Standardized Approach for Counterparty Credit Risk

SUMMARY

The client, a major banking group offering a broad range of financial products and services such as bilateral loans, trade financing and derivative products to corporate and institutional clients, required assistance with calculating the capital requirements for counterparty credit risk under the new standardized approach.

CUSTOMER GOALS

The objective of the client was to implement the latest approach for capital calculation for counterparty credit risk, called Standardised Approach (i.e., SA-CCR) in line with the CRR.

The bank entrusted Avantage Reply with developing and implementing the transition from the Original Exposure Method (OEM) approach to the SA-CCR approach for determining the capital requirements of its OTC derivatives (i.e., IRS and FX) traded at the branch as well as the subsidiary levels.

CHALLENGES

The primary challenge encountered during the project was the lack of critical documentation and the fragmented nature of the information provided which was crucial during the qualitative (i.e., risk mapping) phase.

SOLUTION

Avantage Reply provided a team of experts with credit risk experience to perform the following:

• Reviewed the current documentation to establish and map the OTC products (i.e., IRS and FX) to the appropriate netting sets, risk categories and hedging sets;
• Built a comprehensive excel tool to calculate relevant factors and variables in a step-by-step process in order to derive the capital requirements;
• Drafted a detailed explanatory memo describing the mapping of the derivative trades, the tool functioning steps, the reasoning and assumptions taken.