The Basel Committee’s final standard on a standardized approach for the measurement of counterparty credit risk exposures by financial firms is looming over the industry and big banks in particular. The changes include a new approach which is not based on models, but rather on a standardized approach.
Companies will have to start measuring counterparty credit risk associated with OTC derivatives, exchange-traded derivatives, and long settlement transactions in a new way starting form the 1st of January 2017. Calypso is one of the capital markets software providers that are adding new tools for companies to address the new requirements.
The new standardized approach for counterparty credit risk dubbed SA-CCR will be replacing both the Current Exposure Method (CEM) and the Standardized Method (SM) in the capital adequacy framework.
January 2017 and Basel III Challenging the Banking Industry
The Basel Committee is aiming to develop a new methodology which is sensitive to risk and is able to differentiate between margined and un-margined trades, while assessing whether netting of the exposure is beneficial for the institution.
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The many regulatory initiatives specified by Basel have significantly altered the landscape on the Street
The SA-CCR limits the need for discretion by national authorities, minimizes the use of banks’ internal estimates, and avoids undue complexity by drawing upon prudential approaches already available in the capital framework. It has been calibrated to reflect the level of volatility observed over the recent stress period, while also giving regard to incentives for centralized clearing of derivative transactions.
The Chief Product Officer of Calypso Technology, Pedro Porfirio, said: “The many regulatory initiatives specified by Basel have significantly altered the landscape on the Street. The changes in capital calculations that these models will trigger mean that banks need a reliable partner to help manage the transition.”
“Not only do they need a robust calculation engine to help them meet the regulatory deadline, but they face an urgent need to determine how the new rules will impact their business,” Porfirio explained.
Calypso is offering its SA-CCR solution as a module within its Calypso Risk & Capital product suite. The company has added a cloud based option to calculate SA-CCR which will provide details on Potential Future Exposure, Exposure-at-Default and execute all capital calculations while adhering to the regulatory framework.