risco de cr%e9dito de contraparte - mark white
TRANSCRIPT
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Counterparty Credit Risk Challenges of Approach: A
Former RegulatorsPerspective
Presented October 20, 2011 at theInternational Congress of Risks,Sao Paolo, Brazil
By: Mark E. WhiteFormerly: Assistant Superintendent, Office of the Superintendent of Financial
Institutions (Canada)Member of the Basel Committee on Banking SupervisionChair of the Basel Committees Risk Management and Modelling Group
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Contents
I. Background: Basel II counterparty credit risk(CCR) framework; issues from 2008/9 crisis CCR capital rules cover: OTC derivative (OTCD),
repos/other securities financing transactions (SFT) andsimilar trade exposures
II. Basel III: strengthened CCR capital requirements
A. Capital For CVA (Credit Value Adjustment) RiskB. Calibration of EAD (Exposure At Default)
C. Improved Margin Practices
D. Asset Value Correlation (AVC)
III. CCPs: Bank Exposures to Central Counterparties
GLOSSARY: see last page
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I. Background Basel II Rules Counterparty Credit Risk (CCR) rules cover aim to:
Adequately capitalize pre-settlement risk for counterpartydefault and credit migration risk for OTCDs and SFTs
Consistent with capitalizing the business for a one year horizon Provide for cost to replace a contract with a defaulted counterparty
Create incentives & recognize risk reducing effects of:
Netting e.g. bi-lateral master agreements Collateral/margining
Central counterparties (CCPs)
Sound operational & modelling practices required tomeasure and manage risk
CCR is not market risk which is capitalized by themarket risk (trading book) rules - but markets affect CCR
e.g. how markets value credit risk, a derivative or collateral
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I. Background Basel II Rules CCR is dynamic: OTCD, SFT and other similar trade
exposures are constantly changing due to market forces
Given stochastic nature of counterparty exposure, rules
allow either model-based or supervisory formula-basedestimates of a loan equivalent exposure via: Risk sensitive Internal Models Method (IMM); or
Standardized Method (SM) or Current Exposure Method
(CEM) IMM: uses a measure called Effective Expected Positive
Exposure (Effective EPE or EEPE) metric and an Alphamultiplier (e.g. for potential general wrong way risk)
Estimate Exposure: Rules estimate the Exposure atDefault (EAD) to be capitalized Once EAD is estimated, the risk can be capitalized
Multiple moving pieces: exposure + credit risk +
collateral are all changing, potentially in different directions- 4 -
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I. Basel II CCR Capital Charge Summary
Risk sensitivity
Current
Exposure
Method(CEM)
StandardizedMethod (SM)
InternalModel
Method
(IMM)
EAD is determined on the basis of the current
exposure plus an add-on factor for thepotential future exposure
Rarely used
The bank models the exposure profile over a1-year horizon
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3 methods to calculate a loan equivalent Exposure At Default (EAD) for OTCDs andSFTs - which is then input in the credit risk calculation (under SA or IRB)
Basel II CCRCapital Charge = Default risk charge
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I. CCR Issues Requiring ReformThe crisis indicated that the CCR regime needed review:1. CVA Risk: Credit valuation adjustment (CVA) losses were not
adequately capitalized no explicit CVA capital charge under Basel II
2/3 of CCR losses experienced in 2008/9 were due to CVA2. Default Risk Exposure: EEPE didnt capitalize adequately for stressperiods and wrong way risk (WWR)
3. Margining: OTCD and SFT collateral/margin requirements andpractices were sometimes inadequate
4. Correlations: More interconnected/correlated financial institution (FI)exposures than expected in IRB (internal ratings based) models
Contagion risk underestimated on a bilateral basis
5. Central Counterparties (CCPs): CCPs can mitigate bi-lateral OTCD(and SFT) risks but werent widely used; further, bank exposures toCCPs werent capitalized
G-20 requested increased OTCD standardization and use of CCPsfor standardized OTCDs
