CA-8.3 CA-8.3 Treatment of Counterparty Credit Risk in the Trading Book
CA-8.3.1
Banks must calculate the counterparty credit risk charge for OTC derivatives, repo-style and other transactions booked in the trading book, separate from the capital charge for general market risk and specific risk.62 The risk weights to be used in this calculation must be consistent with those used for calculating the capital requirements in the banking book. Thus, banks applying the standardised approach in the banking book will use the standardised approach risk weights in the trading book and banks applying the IRB approach in the banking book will use the IRB risk weights in the trading book in a manner consistent with the IRB roll out situation in the banking book as described in Paragraphs CA-5.2.28 to CA-5.2.31. For counterparties included in portfolios where the IRB approach is being used the IRB risk weights will have to be applied. The 50% cap on risk weights for OTC derivative transactions is abolished.
62 The treatment for unsettled foreign exchange and securities trades is set forth in Paragraph CA-3.3.13.
Amended: January 2012
Apr 08CA-8.3.2
In the trading book, for repo-style transactions, all instruments, which are included in the trading book, may be used as eligible collateral. Those instruments which fall outside the banking book definition of eligible collateral shall be subject to a haircut at the level applicable to non-main index equities listed on recognised exchanges (as noted in Paragraph CA-4.3.7. Where banks are applying a VaR approach to measuring exposure for repo-style transactions, they also may apply this approach in the trading book in accordance with Paragraphs CA-4.3.22 to CA-4.3.25 and Appendix CA-2.
Amended: January 2012
Apr 08CA-8.3.3
The calculation of the counterparty credit risk charge for collateralised OTC derivative transactions is the same as the rules prescribed for such transactions booked in the banking book.
Apr 08CA-8.3.4
The calculation of the counterparty charge for repo-style transactions will be conducted using the rules in Paragraphs CA-4.3.3 to CA-4.3.25 and Appendix CA-2 spelt out for such transactions booked in the banking book. The firm-size adjustment for SMEs as set out in Paragraph CA-5.3.4 shall also be applicable in the trading book.
Amended: January 2012
Apr 08Credit Derivatives
CA-8.3.5
The counterparty credit risk charge for single name credit derivative transactions in the trading book will be calculated applying the following potential future exposure add-on factors:
Protection buyer Protection seller Total Return Swap "Qualifying" reference obligation 5% 5% "Non-qualifying" reference obligation 10% 10% Credit Default Swap "Qualifying" reference obligation 5% 5%** "Non-qualifying" reference obligation 10% 10%** There will be no difference depending on residual maturity.
The definition of "qualifying" is the same as for the "qualifying" category for the treatment of specific risk under the standardised measurement method in chapter CA-9.
** The protection seller of a credit default swap shall only be subject to the add-on factor where it is subject to closeout upon the insolvency of the protection buyer while the underlying is still solvent. Add-on should then be capped to the amount of unpaid premiums.
Apr 08CA-8.3.6
Where the credit derivative is a first to default transaction, the add-on will be determined by the lowest credit quality underlying in the basket, i.e. if there are any non-qualifying items in the basket, the non-qualifying reference obligation add-on should be used. For second and subsequent to default transactions, underlying assets should continue to be allocated according to the credit quality, i.e. the second lowest credit quality will determine the add-on for a second to default transaction etc.
Apr 08
