Counterparty credit risk ccr and collateral management. Counterparty exposure management in the basel iii era. Counterparty credit risk exists in overthecounter otc derivatives trading. Saccr replaces the current noninternal model approaches, the current exposure method cem of 1995 and the standardised method sm. Bis issued a first consultative paper on the revisions to the standardized approach to credit risk in december 2014. Implementation of basel iii capital standards in hong kong c1 definition of capital, risk weighting framework for counterparty credit risk and integration of pillar 2 purpose 1. Basel ii risk management system for a global bank 10 7. Calculating ead according to the new standardizes approach for counterparty credit risk saccr saccr as part of the basel iv package banks play a major role in the global economy.
Credit risk measures credit risk mitigation model implementation back testing regulatory requirements and basel iii counterparty credit risk and cva under basel iii patrick h. A credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments. Counterparty credit risk, saccr, cva, otc derivatives, basel iii 1. Counterparty credit risk ccr and collateral management in. The existing basel ii regime addresses counterparty default and credit migration risk but not the risk of marktomarket losses caused by credit valuation adjustments. It realizes when a counterparty defaults while having open derivatives in favor of the surviving counterparty. The new basel iii capital accord, a global regulatory standard for bank capital adequacy which kicks in from january 1, presents daunting challenges in the form of managing counterparty default risk. The basel iii standard issued by bis has been up for discussion and debate.
The proposal aims to reduce complexity and modeldriven variation in the calculation of regulatory capital among banking institutions, thus improving comparability. Basel iii strengthens the counterparty credit risk framework in market risk instruments. Basel iii is an extension of the existing basel ii framework, and introduces new capital and liquidity standards to strengthen the regulation, supervision, and risk management of the whole of the banking and finance sector. Counterparty credit risk and cva under basel iii 1. Pdf counterparty credit risk in otc derivatives under basel iii. Pillar 1 of basel iii requires that banks satisfy these minimum capital requirements at all times. All basel iiiamendments regarding counterparty credit risk. The basel 1988 capital accord introduced the concept of current exposure method cem being based on the replacement cost i. Basel 2 requires capital for credit and operational risk.
Basel previously covered the default capital charge for counterparty exposures however, the crisis showed that more than two third of the losses related to this risk emerged from the exposure to the movement of the counterpartys credit quality and not its actual. Basel previously covered the default capital charge for counterparty exposures however, the crisis showed that more than two third of the losses related to this risk emerged from the exposure to the movement of the counterpartys credit quality and not its actual default therefore. Ubs recently announced it had merged its activities outside france, the uk, and switzerland. Basel iii may also lead to an increased level playing field regarding rwa, i. Basel iii comparison of standardized and advanced approaches. In this article, michael pykhtin proposes a general framework for calculating capital for ccr that consistently. Managing counterparty credit risk, basel iii and recent regulatory issues visit. The basel iii reforms introduced a new capital charge for the risk of loss due to the deterioration in the creditworthiness of the counterparty to s transaction or an sft. Changes in rwa amounts over the reporting period for each of the key drivers should be based on a banks reasonable estimation of the figure. Counterparty credit risk, basel iii and recent regulatory. This is unlike the earlier basel i accord where all sovereigns enjoyed a risk weight of 0% and banks had a uniform risk weights 20%. Jul 11, 20 basel iii attempts to mitigate this procyclicality through new capital charges for stressed cva var and correlation between financial intermediaries, which are expected to more than triple counterparty risk capital. According to the basel committee for banking supervision bcbs, the purpose of basel iii is to ensure that the financial sector remains in a position to fulfill its primary function of providing credit to individuals and businesses. Collateral recognition and counterparty credit risk.
A second consultative paper was issued on 10th december 2015. Basel iii highlights counterparty risk markets media. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. Cva appears via a completely new cva capital charge and a downward adjustment of exposureatdefault. Basel iii standardized approach to counterparty credit. The standardised approach for measuring counterparty credit.
