What happened: The Basel Committee on Banking Supervision (BCBS) issued final guidelines for counterparty credit risk (CCR) management. The guidelines include the need for bank counterparties to:
- Conduct comprehensive initial and ongoing counterparty due diligence
- Create a comprehensive credit risk mitigation strategy to effectively manage counterparty exposures
- Measure, control, and limit CCR
- Develop and implement a strong CCR governance framework
The guidelines were developed partly in response to the failure of Archegos, which the BCBS says exposed significant shortcomings in banks’ CCR management.
Why it matters: The final guidelines encourage banks to take a risk-based and proportional approach that accounts for the degree of CCR generated by the bank, its trading and financing activities, and the complexity the CCR exposures.
Banks currently have a range of tools to identify and manage CCR with nonbank counterparties. The revised guidelines are intended to apply to all bank counterparties, but the BCBS notes the greatest benefit is to nonbanks.
Also: The Financial Stability Board issued related policy recommendations to nonbanks regarding liquidity preparedness for margin and collateral calls earlier this week.
MFA on the issue: MFA advocated against an overly prescriptive approach to CCR in a comment letter to BCBS. The final guidelines are consistent with the approach MFA recommended. We will continue to work with regulators to explain that private funds are stable and practice rigorous counterparty risk management with their lenders.
What’s next: The BCBS encourages member states to adopt the new guidelines. The BCBS stated that it will continue to monitor implementation of the counterparty credit risk management guidelines on an ongoing basis.
