22 February 2012

ISDA and industry response to BCBS paper on application of own credit risk adjustments to derivatives

This paper focuses on gains and losses arising from changes in the creditworthiness of counterparties to OTC derivatives and Secured Financing Transactions (SFTs), without examining the relationship to gains and losses arising from a Firm's other liabilities, such as debt issued held at fair value.

ISDA has consulted extensively with the industry and it is clear that, given the large number of current drivers of change, Firms are being forced to restructure their business models significantly. Firms are at differing stages of this process and require clarification as to the effect on their businesses from initiatives including:

• the detail around the segregation between retail and wholesale banking, and their funding, resulting from the Independent Commission on Banking in the UK (the Vickers’ report);
• the implementation at Level Two of the EMIR proposals in Europe;
• the final form of the Dodd Frank proposals and the Volcker Rule;
• the structure and number of Central Counterparties (CCPs) and the consequential effects on netting sets;
• the collateral and funding requirements of whatever segregation models are chosen.

Until these are better understood, and there is more certainty around the resulting business structures, ISDA thinks it is premature to employ a “one size fits all” approach to cover all business models and valuation methodologies at this time.

ISDA argues that regulators should delay imposing rules for the capital treatment of CVA until a consensus has emerged, as this may lead to the penalisation of approaches that price funding more conservatively and manage funding commitments better. It  also believes the Industry should be given more time to devise methods for computing the impact of changes in credit spreads to CVA that would be satisfactory to the Committee.

ISDA recognises that there may be other approaches than the two it details. ISDA is committed to continuing to work with the industry to conduct a review of Industry practice in these areas, and welcomes further discussions with regulators to identify constructive solutions.

Full consultation paper

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