The operational realities of SA-CCR and fragmented regulatory landscape are reshaping counterparty credit risk management, capital reporting, and derivative pricing.

Financial institutions operating across the Asia-Pacific region are grappling with shifting macroeconomic conditions and diverging regulatory regimes as they implement the final stages of the Basel III framework.

During a recent webinar hosted by Regulation Asia and Bloomberg, industry practitioners highlighted how fluctuating interest rates, tight credit spreads, and the adoption of the Standardised Approach for Counterparty Credit Risk (SA-CCR) are forcing banks to overhaul their pricing and balance sheet strategies.

The discussion highlighted that SA-CCR is not a single, uniformly implemented regime. Local rules differ on the availability of the Internal Models Method (IMM), the calibration of supervisory parameters, CVA capital, and the treatment of collateral and netting.

Speaking on the difficulties of the current market environment, Rodney Hoskinson, Director and Quant Analyst at ANZ Global Markets, noted that tighter credit spreads and volatile interest rates tend to compress Credit Valuation Adjustments (CVA) while amplifying funding pressures.

However, he warned against optimising solely for current conditions. If higher rates persist, weaker counterparties may eventually struggle to refinance, causing credit spreads to re-normalise. "The macro picture rarely stays static," Hoskinson said.

Regulatory fragmentation

According to the panellists, a key concern for multinational banks is the inconsistent implementation of SA-CCR across different jurisdictions.

Panayiotis Dionysopoulos, Global Head of Financial and Enterprise Risk at the International Swaps and Derivatives Association (ISDA), described the global regulatory landscape as "consistently inconsistent”.

He pointed to the alpha factor – a parameter originally designed to capture model risk under internal models – which has seen reductions in different ways and for different populations or calculations across the US, UK, and Europe.

This divergence creates significant operational hurdles for APAC institutions. Kannan Rajamani, Senior Vice President and Executive Director for Group Capital Regulatory Reporting at Standard Chartered India, noted that while jurisdictions like Hong Kong and Singapore have already adopted SA-CCR, India is slated to transition to the framework next year under the RBI’s proposed counterparty credit risk framework.

Rajamani explained that major banks often use the IMM at the group level, but regional subsidiaries may be forced to use SA-CCR if local regulators do not approve IMM. This shift toward standardised computations rather than internal models tends to inherently increase capital requirements.

The resulting different capital charges for the same portfolio can force bank treasuries to manage complex “double leverage” scenarios to fund regional capital requirements, he said.

Speaking to the industry's predicament, Gaurav Kapoor, Market Specialist for Derivatives & Risk at Bloomberg, noted that despite a universal desire among market participants and regulators for standardisation, "regulatory divergence is here to stay."

Adding to the complexity is the divergence in CVA frameworks. Rajamani highlighted the ongoing debate around the Basic Approach for CVA (BA-CVA). While BA-CVA 'full' provides hedging benefits on single-name or index swaps, BA-CVA 'reduced' strips those benefits away, prompting banks to actively lobby regulators for more favourable treatments.

Dionysopoulos also pointed to a key asymmetry in the approach regulators are taking to internal models for capitalising counterparty credit risk (CCR). While the US is considering removing recognition of counterparty credit risk internal models entirely, Europe is seeing an increase in applications and requests to expand existing IMM permissions or waivers.

To support the argument for continued use of internal models for CCR capital, ISDA is coordinating CCR internal models benchmarking exercises involving firms across the UK and Europe. These exercises support firms by providing greater transparency of model outcomes to help drive standardisation of best practices and demonstrate their value to supervisors.

SA-CCR deficiencies

The panellists also raised concerns regarding specific technical deficiencies within the SA-CCR framework.

Dionysopoulos highlighted the treatment of initial margin in Potential Future Exposure (PFE) calculations, warning that overly conservative recognition of initial margin does not act as a proper risk mitigant, resulting in overstated capital requirements.

In addition, he pointed to the lack of diversification and netting benefits within the foreign exchange asset classes, where every currency pair is defined as a separate hedging set. This lack of risk sensitivity limits diversification recognition across currency pairs, significantly affecting clients with large, diversified FX portfolios.

