The World Council of Credit Unions (Woccu) wants international regulatory changes to provide a level playing field for credit unions and community-based financial institutions.
In August, the Financial Stability Board, the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) launched a consultation on its report – Incentives to centrally clear over-the-counter (OTC) derivatives.
Woccu vice president and general counsel, Michael Edwards, responded to the document in a letter to Financial Stability Board chair, Mark Carney. FSB is an international body that monitors and makes recommendations about the global financial system.
Mr Edwards said reducing Basel III’s capital requirements for issuers, clearers and users of interest-rate swaps and caps could help better ensure continued access to interest rate derivatives for credit unions.
Woccu, which represents credit unions around the world, is concerned that smaller users of interest rate swaps and caps may no longer be able to access interest rate derivatives at fair rates (or at all) unless revisions are made to the standardised approach for measuring counter-party credit risk exposures (SA-CCR).
The letter points out that credit unions and other community-based financial institutions that use interest rate derivatives typically have relatively small hedged positions that are usually less than €1bn (£890m) and which are structured to hedge against interest rate risk.
“Continued access for credit unions and other community based-financial institutions to fair and affordable interest rate swaps and caps promotes safety and soundness by helping community-based depository institutions hedge interest rate risks related to fixed-rate mortgage loans held in portfolio and similar fixed-rate investments,” wrote Mr Edwards.
“Reducing SA-CCR-related capital requirements under the leverage ratio and other capital measures—especially for banks that are derivatives clearers or issuers— would help ensure that community-based depository institutions continue to have access to interest rate swaps and caps at affordable rates.
“Without changes to SACCR, we are concerned that many banks that are interest rate derivative clearers and issuers may drop clients that have portfolios below several billion Euro because of SA-CCR’s high cost of capital. We urge the Committees to reduce SA-CCR’s capital requirements to help better ensure continued access to interest rate derivatives for smaller uses.”
Woccu also agrees with the report’s characterisation of the difficulties that clients with smaller and/or more directional derivatives activities face in accessing clearing arrangements and conducting hedging activities. According to the letter, credit unions and other community-based depository institutions seeking to hedge interest rate risks in their portfolios through interest rate swaps and caps “frequently face these challenges”.
“From the perspective of community-based financial institutions with smaller, more directional portfolios, the limited number of client clearing service providers raises concerns about whether community-based institutions will have continued access to interest rate derivatives products. More market participants would make it easier for smaller, more directional clients to find client clearing providers that are interested in their business,” wrote Mr Edwards.
In terms of creating incentives to centrally clear OTC derivatives for all financial firms, including the smallest and least active, Woccu agrees with the committees that regulation should seek to create incentives to centrally clear interest rate swaps for all firms, including the smallest and least active, to help better ensure that credit unions and other community-based depository institution can continue to hedge interest rate risk using interest rate derivatives at fair rates.
“We urge the committees to design such incentives or to mandate fair and affordable access to centrally cleared interest rate derivatives for all users,” concluded the letter.