BIS: The standardised approach for measuring counterparty credit risk exposures

31 March 2014

The Basel Committee's final document on 'the standardised approach for measuring counterparty credit risk exposures' includes a comprehensive, non-modelled approach for measuring counterparty credit risk associated with OTC derivatives, exchange-traded derivatives, and long settlement transactions.

The new standardised approach (SA-CCR) replaces both the Current Exposure Method (CEM) and the Standardised Method (SM) in the capital adequacy framework. In addition, the IMM shortcut method will be eliminated from the framework once the SA-CCR takes effect, which is scheduled for 1 January 2017.

The Committee's objective in undertaking this work was to develop a risk sensitive methodology that appropriately differentiates between margined and unmargined trades, and provides more meaningful recognition of netting benefits than either of the existing non-modelled approaches. The SA-CCR limits the need for discretion by national authorities, minimises the use of banks' internal estimates, and avoids undue complexity by drawing upon prudential approaches already available in the capital framework. It has been calibrated to reflect the level of volatilities observed over the recent stress period, while also giving regard to incentives for centralised clearing of derivative transactions.

The SA-CCR retains the same general structure as that used in the CEM, consisting of two key regulatory components: replacement cost and potential future exposure. An alpha factor is applied to the sum of these components in arriving at the exposure at default (EAD). The EAD is multiplied by the risk weight of a given counterparty in accordance with either the Standardised or Internal Ratings-Based approaches for credit risk to calculate the corresponding capital requirement.

After giving due consideration to the feedback received from respondents to the consultative paper and the results of the JQIS, the Committee made a number of the adjustments to the proposed methodology prior to finalising the SA-CCR. These include:

• increased specificity regarding the application of the approach to complex instruments;
• the introduction of a supervisory measure of duration for interest rate and credit derivative exposures;
• removal of the one-year trade maturity floor for unmargined trades and the addition of a formula to scale down the maturity factor for any such trades with remaining maturities less than one year;
• the inclusion of a supervisory option pricing formula to estimate the supervisory delta for options;
• a cap on the measured exposure for margined transactions to mitigate distortions arising from high threshold values in some margining agreements; and
• adjustments to the calibration of the approach with respect to foreign exchange, credit and some commodity derivatives.

Full press release

Full document ‘The standardised approach for measuring counterparty credit risk exposures’

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