cash collateralising their bilateral swaps and forwards for the first time.

Swaps and forwards were carved out of the post-2008 crisis rules that required over-the-counter derivatives to either be centrally cleared or subject to bilateral initial and variation margin. Given the potential savings on offer – collateralised trades are treated far more favourably under SA-CCR – and the fact that clients are posting margin for other derivatives anyway, it’s understood that a few big firms have already taken the plunge.

The BestX data showed that the spread difference between US and European banks had dropped to 0.03bp by the end of August, which could suggest that they may have already had some success.

But getting an asset manager to agree to post cash against their FX trades can be a challenge. Uncollateralised or non-cash collateralised trades make up a large portion of the FX swaps and forwards market, and any change requires technology updates.

If collateralising bilateral positions becomes normalised, though, the question is whether that will nudge the industry towards central clearing. So far, the focus of ForexClear has been on getting the interdealer deliverable swaps and forwards market up and running. If asset managers start posting cash on bilateral trades, one could argue they might as well be able to utilise the netting and counterparty risk benefits of a central counterparty.

Similarly, the normalisation of collateral in this space opens the door to other possibilities, such as the use of FX futures as an alternative to swaps.

FX futures represent only 2% of the $6.6 trillion-traded-a-day global foreign exchange market, but they are growing at a fast rate. According to the Bank of International Settlements, average daily turnover of FX futures rose 42% year-on-year to $199 billion, as of September 2022.

Exchanges like CME Group and Eurex are making a greater push in offering block trading and ‘exchange for related physical’ – the simultaneous exchange of a futures position for an offsetting OTC position – to attract more buy-side firms.

FX futures could also be more operationally friendly for asset managers, given the fact that trading them requires less-complicated documentation compared with an Isda agreement.

There’s a long way to go yet, but markets may only be seeing the start of the changes that SA-CCR will bring about in the FX space.