The document presents the Basel Committee's standardized approach (SA-CCR) for measuring exposure at default (EAD) for counterparty credit risk (CCR). This approach replaces previous methods, the Current Exposure Method (CEM) and the Standardised Method (SM), by providing better risk sensitivity and simplifying application. The main components of exposure under the SA-CCR are replacement cost and potential future…
This document, published in March 2014 by the Basel Committee on Banking Supervision, presents the SA-CCR standard (Standardised Approach for measuring Counterparty Credit Risk exposures) for calculating counterparty credit risk (CCR) exposure. It replaces the previous non-internal methods CEM (Current Exposure Method) and SM (Standardised Method). The scope covers OTC derivatives, exchange-traded derivatives, and settlement-delayed transactions, excluding securities financing transactions (SFT). The standard applies to all banks subject to the Basel regulatory framework, with implementation planned from January 1, 2017 (p. 1-7).
The SA-CCR is a standardized approach developed by the Basel Committee to measure counterparty credit risk exposure in derivative transactions. It addresses the limitations of previous methods (CEM and SM) by clearly differentiating margined and unmargined transactions, improving risk sensitivity, especially under stress, and more realistically recognizing netting and hedging effects. Exposure is calculated as the weighted sum of replacement cost (RC) and potential future exposure (PFE), multiplied by an alpha factor of 1.4 (inherited from the IMM). The PFE is calculated via add-ons specific to five asset classes (interest rates, FX, credit, equities, commodities) and aggregated according to precise rules for recognizing hedges within "hedging sets." The SA-CCR also includes a multiplier that adjusts the PFE based on over-collateralization and negative position values, thus ensuring a prudent reduction of capital requirements when excess collateral is present. The standard provides detailed rules for calculating the RC and PFE components, accounting for margin agreements, defining maturity parameters, supervised delta adjustments, as well as calibrated volatility and correlation factors by asset class. Concrete examples illustrate the practical application of the SA-CCR on various portfolios, showing the calculation methodology and the impacts of margins and collateral. Recommendations include mandatory implementation of the SA-CCR from 2017, with transitional provisions allowing banks and national authorities to adapt. This framework aims to strengthen consistency, comparability, and risk sensitivity in calculating capital requirements related to counterparty credit risk (p. 1-37).
The document responds to the need for a standardized and improved method to measure counterparty credit risk exposure in derivative transactions, replacing the CEM and SM methods considered insufficiently risk-sensitive and poorly differentiating between margined and unmargined transactions. The challenges are to improve the accuracy and consistency of capital requirement calculations, reduce interpretation and application discrepancies across jurisdictions, and better reflect risks observed during stress periods, notably by incorporating netting and collateralization effects. The objective is to propose an approach applicable to a wide range of derivative products, simple to implement, minimizing discretion by authorities and banks, while remaining compliant with the Basel prudential framework. The scope covers OTC derivatives, exchange-traded derivatives, and settlement-delayed transactions, excluding SFTs which are subject to other treatments. The document also sets transitional modalities for gradual adoption (p. 5-7).
Definition and structure of the SA-CCR:
- Exposure at Default (EAD) is the weighted sum of replacement cost (RC) and potential future exposure (PFE), multiplied by an alpha factor of 1.4 (p. 5, 7).
- RC measures the immediate loss in case of default, considering the market value of derivatives and net collateral adjusted by haircuts (p. 9-11).
- PFE represents a prudent estimate of the possible increase in exposure over a one-year horizon (or margin period for margined), calculated via add-ons by asset class (p. 11-12).
Asset classes and hedging sets:
- Five asset classes are considered: interest rates, FX, credit, equities, commodities (p. 5, 19).
- Transactions are grouped into "hedging sets" within a netting set, allowing partial or full recognition of hedges according to class and characteristics (p. 5-6, 16-17).
- Bases and volatilities form separate hedging sets with specific factors (p. 6, 16-17).
Calculation of add-ons:
- Each transaction is adjusted by an adjusted notional, a maturity factor (different for margined and unmargined), a supervised delta adjustment according to nature (long/short, option, CDO), then multiplied by a volatility factor specific to the asset class (p. 12-16, 19-23).
- Add-ons are aggregated at the hedging set and asset class level, without inter-class diversification (p. 12, 19-23).