The risk of counterparty default was already covered in basel i and basel ii. The new importance of riskweighted assets across europe. Counterparty credit risk in basel iii executive summary. This paper outlines the hkmas proposals for giving effect to certain aspects of the basel iii capital standards in hong kong and invites the banking industrys. Counterparty credit risk, sa ccr, cva, otc derivatives, basel iii. Basel iii counterparty credit risk and exposures to central counterparties frequently. Each of these risk types, in turn, carry its own distinct regulatory capital pillar 1 and pillar 2 requirements and it is to these requirements that important changes are being planned. In december 2010, the bcbs published the basel iii rules 2 setting out, amongst other things, capital. A global regulatory framework for more resilient banks and banking systems 1 introduction 1. All basel iii amendments regarding counterparty credit risk. The basel committee on banking supervision the basel committee recently published for comment a consultative document the proposal that describes a new noninternal model method nimm for measuring exposure at default ead used in measuring counterparty credit risk ccr for derivative transactions in capital adequacy calculations.
Calculating cva capital charges basel iii quantifi. This document, together with the document basel iii. This led the basel committee on banking supervision bcbs to include a significant strengthening of its framework for counterparty credit risk ccr for securities financing transactions sfts and both overthecounter otc and centrally cleared derivatives in its basel iii. Basel iii focused on enhancing the stability of the financial system by increasing. Rwa reports that are dependent on manual adjustments to a limited degree. The basel committees final standard on the standardised approach for measuring counterparty credit risk exposures includes a comprehensive, nonmodelled approach for measuring counterparty credit risk associated with otc derivatives, exchangetraded derivatives, and long settlement transactions. It is due to replace both the current exposure method cem and the standardized method sm.
Risk weighted assets corresponding to credit risk only counterparty credit risk excluded. Exemplary aspects of basel iii regarding 3 risk management are the introduction of new management rules regarding counterparty credit risk exposure, the enhancement. An analysis of rwas between regions as well as over time can be found in accenture 2012. It is due to replace both the current exposure method cem and the standardized method sm starting january 1, 2017. Basel iii capital requirements increase from 0% to 20% the credit conversion factor for commitments with an original maturity of one year or less that are not unconditionally cancellable. Recent financial crises were the root of many changes in regulatory implementations in the banking sector. Report on riskweighted assets for counterparty credit risk bis. Dec 28, 2012 the new basel iii capital accord, a global regulatory standard for bank capital adequacy which kicks in from january 1, presents daunting challenges in the form of managing counterparty default risk.
This includes the use of stressed input parameters to determine the capital requirement for counterparty credit default risk. The standardised approach for measuring counterparty credit risk exposures 1 i. The standardised approach for measuring counterparty. Introduction derivatives market witnessed an important bloom in recent decades due to their increasing utility in our financial markets. Basel ii standardised approach for credit risk finance. In march 2014, the basel committee on banking supervision published is standardised approach saccr for measuring exposure at default ead for counterparty credit risk ccr. In december 2010, the bcbs published the basel iii framework with. Weaknesses in risk management practices associated with derivatives were revealed by the great financial crisis. Counterparty exposure management in the basel iii era a new regulation for counterparty exposure risk counterparty credit risk ccr is not a new area of regulation. Under solvency ii, credit risk is the counterparty risk of banking terminology. Mismatch and funding risk is appreciated more in solvency ii than in basel iiiii.
Ccr1 analysis of counterparty credit risk ccr exposure by approach. Calculating cva capital charges basel iii the global financial crisis brought counterparty credit risk and cva very much into the spotlight, this webinar explores the capital charges under the two regimes, the capital relief that can be achieved and the potential to reduce the capital charges via eligible hedges. General credit risk involves consideration of wholesale and retail rwa as well as the counterparty credit risk of repostyle transactions, eligible. Dec 22, 20 counterparty credit risk and cva under basel iii 1.
Background this document presents the basel committees formulation for its standardised approach saccr for measuring exposure at default ead for counterparty credit risk ccr. Counterparty credit risk in otc derivatives under basel iii. With the dramatic capital increases, basel iii incentivises banks to actively manage hedge counterparty risk. Counterparty credit risk counterparty credit risk p. In this post we focus on the various methods to recognize financial collateral in counterparty credit risk calculations. Risk measures change almost linearly wrt to systemic correlation basel ii. Mar 28, 2016 the basel iii standard issued by bis has been up for discussion and debate. The ead itself is the assessment base in measuring counterparty credit risk of derivatives within the basel committees regulatory capital framework. Counterparty credit risk ccr and collateral management in the light of basel iii, basel iii. Qualitative requirements for back and stress testing proposed remedies to better account for counterparty credit risk ccr i regulatory capital calculation. Counterparty risk capital and cva basel iii has incorporated credit valuation adjustment cva in calculations of regulatory capital for counterparty credit risk ccr. Basel committee began issuing proposals to revise the credit risk.
