The standardized approach for

counterparty credit risk Credit risk is the chance that a borrower does not repay a loan or fulfill a loan obligation. For lenders the risk includes late or lost interest and principal payment, leading to disrupted cash flows and increased collection costs. The loss ...

(SA-CCR) is the

capital requirement A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital ...

framework under

Basel III Basel III is the third of three Basel Accords, a framework that sets international standards and minimums for bank capital requirements, Stress test (financial), stress tests, liquidity regulations, and Leverage (finance), leverage, with the goa ...

addressing

counterparty risk Credit risk is the chance that a borrower does not repay a loan or fulfill a loan obligation. For lenders the risk includes late or lost interest and principal payment, leading to disrupted cash flows and increased collection costs. The loss ...

for

derivative In mathematics, the derivative is a fundamental tool that quantifies the sensitivity to change of a function's output with respect to its input. The derivative of a function of a single variable at a chosen input value, when it exists, is t ...

trades. It was published by the

Basel Committee The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten (economic), Group of Ten (G10) countries in 1974. The committee expanded ...

in March 2014. 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 In finance, an asset class is a group of marketable financial assets that have similar financial characteristics and behave similarly in the marketplace. These instruments can be distinguished as either having to do with real assets or having ...

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 Exposure at default (EAD) is a parameter used in the calculation of economic capital or regulatory capital under Basel II for a banking institution. It can be defined as the gross exposure under a facility upon default of an obligor. Outside of ...

, EAD, of derivatives and "long-settlement transactions" exposed to counterparty credit risk, where . Here, α is a "multiplier" of 1.4, acting as a buffer to ensure sufficient coverage; and: *RC is the "Replacement Cost" were the counterparty to default today: the current exposure, i.e.

mark-to-market Mark-to-market (MTM or M2M) or fair value accounting is accounting for the "fair value" of an asset or liability based on the current market price, or the price for similar assets and liabilities, or based on another objectively assessed "fair" ...

of all trades, is aggregated by counterparty, and then netted-off with haircutted- collateral. *PFE is the "Potential Future Exposure" to the counterparty: per

, trade- "add-ons" are aggregated to "hedging sets", with positions allowed to offset based on specified

correlation In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. Although in the broadest sense, "correlation" may indicate any type of association, in statistics ...

assumptions, thereby reducing net exposure; these are in turn aggregated to counterparty "netting sets"; this aggregated amount is then offset by the counterparty's collateral (i.e.

initial margin In finance, margin is the collateral that a holder of a financial instrument has to deposit with a counterparty (most often their broker or an exchange) to cover some or all of the credit risk the holder poses for the counterparty. This risk c ...

), which is subject to a "multiplier" that limits its benefit, applying a 5% floor to the exposure. The SA-CCR EAD is an input to the bank's

regulatory capital A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital ...

calculation where it is combined with the counterparty's PD and LGD to derive RWA; Some banks thus incorporate into their KVA calculations. Because of its two-step aggregation, capital allocation between

trading desk A trading room gathers traders operating on financial markets. The trading room is also often called the front office. The terms "dealing room" and "trading floor" are also used, the latter being inspired from that of an open outcry stock exc ...

s (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. FIS (2017)
"Allocating SA-CCR fairly"
''www.fisglobal.com''. is also input to other regulatory results such as the

leverage ratio In finance, leverage, also known as gearing, is any technique involving borrowing funds to buy an investment. Financial leverage is named after a lever in physics, which amplifies a small input force into a greater output force. Financial leverag ...

and the

net stable funding ratio During the 2008 financial crisis, several banks, including the UK's Northern Rock and the U.S. investment banks Bear Stearns and Lehman Brothers, suffered a liquidity crisis, due to their over-reliance on short-term wholesale funding from the int ...

References

{{Financial risk Credit risk Capital requirement Derivatives (finance)