Issue: CCPs could increase risk if poorly implemented- 6 -
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II. Main CCR Changes - Overview
A. Credit Valuation Adjustment (CVA) risk Create a standalone capital charge for CVA risk
Required for all CCR methods (IMM; CEM; Std)
Advanced Bond Equivalent Method (BEA) + simpler, standard method
B. Improve Internal Modelling Method (IMM) by:i. Calibrate modelled Exposure at Default (EAD) for:
Treatment of specific wrong way risk (WWR)
Stress EEPE metric (volatilities; correlations) to capitalize for stress
ii. Increase margin period of risk (MPOR) for large, complex, disputed andilliquid netting sets (trades; collateral)
Improve collateral management and stress/back-testing practices
C. Recognize interdependence between big financiers: Adjust Internal Ratings Based (IRB) formula
Add multiplier of 1.25 to the Asset Value Correlation (AVC) for IRBexposures to large regulated FIs and all unregulated FIs
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II A. Capital for CVA Risk - Overview
Calculate CVA capital for a hypothetical bondequivalent counterparty exposure using one of twomethods Advanced CVA risk charge (ACVA) using modified
Bond Equivalent Approach (BEA)
Standardized CVA risk charge (SCVA) using pre-set
inputs Recognizes CVA as a market-type risk as creditspreads move based on risk appetiteUses market risk techniques for bond interest rates
Builds on existing methodologies for exposures andcredit spread risk implementable by 2013Consistent - not reliant on bank CVA methodologies
Applies currently available market risk constructs to CCR- 9 -
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No allowance for hedges of exposures constant EAD
Hedges of exposures are too complex to model
Inconsistent industry practices for such hedging
Permits recognition of certain counterparty riskhedges
e.g. hedges where counterparty risk is offset
No reliance on black box or firm derived CVArisk models
No consistency in industry practices
Model must be supervisable and implementable Limited time before 2013 introduction
II A. Capital for CVA Overview (cont.)
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II A. Basel III CCR Capital - SummaryBasel III CCRCapital Charge
CVA Risk Charge:
For banks without Specific RiskVaR approval for market risk.Supervisory formula approximates a1-year Value at Risk due to themovement of the counterparty creditspread.
EAD is calculated using banksmethod to calculate the CCR EAD,ie. CEM, SM or IMM.
Risksensitivity
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Credit Valuation Adjustment(CVA) risk charge (new)
Default risk charge(based on CCR EAD) +=
CEM (as inBasel II)
IMM (enhancedrequirements from BII:eg. Stressed EEPE,treatment of wrongway risk, etc.)
SM (as inBasel II)
StandardizedCVA charge(SCVA)
Advanced CVAcharge (ACVA)
Applies to banks with approvals touse (i) IMM and (ii) Specific RiskVaR for market risk.First calculate the CVA sensitivityusing IMM; this sensitivity is thenused in VaR (market risk framework).
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II A. Capital for CVA Risk - ACVAAdvanced CVA Charge (ACVA) For banks with bothIMM and Specific Risk VaR model approval Final rule achieved following consultations with ISDA +
select banks builds on original BEA proposal VaR model using bond analogy based on EAD Uses credit spread sensitivities CVA spread sensitivities based on coupon bond spreads
run through VaR model Volatile risk profiles distinguish CVA risk
Considers term structure of EEPE Requires calculation of EEPE therefore limited to IMM banks
Credit for single name and index hedges allowed Incents better hedging due to accuracy of hedge credit
These requirements only permit use of advanced CVAcharge for banks with IMM and specific risk VaR models
Standard CVA risk capital charge will need to cover other banks- 12 -
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II A. Capital for CVA Risk - SCVA
Standardized CVA risk capital charge (SCVA)for all other banks
Non-IMM/non-VaR firms: cannot use ACVA risk charge
regime as they cannot model exposure and risk
ACVA requires the ability to model specific risk for a bond + EEPE
Standard CVA risk capital framework overview:
Uses only EAD, effective maturity (M) and supervisor set inputs - e.g.
