The future measurement of credit risks associated with derivatives using the Standardised Approach for Measuring Counterparty Credit Risk Exposures (SA-CCR)
In October 2013, a quantitative impact study was conducted on selected banks for a new method of measuring counterparty default risks - the so-called "non-internal model method" (NIMM). At the end of March 2014, the Basel Committee ultimately published its final paper on the methodological approach for measuring counterparty credit risk associated with derivatives. The findings from the quantitative impact study had already been incorporated into this.
The Standardised Approach for Measuring Counterparty Credit Risk Exposures, abbreviated to SA-CCR, is intended to replace the approaches for assessing risks that are currently still valid, namely, the Current Exposure Method (CEM) and the Standardised Method (SM). The simple original method as well as internal models will remain unaffected.
Improved measurement methodology comes into force on 01 January 2017.
Under the SA-CCR, similarly as under the CEM, Exposure at Default (EAD) is the sum of the current Replacement Cost (RC) and an Add-On, in order to take into account future fluctuations in market value. To determine the Add-On different percentages have to be used (ranging from 0.38 % up to 40 %) depending on the type of transaction risk (interest rate, foreign exchange, equity, commodity or credit).
"Netted" exposures will be possible.
All the transactions with one counterparty can be viewed as a whole and a "netted" exposure may be calculated if there are valid master netting agreements in place. If this is the case, then the entire Replacement Cost should be calculated by taking into account the collateral that has been both received and provided, which in the past, within the regulatory scope of netting, was not accorded high priority in many banks. Consequently, a bank's collateral management will become the focus of special attention. The procedure for creating netting sets as well as for determining the aggregate add-on for each risk class (Potential Future Exposure, PFE) is specified in the Standardised Approach. As compensation effects between the netting sets that are created are taken into account, here, all the Add-On amounts are not simply aggregated. For example, correlations defined by the regulator are used for the risk classes of equities, credit and commodities. An additional risk-mitigating impact on the PFE arises from a multiplier that takes into account the two situations of "over-collateralisation" and "negative market value". Ultimately, the overall sum of the PFE and the Replacement Cost is multiplied by an "alpha" factor that has been specified by the regulator at 1.4.
Our diagram illustrates the process:
SKS Advisory has been focussing on this topic already since the publication of the consultative paper in July 2013. Within the scope of the quantitative impact analyses requested by the regulator we have provided support in the form of specialist expertise, as well as data processing know-how, to our clients as they carried out these analyses. To this end we developed an Excel-based calculation tool that is mass-data capable and, on the one hand, makes data requests transparent and, on the other hand, makes it possible to carry out the method for determining the EAD for portfolios, as shown above. The set of formulas for the SA-CCR as well as for the entire aggregation logic have been stored there. Parallel to the calculations, the results from the Current Exposure Method can also be output for the netting sets in order to perform plausibility checks. Optional customised extensions to the tool are also possible.