Difference between revisions of "Counterparty risk"

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(US and European Counterparty Risk Measurements)
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Counterparty risk is the risk that the other party in an agreement, or the entity taking the opposite side of a trade, will not live up to its contractual obligations, i.e. will default.  In futures and options trading, exchanges generally provide a cushion against counterparty risk by acting as an intermediary between the two parties.   
 
Counterparty risk is the risk that the other party in an agreement, or the entity taking the opposite side of a trade, will not live up to its contractual obligations, i.e. will default.  In futures and options trading, exchanges generally provide a cushion against counterparty risk by acting as an intermediary between the two parties.   
  
==US and European Counterparty Risk Measurements==
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==US Counterparty Risk Measurements==
  
 
In November 2019, three US banking agencies announced a final rule on how banks are required to measure counterparty risk. The Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency jointly issued the rule, effective April 1, 2020, implementing the so-called "standardized approach for measuring counterparty credit risk", or SA-CCR. The SA-CCR approach replaced prior risk methodologies for large, international banking organizations. Smaller banks and organizations can voluntarily use SA-CCR.  
 
In November 2019, three US banking agencies announced a final rule on how banks are required to measure counterparty risk. The Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency jointly issued the rule, effective April 1, 2020, implementing the so-called "standardized approach for measuring counterparty credit risk", or SA-CCR. The SA-CCR approach replaced prior risk methodologies for large, international banking organizations. Smaller banks and organizations can voluntarily use SA-CCR.  
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SA-CCR was designed by the [[Basel Committee on Banking Supervision]] (BCBS) and will be applied to:
 
SA-CCR was designed by the [[Basel Committee on Banking Supervision]] (BCBS) and will be applied to:
The supplementary leverage ratio
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* The supplementary leverage ratio
The credit valuation adjustment capital charge
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* The credit valuation adjustment capital charge
The exposure amount for derivatives in the BCBS output floor
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* The exposure amount for derivatives in the BCBS output floor
The global systemically important banks buffer
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* The global systemically important banks buffer
Use in single counterparty credit limits
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* Use in single counterparty credit limits
Use in the FDIC assessment charge
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* Use in the FDIC assessment charge
• The comprehensive capital analysis and review
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* Comprehensive capital analysis and review
 
<ref>{{cite web|url=https://www.occ.treas.gov/news-issuances/news-releases/2019/nr-ia-2019-136.html|name=Federal Bank Regulatory Agencies Finalize Rule to Update Calculation of Counterparty Credit Risk for Derivative Contracts|org=Federal Bank Regulatory Agencies|date=November 20, 2019}}</ref><ref>{{cite web|url=https://www.isda.org/a/3akME/SA-CCR-Impact-on-the-US.pdf|name=SA-CCR: Impact on the US|org=ISDA Press Release|date=November 20, 2019}}</ref><ref>{{cite web|url=https://www.occ.treas.gov/news-issuances/news-releases/2019/nr-ia-2019-136a.pdf|name-Standardized Approach for Calculating the Exposure Amount of Derivative|org=US Treasury|date=November 20, 2019}}</ref>
 
<ref>{{cite web|url=https://www.occ.treas.gov/news-issuances/news-releases/2019/nr-ia-2019-136.html|name=Federal Bank Regulatory Agencies Finalize Rule to Update Calculation of Counterparty Credit Risk for Derivative Contracts|org=Federal Bank Regulatory Agencies|date=November 20, 2019}}</ref><ref>{{cite web|url=https://www.isda.org/a/3akME/SA-CCR-Impact-on-the-US.pdf|name=SA-CCR: Impact on the US|org=ISDA Press Release|date=November 20, 2019}}</ref><ref>{{cite web|url=https://www.occ.treas.gov/news-issuances/news-releases/2019/nr-ia-2019-136a.pdf|name-Standardized Approach for Calculating the Exposure Amount of Derivative|org=US Treasury|date=November 20, 2019}}</ref>
 
  
 
== See Also ==
 
== See Also ==

Revision as of 10:38, 20 November 2019

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Counterparty risk is the risk that the other party in an agreement, or the entity taking the opposite side of a trade, will not live up to its contractual obligations, i.e. will default. In futures and options trading, exchanges generally provide a cushion against counterparty risk by acting as an intermediary between the two parties.

US Counterparty Risk Measurements

In November 2019, three US banking agencies announced a final rule on how banks are required to measure counterparty risk. The Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency jointly issued the rule, effective April 1, 2020, implementing the so-called "standardized approach for measuring counterparty credit risk", or SA-CCR. The SA-CCR approach replaced prior risk methodologies for large, international banking organizations. Smaller banks and organizations can voluntarily use SA-CCR.

SA-CCR is used to calculate total risk-weighted assets, and replaced the so-called "current exposure method" or CEM, which calculated standardized total risk-weighted assets. In other words, SA-CCR is used to determine the amount of capital a bank needs to cover risks in the event its derivatives trading partner fails to pay. It is considered more risk sensitive without becoming too complex and can be used on margined and non-margined trades and takes netting of positions into account.

The US rule requires SA-CCR to be used to "determine the exposure amount of derivative contracts included in the banking organization’s total leverage exposure, the denominator of the supplementary leverage ratio." In addition, the final rule incorporated SA-CCR into the cleared transactions framework. SA-CCR is considered a significant switch to "avoid negative impacts on the liquidity and functioning of the US derivatives market," according to the International Swaps and Derivatives Association. [1]

SA-CCR was designed by the Basel Committee on Banking Supervision (BCBS) and will be applied to:

  • The supplementary leverage ratio
  • The credit valuation adjustment capital charge
  • The exposure amount for derivatives in the BCBS output floor
  • The global systemically important banks buffer
  • Use in single counterparty credit limits
  • Use in the FDIC assessment charge
  • Comprehensive capital analysis and review

[2][3][4]

See Also

Credit risk

References

  1. Federal Bank Regulatory Agencies Finalize Rule to Update Calculation of Counterparty Credit Risk for Derivative Contracts. Federal Bank Regulatory Agencies.
  2. Federal Bank Regulatory Agencies Finalize Rule to Update Calculation of Counterparty Credit Risk for Derivative Contracts. Federal Bank Regulatory Agencies.
  3. SA-CCR: Impact on the US. ISDA Press Release.
  4. {{{name}}}. US Treasury.