Alternative investment industry representative body the MFA has encouraged the Basel Committee on Banking Supervision (BCBS) to adopt flexible, risk-based guidelines on counterparty credit risk (CCR) management in a comment letter submitted today.
The letter is in response to the Consultative Document on Guidelines for Counterparty Credit Risk Management.
“Alternative asset managers support efforts to ensure the banking system has resilient counterparty credit risk management. However, we have concerns that the proposed guidelines are overly prescriptive with a one-size-fits-all approach that ignores banks’ robust risk management processes. Banks have a wide range of counterparties that may not fit neatly into the framework,” said Bryan Corbett, MFA President and CEO. “The guidelines would hinder the ability of nonbank counterparties to invest and support economic growth. This proposal risks harm to economies around the world without providing commensurate benefits to banks or the financial system. The final guidelines should give banks the flexibility to measure and manage the risks posed by a particular counterparty.”
In the letter, MFA supports the BCBS’s objective to establish standards for banks to manage CCR. However, according to MFA, the rigid approach in the proposed guidelines lacks nuance and would impede a bank’s ability to tailor its CCR management to an individual counterparty in a manner that best minimises risk.
MFA believes the one-size-fits-all framework is especially inappropriate when the counterparties are private funds, whose diverse strategies and structures require non-prescriptive CCR management from banks. Banks have developed and put into practice robust due diligence requirements to manage risk, including from counterparties like alternative asset managers. The rigid approach of the consultation guidelines on CCR management ignores banks’ current risk management practices and is neither proportionate nor risk-based.
The inflexible framework would jeopardise the viability of investment strategies used by private funds, harming market efficiency, including lending to small and mid-sized businesses, say MFA which recommends that the final guidelines allow for greater flexibility for banks to handle CCR in a way that is proportional to the counterparty risk.
MFA’s letter emphasises that Archegos, whose principals are on criminal trial for fraud, is not a proper lens to view bank’s CCR management of private funds.
In the letter, MFA writes: “We further would note that the underlying rationale for the Consultation – Archegos Capital Management (Archegos) – is wholly misplaced in its applicability to private funds, given that Archegos was an unregulated family office, and its principals are currently standing criminal trial in the US for fraud. That firm and the circumstances surrounding its failure is hardly an appropriate prism through which to view CCR management for the broad, diverse spectrum of entities that constitute nonbank financial intermediaries.
“Credit Suisse, for example, had extensive controls that would have prevented at least some of its losses to Archegos, but it failed to properly implement those controls. We note that other bank-counterparties that conducted business with Archegos and enforced their risk controls and processes and remain in business today. In short, the conduct that resulted in Credit Suisse’s failure was not the result of poor processes or controls, but rather an inability to follow and enforce them.”
