Is Citi’s SA-CCR hit a sign of things to come?

When I view FX Market’s Counterparty Radar rankings for FX forwards, I try to compare them to well-known English Premier League football teams. At the top, you have Morgan Stanley and BNP Paribas – akin to Manchester City and Liverpool, which have steadily climbed up the rankings by loading up on business from some of the largest US mutual funds, such as BlackRock, Pimco and Vanguard.

Next you have JP Morgan – the Chelsea in my comparison – a powerhouse US investment bank that has hovered in third place for the past two years. Then comes Citi – which I see as Manchester United – a dynasty franchise that is now struggling for a Champions League place.

Perhaps that’s a crude comparison, but since the first quarter of 2020, the US bank has fallen from top position to fifth amongst US mutual fund managers, and for G10 FX forwards it is ranked ninth – below the likes of Goldman Sachs, TD Securities, State Street and UBS.

The message on Citi’s offering from a number of large clients we spoke with last month is that its prices are less competitive than they were – much like Manchester United’s – and signs point to the newly enforced standardised approach to counterparty credit risk (SA–CCR) as the cause.

This new regime imposes higher capital requirements on banks that deal in uncollateralised FX swaps and forwards with short-dated tenors. The fact that Citi holds the largest book of sub-one-year over-the-counter FX derivatives is an indication that it was going to be hit harder than most.

But why Citi has stood out amongst clients as one of the major banks to widen spreads could suggest that it is an early mover.

It is true that SA–CCR will affect banks differently, with some feeling less of a pinch than others, depending on their client make-up. Despite the regulation being bank-specific, it will eventually reverberate through the value chain if FX dealers decide they can no longer absorb the increased cost of capital.

The fact that the majority of FX swaps and forwards trades by banks on behalf of their asset manager and corporate clients are uncollateralised, while also being at the short end of the curve, means the impact of SA–CCR could evolve to hit them all.

As time goes on and the cost of capital continues to bite, banks that may be troubled by the regime would have to price rolling forwards trades more conservatively around month and quarter end. But banks may also have to start asking clients to either put up cash as collateral or pay more to trade.

The changes will have long-term implications for how the FX market operates, and both dealers and clients will soon have to get used to the new reality.