European banks can’t escape SA-CCR hit, warns FX exec

Although not yet directly affected, EU dealers may feel regulation’s impact, says Goldman’s Wilkins


European banks will be unable to dodge the counterparty credit charges that have made their US counterparts less competitive when trading foreign exchange forwards and swaps, according to a Goldman Sachs e-FX executive.

With increased capital charges stemming from the standardised approach to counterparty credit risk, or SA-CCR, some US banks have been forced to widen their bid/offer spreads for certain derivatives quotes. The new regime hits uncollateralised FX swaps and forwards particularly hard, and European banks are said to have taken advantage of the situation.

Research by trade analytics provider BestX has placed the difference between US and European bid/offer spreads at 0.2 basis points since the regulation came into force at start of this year. The impact may only be temporary, though.

“With any of these changes in regulation or market dynamics, it takes a while – months, even years – for a market to recalibrate. We’re still in a moment of recalibration,” said David Wilkins, global head of e-FX sales and head of Ficc execution services for Europe, the Middle East and Africa at Goldman Sachs.

“I don’t think the European banks are necessarily going to continue to be able to price forwards and swaps almost as a free utility, because in the end, for the most part, they’re going to have to fund dollars. Normally that comes from the US banks, and the US banks are going to pass that on in the wholesale market in increased spreads,” he added.

Wilkins was speaking on a panel at the FX Markets Europe conference earlier today (June 28).

The regulation requires banks to factor in the cost they would incur if an unmargined trade were closed out after a counterparty default, as well as the cost associated with the potential increase in exposure between default and the transactions’ closure or replacement. Those costs are then increased by 40% via the so-called alpha scalar.

Short-dated FX trades that managers constantly roll over tend to stay on a dealer’s books as well, making them more expensive to trade.

The buy side has already noticed that at least one US dealer, Citi, has been pricing these trades less competitively, likely contributing to a drop in forwards volumes with US mutual funds.

“Everyone’s noticed swaps’ costs rise recently, but that’s from a super-low base,” said David Turner, head of FX trading for Europe, the Middle East and Africa at BlackRock, speaking on the same panel. “We were getting a lot of choice pricing last year.”

The rule also took effect for JP Morgan and Goldman Sachs at the start of the year, but impacts vary.

“It’s much more expensive for us to price forwards and swaps,” said Wilkins. “The further you go out in the curve, the more expensive it gets – particularly for uncollateralised swaps, which is what a lot of asset managers do. A certain amount of that increased cost we can absorb as an organisation, and after a while, we then pass that on within the spread that we’re charging.”

Dealers have attempted to address the issues by using capital optimisation vendors like Capitolis and triOptima. Some in the industry have speculated that the regulation could push users towards exchange-listed products.

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