WASHINGTON--(BUSINESS WIRE)--The Coalition for Derivatives End-Users (the “Coalition”) appreciates the care taken by the FDIC in issuing and adopting a final rulemaking regarding the standardized approach for calculating the exposure amount of derivatives contracts (“SA-CCR”).1 The final rule adopted by the FDIC reflects reasoned consideration of the issues advanced in the Coalition’s and other end-user letters.2 In particular, we applaud the provisions in the final rule that would exclude the application of the alpha factor to commercial end-user derivatives exposures. This serves to protect the cost savings afforded to end-users as a result of previously enacted congressional relief.
However, we remain concerned with the final rule’s calibration of supervisory factors for commodities. While the FDIC did revert their calibrations to the Basel Committee’s proposed supervisory factors for non-electricity “energy,” we believe that the Basel Committee’s proposed supervisory factors overstate the volatility risk presented by commodity derivatives because they are not appropriately tailored to the level matching the actual exposure risk presented by the underlying derivative. Declining to address this would leave commodity derivatives with punitive capital charges that are out of step with other asset classes and not calibrated to the actual risks intended to be mitigated by the final rule. We remain hopeful that this will be addressed in the future.
Further, we remain concerned that collateral recognition is limited to only cash collateral. As the Coalition has previously noted, end-users do not generally utilize cash margining, as it is often prohibitively expensive, tying up capital in hedging transactions when it could be better deployed in growing the business, job growth, and competition, consistent with officers’ and directors’ fiduciary responsibilities. Because of these limitations, the Coalition would again stress the need for the final rule to recognize alternative forms of margining widely employed by end-users, including the use of liens and letters of credit to off-set exposure risks.
The Coalition is committed to working with the prudential regulators to ensure that the final SA-CCR rule does not impede end-users’ ability to efficiently mitigate and manage their commercial risks.
Since the financial crisis, the Coalition for Derivatives End-Users has advocated for smart, well-tailored derivatives regulations that promote economic stability, reduce systemic risks and increase transparency without imposing undue burdens on end-users. The Coalition for Derivatives End-Users represents the views of companies that employ derivatives primarily to manage risks associated with their businesses. Nearly 300 companies and business associations have joined the Coalition in seeking strong, effective and fair regulation of derivatives markets that brings transparency and mitigates risks to the financial system while not unduly burdening American businesses and harming job growth.
- Federal Deposit Insurance Corporation, Standardized Approach for Calculating the Exposure Amount of Derivative Contracts, Final Rule (November 19, 2019), available at https://www.fdic.gov/news/board/2019/2019-11-19-notice-dis-a-fr.pdf.
- See, e.g., Coalition for Derivatives End-Users, Comment Letter (submitted March 18, 2019), available at https://www.federalreserve.gov/SECRS/2019/March/20190320/R-1629/R-1629_031819_133558_425805351312_1.pdf.