What is SA-CCR: Standardised Approach for Counterparty Credit Risk ?

The standardized approach for counterparty credit risk (SA-CCR) is a new computational method for exposure at default (EAD) under the Basel capital adequacy framework.  This approach replaces the Current Exposure Method (CEM), used by banks in India, for measuring exposure for counterparty credit risk arising from derivative transactions, with effect from April 1, 2018.

The SA-CCR will be used for measuring exposure at default (EAD) for OTC derivatives, exchange-traded derivatives and long settlement transactions, whether centrally cleared or not. The ‘Long Settlement Transactions’ are transactions where a counterparty undertakes to deliver a security, or a foreign exchange amount against cash, other financial instruments, or vice versa, at a settlement or delivery date that is contractually specified as more than the lower of the market standard for this particular instrument and five business days after the date on which the bank enters into the transaction.

The general structure of SA-CCR remains same as that used in the CEM, consisting of two key regulatory components: replacement cost and potential future exposure. An alpha factor is applied to the sum of these components in arriving at the exposure at default (EAD). The EAD is multiplied by the risk weight of a given counterparty in accordance with either the Standardised or Internal Ratings-Based approaches for credit risk to calculate the corresponding capital requirement. Exposure will be calculated separately for the each netting set. However, in cases where bilateral netting is not permitted, each and every trade will be its own netting set.

When a bank purchases credit derivative protection against a banking book exposure, or against a counterparty credit risk exposure, it will determine its capital requirement for the hedged exposure subject to the criteria and general rules for the recognition of credit derivatives, i.e., substitution or double default rules as appropriate.

Thus, the objective of this method is to develop a risk sensitive methodology that appropriately differentiates between margined and without margined trades, and provides more meaningful recognition of netting benefits than either of the existing non-modeled approaches. The new approach has also been calibrated to reflect the level of volatilities observed during the stress period and giving regard to incentives for centralised clearing of derivative transactions.