Basel IV: Standardised Approach for Counterparty Risk (SA-CCR)

Within the framework of CRR II, the proposal for a new standardised approach for counterparty risk (SA-CCR) published by the Basel Committee in March 2014 will be implemented. It replaces the previous Standardised Method (SM) and the Current Exposure Method (CEM), which had weaknesses in particular in the mapping of variation margin. In addition, the CEM was considered too simple and the SM too complex when it came to mapping netting and diversification effects.

Compared to the previous standard methods, the implementation of the new SA-CCR places significantly higher demands on product and counterparty information. The new SA-CCR determines the counterparty risk via three factors: the regulatory scaling factor alpha, which was set at 1.4, the replacement cost (RC) and an add-on for the potential future exposure (PFE), which continues to depend on the underlying - but is weighted with a factor that takes into account the risk-reducing effects of overcollateralisation and negative market values.

Depending on the portfolio, the methodological changes can lead to material increases in RWA, especially for unsecured derivatives, the exposure-at-default (EaD) increases significantly compared to the mark-to-market method. The introduction may also have implications for economic risk measurement and management. The effect of the new regulation will be intensified by the use of the risk position values determined according to SA-CCR, e.g. in the calculation of the leverage ratio, the NSFR as well as the determination of large exposures.

The innovations on counterparty risk require quantitative impact analyses and subsequently, if necessary, an optimisation of the trading portfolio as well as careful planning of the implementation. The implementation of the SA-CCR is already foreseeable in concrete terms, as it is already included in CRR II, which is currently in the EU trilogue process. The proposals of the Basel Committee were largely adopted. In order to take account of the proportionality principle, a simplified standardised approach and a modified original method are available for small derivative portfolios.

KPMG has extensive experience at the interface between risk measurement, supervisory law and trading and IT. Our advisory services include carrying out simulations of the future capital requirement as well as designing calculations according to the selected capital approaches and their implementation and integration into the regulatory reporting system.