The standardized approach for
counterparty credit risk (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 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 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, 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 of all trades, is aggregated by counterparty, and then netted-off with
haircutted-
collateral.
*PFE is the
"Potential Future Exposure" to the counterparty: per
asset class, 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), 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 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 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.
[ FIS (2017)]
"Allocating SA-CCR fairly"
''www.fisglobal.com''. is also input to other regulatory results such as the
leverage ratio 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)