Standard CSA Lives to Die Another Day
Risk Magazine is reporting that ISDA is to embark on a re-write of the Standard Credit Support Annex (SCSA), dubbed “SCSA II”.
The triple-whammy delivered by the Basel Leverage Ratio (see this blog post for more detail), the BCBS/IOSCO rules on margin requirements for non-centrally cleared derivatives (see this blog post for more detail) and the Basel II credit risk framework[1] have proved fatal.
Accordingly, an ISDA working group has been charged with amending the Implied Swap Adjustment methodology within the SCCA – which employs the concept of settlement in one of seven ‘Transport Currencies’ – to something that it both regulatory compliant and less capital intensive. The preferred solution appears to involve settlement in one of 17 underlying currencies which, whilst more capital efficient, largely re-introduces the cross-currency settlement risk that ISDA was so keen to eliminate first time round.
[1] This requires a bank to levy an 8% haircut on collateral which is in a different currency to the associated exposure.