credit spread + volatilities are pre-set
50% systematic correlation caps index hedge credit
Allows single name hedges for idiosyncratic risk ACVA/SCVA calibration:
Calibrated to give correct incentives e.g. reduced capital if ACVA
Calibrated to ensure reasonably consistent results and sufficientcapital to offset CVA losses (e.g. as in crisis)- 13 -
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II A. Advanced & Standardized CVA Multiple QIS: results were used to calibrate/confirm
supervisory inputs in SCVA and relativity of outputs
Results achieved to capitalize for CVA risk:
Rules protect banks against CCR risk arising from changing
exposures and spreads i.e. CVA risk
Rules create correct incentives:
CVA charges generally more than double CCR capital charges whencompared to Basel II CCR default risk capital
ACVA approach generally has less than the capital of SCVA
SCVA approach using IMM has less capital than SCVA using CEM
CVA risk charge calibration is complete Effective maturities M capped at 1 year if Specific Risk VaR captures
ratings migrations
Adjust VaR model if it does not capture ratings migrations
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NO
YES Does a Bank have anapproval for the use ofVAR model in MarketRisk Framework?
YES
Standardized CVAregime for CVA riskcapital charge, with theuse of IMM for EAD
Does a Bank
have anapproval for theuse of IMM inthe calculation ofEAD (CCRframework)?
Advanced CVA regimefor CVA risk capitalcharge, with the use ofIMM for EAD
NO
Basel II: Default Risk Capital Charge Basel III: CVA risk capitalcharge is added
Standardized CVAregime for CVA riskcapital charge, with theuse of CEM or SM for
EAD
II A. CCR Framework: Decision Tree
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II A. CCR Summary: Default + CVA ChargesOverall CCR capital charge (default + CVA) is,depending on the bank-type, calculated as follows:
1. IMM + Specific Risk VaR banks = Advanced CVA Charge
IMM default charge (stressed EEPE) +
CVA risk Advanced CVA charge
3 x BEA VaR +
3 x BEA stress VaR (worst 1 yr in 3 yr stress period)
2. IMM + Std Approach Market Risk banks = Std CVA Charge IMM default charge (stressed EEPE) +
Standardised CVA charge (exposure via IMM)
3. Other (non-IMM) banks = Std CVA Charge
Standardised (CEM, SA) default charge + Standardised CVA charge (exposure via CEM/SM)
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II A. Treatment of CVA P&L Losses
Potential for double counting:
With capitalization of CVA risk, a risk of double
counting exists as the CCR default chargecapitalizes for risk of loss
Cant lose $ again if CVA P&L loss has alreadyreduced retained earnings
Incurred CVA Treatment
For default risk capital charges: Deduct CVA
P&L losses (gross of DVA debit valueadjustment) from EAD for default risk Cant lose $ again - analogous to securitization FV adjustment
Gross DVA already deducted from capital
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No credit for CVA P&L losses in CVA risk capitalcharge Banks dont reduce exposure by CVA losses
A complex calculation e.g. counterparty level
The result is generally not material to CVA risk capital CVA risk remains until exposure is substantially reduced by
losses Capital is required for the exposure next subject to write-
down
Write-downs dont reduce the likelihood of future CVA losses
QIS results: Indicated reduction of EAD by CVA incurred P&L losses
is reasonable result
Other alternatives dont result in materially differentcapital
II A. Treatment of CVA P&L Losses (cont.)