Eligible collateral is used to mitigate counterparty credit risk. Ecb guide to internal models ecb banking supervision. Counterparty credit risk, saccr, cva, otc derivatives, basel iii. International framework for liquidity risk measurement, standards and monitoring, presents the basel committees1 reforms to strengthen global capital and liquidity rules with the goal of promoting a more. Dec 2012 basel iii counterparty credit risk and exposures to central. In general, ead under the nimm would be determined based on the particular characteristics of the trades within the netting set. Content counterparty credit risk ccr definition ccr management tools ccr indicators ccr and basel ii. The second form specifies the minimum capital required to cover potential future losses from future changes in the credit quality of the counterparty that result in changes in the credit spreads for the counterpartys credit exposures.
Standardised approach for counterparty credit risk. Basel iii counterparty credit risk july 22, 20 estimate of potential future exposure pfe of the netting setthe calculation methodologies differ significantly. Derivatives hold several types of risks such as market, liquidity and credit, however the. The surviving counterparty is forced to replace the contract with a new counterparty suffering a loss that is exactly the positive. The standardized approach for counterparty credit risk saccr is a new computational method for exposure at default ead under the basel capital adequacy framework. Last week, the basel committee on banking supervision basel proposed floors and other constraints on the use of internal models for calculating credit risk capital. The objective of this paper is to provide an overview of the changes in the calculation of minimum regulatory capital requirements for credit risk that have been drafted by the basel committee on banking supervision basel ii. Basel iii counterparty credit risk and exposures to central counterparties frequently asked questions update of faqs published in november 2012 also available in. In an efficient market, higher levels of credit risk will be associated with higher borrowing. The introduction of saccr, based on the basel committees proposal, is planned for january 1st 2017. Therefore, basel iii amended the computation of an additional cva capital. In the wake of the recent credit crisis, with counterparty risk being widely thought of as the center of the credit crisis, it is not surprising that regulators demand a significantly higher market discipline in risk management of counterparty exposure under the heading of basel iii.
Default counterparty credit risk was already accounted for but a bis study showed that two thirds of the losses due to counterparty risk during the financial crises resulted from the cva and not the default of the concerned counterparties. While banks are moving toward active management of counterparty risk, there is limited or no liquidity in credit default swaps contracts needed to. When combining model results with human judgement, the judgement must take intro account all. Basel iii attempts to mitigate this procyclicality through new capital charges for stressed cva var and correlation between financial intermediaries, which are expected to more than triple counterparty risk capital. Basel iii reforms strengthen the regulatory requirements where there is contractual support for shadow banking activities. We present a brief comparison of the marked differences between the two documents. Note 17 loans, allowance for loan losses and credit. Basel iii uses the same basic framework as basel ii, but imposes stricter minimum capital and liquidity standards. Basel iii standardized approach to counterparty credit risk. Basel iii counterparty credit metrics kamakura corporation.
Ccr and cva capital charges in basel iii basel iii introduces a new charge for mtmlosses cva spread risk. In the case of corporates, claims have risk weights based on credit ratings similar to the ones given to banks in the table. Ccr models are relatively new to the basel framework basel ii for imm and basel. Basel committee revises basel iii on the capital treatment. Counterparty exposure management in the basel iii era by. Several typologies and complexity lehow to cite this paper. Basel iii initiatives must address both business and technical needs 7 6. Pdf recent financial crises were the root of many changes in regulatory implementations in the banking sector.1424 1384 128 1555 1413 258 1618 1067 773 82 767 1577 647 1298 656 1135 1327 1031 485 686 203 13 583 949 587 1240 589 1632 443 426 179 1328 607 433 1071 1312 713 441 768