Basel Framework International regulatory standards for banks |
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The standardized approach for counterparty credit risk (SA-CCR) is the capital requirement framework under Basel III addressing 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 the sum of (i) a "Replacement Cost" (RC), were the counterparty to default today; and (ii) the "Potential Future Exposure" (PFE) to the counterparty:
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.[3] SA-CCR is also input to other regulatory results such as the leverage ratio and the net stable funding ratio.
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