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II B. Calibration of Modelled EAD
Stressed EEPE Background: Inadequate CCR capital held during stress
Default risk is higher if credit spreads widen
Partly due to IMM models using good times data
Similar to the need for stress VaR in trading book
CCR capital should cover stress losses given actualexposures at time of stress
Note conflict: actual & stress period exposures may differ
Historic stress period data may not reflect current risks
IMM CCR capital to be the greater of: (I) current IMMcalculation; and (II) stress period IMM calculation
Use 3 yr stress period to estimate credit default spreads
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Stressed EEPE (cont.) Decision: principles based stress period selection
(e.g. spread increases) - similar to the downturn LGD
Stress period identified at portfolio level (notcounterparty)
Benchmarking to ensure that stress calibration is
consistent with exposures generated during stress andIMM model methods
Specific Wrong-Way Risk (WWR)
Allow banks to reflect recoveries in WWR EAD Jump-to-default risk on single name CDS = FV at risk
on underlying
II B. Calibration of Modelled EAD
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II C. Improved Margin Practices
Crisis Experience: OTCD and SFTs could not be closed outwithin expected MPOR (margin period of risk) Current MPOR: 5 days SFTs - 10 days for OTCD
Increased MPOR for: large netting sets - exotic derivatives& illiquid collateral disputed netting sets 20 days for all netting sets that have over 5,000 trades or contain
illiquid/exotic collateral/transactions
Double margin period for 2 quarters if a netting set experiencesmaterial disputes (i.e. >2 disputes over 2Q)
The increases in IMM MPOR extend to the simpler methods (CEM,SA)
Strengthen Collateral: Securitization haircuts double (vs.corporate bonds) - re-securitizations ineligible collateral Collateral management: improve practices (e.g. downgrade
triggers; re-hypothecation) and resources
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II D. Asset Value Correlations (AVC)
Background: IRB assumes a certain correlationbetween exposures crisis showed need for review
RMMG studies on AVCs showed AVCs for FI exposures: higher than those for non-FIs
AVCs for exposures to large FIs: higher than forsmaller FIs
Apply a 1.25 multiplier to the AVC for bankexposures to regulated and unregulated FIs Applies to all IRB exposures to FIs not just CCR
Apply multiplier to exposures to: Groups with regulated FIs and assets greater than
US$100B; and
All unregulated FIs- 22 -
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III. CCPs: Overview Background: G20 instructed BCBS to create incentives for
firms to use CCPs to clear trades Basel II provided for nil exposure/capital for bank exposures to
CCPs
Very favourable but unclear scope of application
Basel III greatly increased capital for non-CCP trades
Mitigate concerns over CCPs and systemic risks by: CPSS/IOSCO rules: margining; risk management; financial
resources; stress tests; liquidity; supervision Ongoing CPSS/IOSCO dialogue with RMMG/BCBS
CPSS/IOSCO consulted on draft rules; final rules expected soon
Proper bank capitalization of exposures to CCPs
Ensure bank system holds appropriate capital for exposures Dependent on assumption that CCPs are consistently well managed,
capitalized, funded and supervised
Help to create the right incentives for all stakeholders
BCBS still finalizing capital rules for exposures to CCPs- 23 -
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Compliant CCPs: Reduced capital held by a bank if acounterparty is a CCP following, and supervised under,CPSS/IOSCO standards Trade exposures/EAD receive 2% risk weight
Default exposures capitalized based on risks Non-Compliant CCPs: Exposures to non-compliant CCPs
are bilateral exposures i.e. normal CCR capital Default Fund (DF) Exposures: Bank capital for DF
exposures based on riskiness waterfall approach BCBS is evaluating risk sensitive and simple approaches
Bank capital (not CCP resource) perspective Capitalize business (not trade)
BCBS Status: Initial consultations and QIS complete
Broad consultation process after Dec 2010 paper
Revisions to Dec 2010 consultation paper proposed
Follow-up consultation on revisions expected shortly
III. CCPs: Conceptual Framework
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III. Capital for Bank Exposures to CCPs
Is it a qualifying CCP?(to qualify a CCP must be: (1) subject to supervisionaccording to CPSS-IOSCO standards and (2) able to calculate KCCP)
Yes No
1250% * (prefundedcontributions + unfundedcommitments)
Exposure arising from pre-fundedcontributions
1st
step calculate Kccp (using CEM): Kccp is thehypothetical capital a CCP would hold under the bilateralCCR rules if it was a bank with CCR exposures to banks
2nd step risk sensitive waterfall approach:
determines riskiness of exposure based on CCP profile
3
rd
step allocate capital requirements to eachclearing member: based on CCP profile
B. Default Fund Exposures
Bilateral framework
applies Exposure measured using Current Exposure Method
(CEM), Internal Model Method (IMM) or StandardizedMethod (SM) depending on banks existing practices
RW = 2%
A. Trade-Related exposures(includes MtM current, plus potential future exposure, and initial and variation margin posted to the CCP)
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E
KCCP
DFCCP
DFCCP
DFCCP
DFCM
DFCM
DFCM
AC
D
(iii)(ii)(i)
B
III. CCPs: Risk Sensitive DF Capital 2nd Step
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Caption:DFccp: CCP own loss-bearing capital (from its own resources) contributed to default fundDFcm: Default fund contributions of the clearing members (CM)Kccp = (CEM Exposure amounts) * 20% * 8% = CCP hypothetical capital requirement.
