SunGard: Corporate Hedgers To Be Hit Hard By New SA-CCR Capital Rules
Posted: 10 November 2014
Basel’s new Standardized Approach for Counterparty Credit Risk (SA-CCR) will have the contentious effect of penalizing corporate hedging, according to analysis by SunGard. This is due to the higher capital requirements that will be imposed on banks’ derivative activities, especially on non-diversified, non-margined, non-cleared transactions such as those undertaken with corporate hedgers. Banks are expected to either pass on the additional cost of capital to their corporate clients, or force them into bilateral margining arrangements, possibly requiring upfront initial margin, or exit this type of business altogether which would diminish the liquidity of the corporate hedging markets.
Corporate hedgers are sometimes referred to as ‘end-users’ of derivatives. They enter into derivative transactions to protect their business against fluctuations in interest rates, exchange rates, commodity prices, etc. These are perfectly legitimate uses of derivatives, unlike the perceived speculation or arbitrage associated with interbank proprietary trading.