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BCBS Finds CSA’s Soft Underbelly

Risk Magazine is reporting that the Basel Committee on Banking Supervision’s (BCBS) final “Basel III leverage ratio framework and disclosure requirements”, published on 12 January 2014 may force the restructuring of existing portfolios of credit support annexes (CSA) and looks set to deal a serious blow to the viability of ISDA’s standard credit support annex (SCSA).

The issue arises because, apparently fearful of FX risk, the BCBS drafted its new rules such that banks will only be allowed to reduce derivatives exposure with cash variation margin if it is in the same currency as the underlying swap[1] .

Clearly, this is not the case under traditional CSAs, whereby exposure is typically collateralised on a portfolio basis.  Unfortunately, even the SCSA fails to escape, requiring parties to post collateral in one of 7 ‘transport currencies’ (which will not be the same as the currency of the underlying transaction in all cases) in order to mitigate Herstatt risk.  The article reports that, as a result, dealers may revert to a previously mooted payment-versus-payment option.  Whilst this would mitigate the effects of cross-currency settlement risk, it would greatly increase the operational burden associated with effecting settlement.


[1] see “Exposure measure”, paragraph 25(iii) of the final rules

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