This calculation is done from the CCP perspective. As such, posted initial margin and othercollateral reduce the CEM-derived exposure the CCP is assumed to have to the CMs.
Aggregate capital requirements for clearing members (CM) of a CCP dependon the CCPs own resources (DFccp) and its member-contributed resources
(DFcm) and the resulting risk using the risk sensitive waterfall approach:
Case (i) shortfall in CCP resources = 1.2 (A) + B
Case (ii) excess CCP resources from CM = C + .016 (D)
Case (iii) excess CCP resources from CCP = .016 (E)
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III. CCPs: 5 Prudential Issues(I) Risk sensitive waterfall capital requirements for
default fund (DF) exposures are they accurate/fair?
Based on consistent exposure calculation across CCPs
May create information and supervisability issues
Consistently evaluates hypothetical capital a CCP wouldrequire to withstand exposures to its members if theCCP were a bank with bilateral OTCD
Takes into account initial margin/collateral
Uses the CEM method to consistently calculate the
hypothetical capital Attempts to use the CCPs actual risk profile/facts to:
consistently determine its exposures to its CMs via CEM; and
the riskiness of its CMs DF exposures to the CCP- 27 -
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(IV) Indirect access to CCPs how should a bankwith indirect access capitalize its trades? Proposal: A non-CM banks trade (i.e. client trade) with
a CCP clearing member (CM), which is indirectly clearedby the CCP, may receive CCP treatment if: Assets are segregated/bankruptcy remote from CM
(segregation); and
Bank is legally assured that another CCP member will take overtrade from defaulted/insolvent CM (portability)
Otherwise, treated as bilateral exposures to the CM
Segregation is achieved under various structures, but
portability is a question Structure must substantially put client in the same position as a
CM (same incentives and assurances that trades will continue)
III. CCPs: 5 Prudential Issues (cont.)
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(V) Why is portability necessary to receive CCPcapital treatment and can it be assured?
CMs may trade with several clients (with some offsetting
positions) and only hedge the net positionClient does not receive multi-lateral netting benefits
Can portability be assured? although it isnt commonlyassured, portability could be assured - e.g.:
CM could act as agentCCP/solvent CMs could replace trade at no-cost to client
Why isn't portability currently offered?
Even if the CMs trade with the CCP is an exact mirror of the clienttrade, the CCP (or solvent CMs) may not want to take on the risk ofthe client trade (i.e. on the same terms as the defaulting CM)
Clients do not contribute to, and therefore do not benefit from, thedefault fund of the CPP; clients CCR exposure is to its CM
No loss mutualisation if a client loses due to a CM default
III. CCPs: 5 Prudential Issues (cont.)
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Conclusions Improved risk capture in CCR capital charges CVA capital charge: added to supplement default risk
capital charge
Advanced CVA charge for IMM + Specific Risk VaR banks Standardized charge for all others
Stress calibration for EEPE modeling to improve defaultcharge
Increased MPOR for certain netting sets to reflect longerclose-out periods
Increased AVC for FI-to-FI business to reflectinterconnectedness in the system
Promote use of CCPs Increased capital requirements for bilateral trades
Enhance bank capitalization of CCP exposures to ensure
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GlossaryAVC asset value correlationBCBS Basel Committee on Banking
SupervisionBEA bond equivalent approachCCP central counterparty
CCR - counterparty credit riskCDS credit default swap
CEM current exposure methodCM clearing member
CPSS/IOSCO - Committee on Paymentand Settlement Systems /International Organization ofSecurities Commissions
CVA credit valuation adjustment
DF - default fundDVA debt value adjustmentEAD exposure at defaultEEPE effective expected positive
exposureFI financial institution
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FSB Financial Stability BoardFV fair valueIMM internal models methodIRB internal ratings based approachIRC incremental risk charge
LGD loss given defaultM - maturityMPOR margin period of riskOTCD over the counter derivatives
OTC over the counterPFE - Potential Future ExposureP&L profit and lossRMMG Risk Management &
Modelling Group
SA standardised approachSFT securities financing transactionsSM standardized methodVaR value-at-risk
WWR wrong way risk