Divergence is also emerging in cross-product netting. Driven by the upcoming US Treasury clearing mandate, the US is introducing a provision allowing banks to include derivatives and securities financing transactions (SFTs) under the same netting set, subject to certain rules and conditions.

This allows institutions to model SFTs as forward purchases or sales, leveraging over-collateralisation to reduce overall portfolio exposure. However, this provision does not currently exist in other jurisdictions, further complicating global alignment efforts.

Beyond capital calculations, supervisory expectations on counterparty credit risk management are intensifying. Dionysopoulos pointed to Basel Committee guidelines that were published in 2024 that outline more than 120 individual expectations or practices, spanning exposure calculation, reporting, governance and default management.

He noted that an ISDA survey of 30 global firms  showed firms’ processes  generally align to these guidelines, and internal modelling improvements, such as multi-factor interest rate models and higher Monte Carlo simulation runs, are widely used across firms. However, backtesting of counterparty risk models remains one of the industry's most significant and least standardised challenges, Dionysopoulos said.

Rajamani added that data quality remains a major hurdle, with banks struggling to aggregate the data required to enable cross-asset class netting and large exposure reporting. He specifically pointed to the substitution approach under the BCBS large exposures framework, which requires banks to maintain granular data on collateral, issuers, counterparties, and netting sets.

Kapoor echoed these operational challenges, noting that many institutions are finding their legacy systems and internal processes struggle to accurately model the PFE for complex structured products under the rules.

Pricing discipline

The panellists also spoke at length on how the evolving regulatory landscape is directly impacting how banks price derivatives through X-Value Adjustments (XVA).

Kapoor noted that given the current macro uncertainty and regulatory fragmentation, XVA is increasingly being viewed not just as a tool for accurate derivative pricing, but as a critical mechanism for broader balance sheet optimisation.

According to Hoskinson, while CVA and Funding Valuation Adjustments (FVA) are now established industry practices, calculating and charging for Margin Valuation Adjustments (MVA) and Capital Valuation Adjustments (KVA) remains highly challenging.

He noted that banks typically fund Standard Initial Margin Model (SIMM) requirements on a pay-as-you-go basis. However, in mature portfolios, initial margin exposures now rival spot counterparty exposures.

Because MVA, the cost of funding segregated initial margin, may be difficult to charge to dealer-to-dealer counterparties, banks may, as with FVA, look to pass these costs onto uncollateralised end-users whose trades force the bank to incur initial and variation margin on their hedges.

To manage the complexity of forward-looking capital calculations under the evolving landscape, Hoskinson suggested that banks might rely on economic expected shortfall models within their XVA simulations, using regulatory numbers as an overlay.

He specifically cautioned that a technically correct KVA, the cost of remunerating shareholders for capital committed against the trade’s risk, should reflect not just the cost of regulatory capital, but also the year-on-year erosion of returns caused by funding segregated initial margin for client transactions.

Hoskinson noted that while competition may not allow all XVA-related costs to be included in prices charged to derivative counterparties, XVA is about creating value by quantifying and managing all trading costs related to credit risks, funding and capital.

Tech and tokenisation

The panellists said banks are exploring new technologies to try and reduce the burden of these calculations, though they noted that regulatory acceptance remains cautious.

According to Rajamani, while artificial intelligence (AI) is useful for data cleansing, regulators are often reluctant to approve AI models for actual regulatory capital and XVA simulations, preferring more standardised approaches.

Hoskinson added that banks are instead utilising technologies that AI leans on, such as GPUs and algorithmic differentiation, to speed up risk computations and manage rising technology costs.

Looking ahead, tokenisation could also offer a structural solution to capital efficiency pressures. Rajamani noted that the Hong Kong Monetary Authority (HKMA) has been open to the use of digital assets to facilitate the real-time settlement of collateral.

By increasing collateral velocity, tokenisation has the potential to significantly reduce the margin period of risk (MPOR), thereby altering margin valuations and easing balance sheet pressures for APAC institutions, he said.

Dionysopoulos agreed, noting that proofs of concept for tokenised collateral are approaching production, and this could transform financial markets over the next three to four years. He noted, however, that this may also introduce new risks, including fragmentation of market liquidity.

--

This article and the associated webinar were produced through a collaboration between Bloomberg and Regulation Asia. The webinar is available for on-demand viewing here.