Finance:Standardized approach (counterparty credit risk)

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The Standardized approach for counterparty credit risk (SA-CCR) is the capital requirement framework under Basel III addressing counterparty risk. It was published by the Basel Committee in March 2014. [1]

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", were the counterparty to default today; combined with (ii) an "Add On" with its appropriate multiplier, essentially potential future exposure. For the former: exposure is aggregated by counterparty, and then netted-off with haircutted-collateral. For the latter: per asset class, trade exposures - as reduced by hedging - are aggregated to “hedging sets”; these are then aggregated to "netting sets", and offset by the counterparty's collateral.

The SA-CCR EAD is an input to the bank's regulatory capital calculation where it is combined with the counterparty's PD and LGD to derive RWA; (some) banks thus incorporate SA-CCR into their KVA calculations. Because of its two-step aggregation, capital allocation between 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. [2] SA-CCR is also input to other regulations such as the leverage ratio and the net stable funding ratio.

References

  1. Basel Committee on Banking Supervision (2014-03-31). The standardised approach for measuring counterparty credit risk exposures (BCBS 279). https://www.bis.org/publ/bcbs279.htm. Retrieved 3 May 2018. 
  2. FIS (2017). "Allocating SA-CCR fairly", www.fisglobal.com.