CA-3.1.1

This Chapter sets out the rules relating to the standardized approach to credit risk. The securitisation framework is presented in Chapter CA-6. The standardized approach makes use of external credit assessments⁹ as a means of calculating the risk weight for exposures to certain categories of counterparty.

⁹ The notations follow the methodology used by one institution, Standard & Poor's. The use of Standard & Poor's credit ratings is an example only; those of some other external credit assessment institutions could equally well be used. The ratings used throughout this document, therefore, do not express any preferences or determinations on external assessment institutions by CBB.

CA-3.1.2

The credit equivalent amount (CEA) of Securities Financing Transactions (SFT)¹⁰ and OTC derivatives that expose a conventional bank licensee to counterparty credit risk¹¹ is calculated under the rules set out in Appendix CA-2.

¹⁰ Securities Financing Transactions (SFT) are transactions such as repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin lending transactions, where the value of the transactions depends on the market valuations and the transactions are often subject to margin agreements.

¹¹ The counterparty credit risk is defined as the risk that the counterparty to a transaction could default before the final settlement of the transaction's cash flows. An economic loss would occur if the transactions or portfolio of transactions with the counterparty has a positive economic value at the time of default. Unlike a firm's exposure to credit risk through a loan, where the exposure to credit risk is unilateral and only the lending bank faces the risk of loss, the counterparty credit risk creates a bilateral risk of loss: the market value of the transaction can be positive or negative to either counterparty to the transaction. The market value is uncertain and can vary over time with the movement of underlying market factors.

CA-3.1.3

In determining the risk weights in the standardised approach, conventional bank licensees must use assessments by only those external credit assessment institutions which are recognised as eligible for capital purposes by CBB in accordance with the criteria defined in Section CA-3.4.

CA-3.1.4

Exposures must be measured at the book value as shown in the financial statements of the conventional bank licensee (normally at amortised cost or fair value after applying specific provisions or fair value adjustments as applicable) and risk-weighted taking into account eligible financial collateral as applicable (see Chapter CA-4 concerning credit risk mitigation).