Understanding Risk Shifting for SCCL Compliance

Understanding Risk Shifting for SCCL Compliance

1. Overview

The Single Counterparty Credit Limits (SCCL) rule is designed to prevent large U.S. and foreign banks from having too much credit exposure to any one counterparty. A key aspect of this rule is accounting for "risk shifting," a process where a bank tries to reduce its reported exposure to a counterparty by using credit risk mitigants like guarantees, derivatives, or collateral. Learn how mitigants are applied under SCCL.

While these instruments can help reduce risk, they often shift that risk to a new party. If the new party is also subject to SCCL limits, the bank must report the exposure accordingly. The goal is to make sure that total exposure across all counterparties is transparent and accurately measured.

This blog post explains what risk shifting means under the SCCL rule, why it matters, common challenges banks face, how peers manage it, and how GLOBAL ABAS can help.

2. Regulatory Requirement

Under the SCCL rule, risk shifting is addressed in sections 252.74 and 252.174. Specifically, Schedule G-5 of the FR 2590 report requires banks to disclose when and how they have used credit risk mitigants that shift exposure from one counterparty to another. The mitigants include:

  • Eligible collateral
  • Eligible guarantees
  • Eligible credit and equity derivatives
  • Other eligible hedges
  • Unused portions of certain credit extensions
  • Transactions involving excluded or exempt entities

In each case, the risk may not be eliminated, but transferred. The SCCL rule requires banks to trace the exposure to the ultimate obligor, the party that would actually absorb the loss if something goes wrong. This is often referred to as the "look-through" approach.

Here are some examples of how this works in practice:

  • Credit Derivatives: Suppose your bank buys a credit default swap (CDS) to protect against the default of Counterparty A. The CDS is provided by Counterparty B. SCCL rules require you to report the lower of the adjusted exposure to A or the exposure to B, since the risk has shifted but still exists.
  • Guarantees: If Counterparty A’s obligation is guaranteed by Counterparty B, and the guarantee is enforceable, part of the exposure should be allocated to B. Again, the risk has not disappeared but has moved.
  • Asset Sales with Recourse: If you sell a loan but retain some risk through a recourse clause, the exposure must still be measured against the original counterparty.

Schedule G-5 of the FR 2590 report requires banks to show, for each counterparty, how much gross exposure is attributable to each type of risk shifting. The final column must reflect the total exposure after applying all adjustments.

3. Common Challenges

Accurately reporting risk shifting under SCCL is not always straightforward. Below are several challenges that banks often face:

Complex Instruments

Derivatives, structured products, and cross-border transactions can involve multiple layers of counterparties. Identifying the true obligor may require detailed analysis of terms and legal structures.

Data Integration

Risk-shifted exposures must be tracked across different systems, such as trading desks, loan systems, collateral management, and more. Bringing all this data together in a way that supports SCCL reporting can be a major task.

Legal Enforceability

Guarantees and netting agreements only count for risk shifting if they are legally enforceable. Banks need legal review processes in place to confirm enforceability across jurisdictions.

Operational Burden

Monitoring and updating risk-shifted exposures is an ongoing requirement. It involves coordination between risk, legal, compliance, finance, and IT teams. This adds to the overall operational load of SCCL compliance.

Dynamic Risk Profiles

Exposures change over time. A CDS may expire, a guarantee could be revoked, or market movements might affect collateral values. Banks must re-evaluate their exposures regularly to ensure continued compliance.

4. Peer Approaches

Leading banking organizations are taking several steps to manage risk shifting compliance effectively:

  • Centralized Exposure Systems: Many banks are developing unified systems that aggregate exposures across all business lines in real time.
  • Pre-Trade Controls: Some institutions are embedding SCCL checks into their trading tools to prevent breaches before trades are booked.
  • Legal Documentation Review: Automated tools and legal review teams are used to assess enforceability of guarantees and netting agreements.
  • Scenario Testing: Banks are conducting stress tests and scenario analyses to understand how risk-shifting arrangements would perform under adverse conditions.

These practices help ensure that risk shifting is properly measured, documented, and reported under the SCCL framework.

5. GLOBAL ABAS View

At GLOBAL ABAS, we believe that managing risk shifting exposures is not just about compliance, it is about understanding your true risk footprint. Banks must be able to answer two key questions:

  1. Have we reduced the risk, or just moved it?
  2. Are we accurately reporting where the risk now resides?

We help clients by providing:

  • Clear interpretations of SCCL rules and how they apply to real-world transactions
  • Detailed reviews of risk-shifting arrangements, including CDS, guarantees, and collateral agreements
  • Support for building or enhancing exposure aggregation and reporting systems
  • Training for front office, risk, and compliance teams on how to recognize and report risk-shifted exposures

Our goal is to help firms build a sustainable SCCL program that meets regulatory expectations while supporting sound risk management.

6. Final Thoughts

Risk shifting is a key concept in SCCL compliance. It ensures that banks cannot simply offload risk without recognizing the new counterparty exposure that comes with it. Properly reporting risk-shifted exposures protects the financial system from hidden concentrations and helps regulators get a clear picture of each bank's risk profile.

To manage this effectively, banks need strong data systems, legal reviews, and clear policies for identifying the ultimate obligor. While the work can be complex, it is essential for both compliance and sound risk management.

To learn more about how GLOBAL ABAS can support your SCCL compliance program, visit our website or subscribe for future updates.

Disclaimer: This blog post is for informational purposes only and reflects our understanding of the SCCL rule and FR 2590 reporting as of the date of publication. It does not constitute legal, regulatory, or professional advice. Institutions should consult with internal and external advisors and refer directly to the SCCL rule (12 CFR Part 252, Subpart H) and FR 2590 instructions for specific guidance. GLOBAL ABAS disclaims any liability for actions taken or not taken based on this information.

Consult a GLOBAL ABAS Consulting, LLC professional regarding your specific issues and questions. Your feedback will help us improve the SCCL Compliance Lab. Please let us know what you think in the Comment below. Copyright © 2025 GLOBAL ABAS Consulting, LLC. All rights reserved.

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