Standardized approach (counterparty credit risk)
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| Pillar 1: Regulatory capital |
| Pillar 2: Supervisory review |
| Pillar 3: Market disclosure |
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The standardized approach for counterparty risk for derivative trades.
[1]
It was published by the Basel Committee in March 2014.
[2]
See Basel III: Finalising post-crisis reforms.
The framework replaced both non-internal model approaches: the Current Exposure Method (CEM) and the Standardised Method (SM). It is intended to be a "risk-sensitive methodology", i.e. conscious of
asset class and hedging, that differentiates between margined and non-margined trades and recognizes netting benefits
; considerations insufficiently addressed under the preceding frameworks.
SA-CCR calculates the exposure at default of derivatives and "long-settlement transactions" exposed to counterparty credit risk. It builds EAD as (i) a "Replacement Cost" (RC), were the counterparty to default today; combined with (ii) the
"Potential Future Exposure"
(PFE) to the counterparty.
For the former: current exposure, i.e. mark-to-market of the trades, is aggregated by counterparty, and then netted-off with haircutted- collateral
.
For the latter:
per asset class, trade "add-ons", as reduced by offsetting based on correlation
assumptions, are aggregated to "hedging sets";
these are then aggregated to "netting sets", and offset by the counterparty's collateral (i.e. initial margin
), which is subject to a "multiplier" that limits its benefit and applies a 5% floor to the exposure.
The SA-CCR EAD is an input to the bank's
trading desks (or even asset classes) is challenging; thus making it difficult to fairly calculate each desk's risk-adjusted return on capital. Various methods are then proposed here.[3] SA-CCR is also input to other regulations such as the leverage ratio and the net stable funding ratio
.
References
- ^ Basel Committee on Banking Supervision (2018). "Counterparty credit risk in Basel III - Executive Summary". www.bis.org
- ^ Basel Committee on Banking Supervision (2014-03-31). "The standardised approach for measuring counterparty credit risk exposures (BCBS 279)". www.bis.org. Retrieved 3 May 2018.
- ^ FIS (2017). "Allocating SA-CCR fairly", www.fisglobal.com.