Current exposure method for CCP’s under Basel III

Author:

Kotzé AntonieORCID,du Preez Paul

Abstract

Exposure-at-default is one of the most interesting and most difficult parameters to estimate in counterparty credit risk. Basel I offered only the non-internal Current Exposure Method for estimating this quantity whilst Basel II further introduced the Standardized Method and an Internal Model Method. Under new Basel III rules a central counterparty is defined as being a financial institution. New principles set out by the Basel Committee on Banking Supervision forces Central Counterparties in using the Current Exposure Method when estimating the credit exposures to Clearing Member banks notwithstanding its shortcomings. The Current Exposure Method relies on the Value-at-Risk methodology and its characteristics are discussed in this note. We will particularly investigate exposures to SAFCOM, the South African clearing house and point to a mathematical discrepancy on how netting is effected through the Basel accord.

Publisher

Virtus Interpress

Subject

Strategy and Management,Economics and Econometrics,Finance

Reference25 articles.

1. Alexander, C. (2008), «Value-at-Risk Models», John Wiley & Sons, England.

2. Arnsdorf, M. (2012), «Quantification of Central Counterparty Risk», Journal of Risk Management in Financial Institutions, Vol. 5, 3, pp273-287.

3. Balthazar, L. (2006), «From Basel 1 to Basel 3: The Integration of State-of-the-Art Risk Modeling in Banking Regulation», Palgrave Macmillan, New York.

4. Basel Committee on Banking Supervision (2006), «International Convergence of Capital Measurement and Capital Standards», Bank for International Settlements, ISBN print: 92-9131-720-9 ISBN web: 92-9197-720-9. URL: http://www.bis.org/publ/bcbs128.htm.

5. Basel Committee on Banking Supervision (2012), «Capital requirements for bank exposures to central counterparties», Bank for International Settlements, ISBN print: 92-9131-143-X.

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