The Standardized approach for

counterparty credit risk A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...

(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 Basel Accord, a framework that sets international standards for bank capital adequacy, stress testing, and liquidity requirements. Augmenting and superseding parts of the Basel II standards, it was developed in response t ...

addressing

counterparty A counterparty (sometimes contraparty) is a legal entity, unincorporated entity, or collection of entities to which an exposure of financial risk may exist. The word became widely used in the 1980s, particularly at the time of the Basel I deliberat ...

risk for

derivative In mathematics, the derivative of a function of a real variable measures the sensitivity to change of the function value (output value) with respect to a change in its argument (input value). Derivatives are a fundamental tool of calculus. ...

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 (G10) countries in 1974. The committee expanded its membership in 2009 a ...

in March 2014. 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 financial instruments that have similar financial characteristics and behave similarly in the marketplace. We can often break these instruments into those having to do with real assets and those 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 of derivatives and "long-settlement transactions" exposed to counterparty credit risk. It builds EAD as (i) a "Replacement Cost" (RC), were the counterparty to default today; combined with (ii) the "Potential Future Exposure" (PFE) to the counterparty. For the former: 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 the trades, is aggregated by counterparty, and then netted-off with haircutted- collateral. For the latter: per

, trade "add-ons", as reduced by offsetting based on

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 statistic ...

assumptions, are aggregated to “hedging sets”; these are then aggregated to "netting sets", and offset by the counterparty's collateral (i.e. initial margin), which is subject to a "multiplier" that limits its benefit and applies 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 SA-CCR into their KVA calculations. Because of its two-step aggregation, capital allocation between

trading desk Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market. An early form of trade, barter, saw the direct excha ...

s (or even asset classes) is challenging; thus making it difficult to fairly calculate each desk's

risk-adjusted return on capital Risk-adjusted return on capital (RAROC) is a risk-based profitability measurement framework for analysing risk-adjusted financial performance and providing a consistent view of profitability across businesses. The concept was developed by Banker ...

. Various methods are then proposed here.

FIS FIS or fis may refer to: Science and technology * '' Fis'', an ''E. Coli'' gene * Fis phenomenon, a phenomenon in linguistics * F♯ (musical note) * Flight information service, an air traffic control service * Frame Information Structure, a Se ...

(2017)
"Allocating SA-CCR fairly"
''www.fisglobal.com''. SA-CCR is also input to other regulations such as the leverage ratio and the

net stable funding ratio During the financial crisis of 2007–2008, 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 fro ...

References

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