Basel standardisation approach needs refining

Author: Olly Jackson | Published: 1 Feb 2019

The move towards a standardised approach for measuring counterparty credit risk exposures (SA-CCR) does not adequately reflect the risk-reducing impact of margin, market sources have told IFLR.

According to Sahir Akbar, director of prudential regulation at the Association for Financial Markets in Europe (Afme), the approach is too conservative in its calibration, which increases the capital charge overall.

"It doesn’t just impact counterparty credit risk, but also feeds into elements of regulatory capital, including in the large exposures framework where the impact is significant," he said.

The new standardised approach for measuring counterparty credit risk exposures began on January 1 2017 and replaces all alternative approaches for over-the-counter derivatives, long settlement transactions and exchange-traded derivatives. This follows the standardised method (SM), which began in 2005, and the current exposure method (CEM), in 1995.      

Some criticised CEM for not differentiating between margined and unmargined transactions and the flawed...