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Single-Counterparty Credit Limit Reproposal Could Be Further Improved


Sean Oblack

New York, NY – June 6, 2016 – The Clearing House Association, along with the American Bankers Association, the Financial Services Roundtable, the Securities Industry and Financial Markets Association, and the International Swaps and Derivatives Association, have submitted a comment letter to the Federal Reserve on its reproposal of the single-counterparty credit limit (SCCL) requirement of the Dodd-Frank Act.  The SCCL was initially proposed in 2011, and the letter notes substantial improvements included in the March 2016 reproposal.   The letter also details some problematic aspects that still remain that could make the rule needlessly difficult to implement and in some instances unworkable.   The Federal Reserve’s proposed regulation would apply to U.S. bank holding companies, foreign banking organizations (FBOs) and intermediate holding companies of FBOs with at least $50 billion in assets.

Under the reproposal, the stringency of the applicable SCCL would vary based on the size and type of bank holding company, with U.S. global systemically important banks (GSIBs) and foreign banking organizations and U.S. intermediate holding companies with total consolidated assets of $500 billion or more subject to the most stringent SCCL.  In connection with the submission to the Federal Reserve, The Clearing House issued a research note that reviews and assesses the methodology used by the Federal Reserve to calibrate the exposure limit that would apply in the case of a U.S. GSIB’s credit exposure to another U.S. GSIB.

“The reproposal includes notable improvements compared to the original proposal; however, there are several areas where changes are warranted to make the framework more risk-based and workable,” said Gregg Rozansky, Managing Director for The Clearing House.

The Clearing House research note demonstrates that the analysis presented in a Federal Reserve white paper accompanying the reproposal does not provide an appropriate empirical basis for the more stringent inter-GSIB credit limit, and fails to consider how the SCCL relates to other rules.  For example, it does not take into account the GSIB surcharge framework aimed at reducing the likelihood and costs of a failure of a GSIB and, accordingly, the reduction in a GSIB’s probably of default that such framework implies. 

“The analysis presented in the SCCL white paper is not a calibration and therefore does not present compelling evidence for the specific inter-GSIB limit included in the regulation.  Moreover, the methodology described in the SCCL white paper is inconsistent with the methodology described in a recent Federal Reserve white paper on the GSIB surcharges. To make the SCCL rule consistent with the actual risks of such exposures, the final rule should take into account numerous other regulations already in place that address the same risk,” said Francisco Covas, Deputy Head of Research at The Clearing House.

Positive changes contained in the reproposal include more risk-sensitive measurement methodologies for derivatives and other transactions that adhere more closely to the risk-based capital rules’ exposures amounts, and exemptions for exposures to certain sovereign issuers and qualifying central counterparties (“QCCPs”).

To better ensure that any final SCCL rule is appropriately tailored to achieve its policy objective, the letter asks the Federal Reserve to impose operational burdens only where necessary to achieve the financial stability objectives that underlie the SCCL, use reasonable measurement methodologies that are a realistic reflection of risk, and vary the application for certain classes of bank holding companies only where there are reasonable and substantiated reasons for doing so.

The letter provides several recommendations to simplify the reproposal.  It urges the Federal Reserve to align various aspects of the reproposal with similar risk-based capital rules and, in certain cases, the Office of the Comptroller of the Currency’s lending limits that have been in place for many years.  It also suggests alignment with the Basel Committee’s own Large Exposures Framework, where appropriate.   

About The Clearing House.  The Clearing House is a banking association and payments company that is owned by the largest commercial banks and dates back to 1853.  The Clearing House Payments Company L.L.C. owns and operates core payments system infrastructure in the United States and is currently working to modernize that infrastructure by building a new, ubiquitous, real-time payment system.  The Payments Company is the only private-sector ACH and wire operator in the United States, clearing and settling nearly $2 trillion in U.S. dollar payments each day, representing half of all commercial ACH and wire volume.  Its affiliate, The Clearing House Association L.L.C., is a nonpartisan organization that engages in research, analysis, advocacy and litigation focused on financial regulation that supports a safe, sound and competitive banking system.  

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