Standardized Approach For Counterparty Credit Risk
There has always been a lot of criticism around the existing non-model approaches (Current Exposure Method and Standardized Method) for calculating counterparty exposures for OTC derivatives, exchange-traded derivatives and long settlement transactions. The regulation on SA-CCR, which will take effect in January 2017, will replace the existing non-model approaches, rectifying their short-comings.
The 2008 financial crisis exposed a lot of insufficiencies in the current regulatory framework, from market risk to interest rate risk, and credit risk domains. Basel committee has launched a series of initiatives to replace the existing regulations in those risk domains. We have seen many recently-announced revised regulatory frameworks such as FRTB, IRRBB, BCBS 239, IFRS 9, and so on, with the purpose of improving banks’ resilience and capability to withstand stressed conditions. SA-CCR regulation fundamentally changes the logic in calculating exposure, which has a strong implication to banks’ minimum required capital and business strategy.
In this paper we will deep dive into the details of the SA-CCR approach and analyze how it will affect banks.