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  • CA-8.3 CA-8.3 Treatment of Counterparty Credit Risk in the Trading Book

    • CA-8.3.1

      Conventional bank licensees 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.43 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, conventional bank licensees must use the standardised approach risk weights in the trading book.

      43 The treatment for unsettled foreign exchange and securities trades is set forth in Paragraph CA-3.3.13.

      January 2015

    • CA-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 are 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 conventional bank licensees 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.

      January 2015

    • CA-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.

      January 2015

    • CA-8.3.4

      The calculation of the counterparty charge for repo-style transactions must follow the rules in Paragraphs CA-4.3.3 to CA-4.3.25 and Appendix CA-2.

      January 2015

    • Credit Derivatives

      • CA-8.3.5

        The counterparty credit risk charge for single name credit derivative transactions in the trading book must 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 treatment of specific risk in chapter CA-9.

        ** The protection seller of a credit default swap is only 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 must then be capped to the amount of unpaid premiums.

        January 2015

      • CA-8.3.6

        Where the credit derivative is a first to default transaction, the add-on is 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 is used. For second and subsequent to default transactions, underlying assets must continue to be allocated according to the credit quality, i.e. the second lowest credit quality determines the add-on for a second to default transaction etc.

        January 2015