- Supervised correlations are applied for credit, equities, and commodities to model systemic and idiosyncratic risk (p. 16-21).
Treatment of margins and collateral:
- RC and PFE are calculated differently depending on whether transactions are margined or not (p. 8-11).
- The Net Independent Collateral Amount (NICA) concept is introduced to reflect net independent collateral usable in case of default (p. 10-11).
- The multiplier applied to the PFE reduces exposure in the presence of over-collateralization, with a floor at 5% (p. 11-12).
- Standard margin agreements (threshold, minimum transfer amount, independent amount) are integrated into the RC formula (p. 10-11, annexes).
Temporal parameters and adjustments:
- Four key dates are defined for each transaction: maturity, start and end of the underlying period, exercise date for options (p. 13-14).
- The maturity factor depends on the transaction type and risk period (one year for unmargined, margin period for margined) (p. 17).
- Supervised delta adjustments consider position (long/short), nature (option, CDO) and are calculated via specific formulas (p. 15-16).
Application examples:
- Several examples illustrate the SA-CCR calculation on typical portfolios composed of interest rate, credit, and commodity derivatives, with or without margin, demonstrating the complete methodology (p. 26-34).
- The impact of standard margin agreements on the RC calculation is detailed in annex 4b with practical cases (p. 35-36).
Regulatory revisions:
- The SA-CCR replaces the CEM and SM methods within the Basel framework, with removal of corresponding sections and update of regulatory references (p. 7-21).
- Disclosure requirements integrate the SA-CCR (p. 25).
In summary, the SA-CCR provides a more risk-sensitive, consistent method applicable to a wide range of derivative products, incorporating margin and collateral effects, with calibrated parameters and precise aggregation and adjustment rules.
- The SA-CCR offers a more precise and prudent measure of counterparty credit risk exposure, correcting weaknesses of the CEM and SM methods (p. 5).
- Exposure is calculated as the weighted sum of replacement cost and potential future exposure, with an alpha factor of 1.4, ensuring consistency with the IMM approach (p. 7, 8).
- Differentiated treatment of margined and unmargined transactions improves risk sensitivity, notably by incorporating effects of standard margin agreements (threshold, MTA, independent amount) (p. 9-11).
- Recognition of hedging sets allows better consideration of partial or full hedges within asset classes, with specific rules for bases and volatilities (p. 5-6, 16-17).
- Volatility, correlation, and delta adjustment parameters are calibrated to reflect observed risks, without recourse to internal models, ensuring uniform application (p. 19-23).
- Examples show that the SA-CCR can be effectively applied to diversified portfolios, with consistent results sensitive to transaction characteristics and margin agreements (p. 26-34).
- Integration of margins and collateral, notably via the PFE multiplier, allows capital requirement reduction in case of over-collateralization, while maintaining a minimum prudence (p. 11-12).
- The regulatory framework is adjusted to replace old methods with the SA-CCR, with transitional provisions to facilitate adoption (p. 7-21).
- Uncertainties mainly lie in the operational complexity of implementation and the need to adapt banking and supervisory systems (p. 7).
- The absence of inter-asset class diversification in add-on aggregation may lead to some overestimation of overall risk (p. 12, 19).
The Basel Committee recommends mandatory adoption of the SA-CCR from January 1, 2017, replacing the CEM and SM methods, to improve risk sensitivity and consistency in calculating capital requirements for counterparty credit risk (p. 7).
The SA-CCR must be applied to all OTC derivatives, exchange-traded derivatives, and settlement-delayed transactions, with specific treatment of margins and collateral incorporating standard agreements (p. 5-7).
Banks must calculate exposure separately for each netting set, distinguishing margined and unmargined transactions, and apply detailed formulas for RC and PFE, considering hedging sets, delta adjustments, volatility, and correlation factors (p. 8-23).
National authorities must ensure proper implementation, notably by validating netting contracts and ensuring margin practice compliance (p. 9, 134).
Examples and annexes are provided to facilitate understanding and practical application of the SA-CCR (p. 26-36).
Finally, the Basel regulatory framework is amended to integrate the SA-CCR into capital and disclosure requirements, ensuring international harmonization (p. 7-25).
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