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Manual Credit Risk Valuation: Methods, Models, and Applications

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Methods, Models, and Applications

Stock Image. Credit Risk Valuation Manuel Ammann. Published by Springer New Hardcover Quantity Available: 1. Seller Rating:. Credit Risk Valuation Ammann, Manuel. New Hardcover Quantity Available: 2. New Paperback Quantity Available: Published by Springer Berlin Heidelberg Feb New Quantity Available: 2. Rheinberg-Buch Bergisch Gladbach, Germany. BuchWeltWeit Inh. Ludwig Meier e. Bergisch Gladbach, Germany.

New Quantity Available: 1. This refers to exposure calculations under IMM, or the IMM short cut method of paragraph 47 and for the holding periods entering the exposure calculation of repo-style transactions in Chapter 5 — Credit Risk Mitigation, Section 5. Where settlement is legally enforceable on a net basis in an event of default and regardless of whether the counterparty is insolvent or bankrupt, the total replacement cost of all contracts relevant to the trade exposure determination can be calculated as a net replacement cost if the applicable close-out netting sets meet the requirements set out in Footnote 26 :.

Chapter 5 — Credit Risk Mitigation, paragraph 63 and, where applicable, also 64 in the case of repo-style transactions;. To the extent that the rules referenced above include the term "master netting agreement", this term should be read as including any "netting agreement" that provides legally enforceable rights of set-off Footnote If the bank cannot demonstrate that netting agreements meet these rules, each single transaction will be regarded as a netting set of its own for the calculation of trade exposure.


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The clearing member will always capitalise its exposure including potential CVA risk exposure to clients as bilateral trades, irrespective of whether the clearing member guarantees the trade or acts as an intermediary between the client and the CCP. However, to recognise the shorter close-out period for cleared transactions, clearing members can capitalise the exposure to their clients applying a margin period of risk of at least 5 days if they adopt the IMM ; or multiplying the EAD by a scalar of no less than 0.

Where a bank is a client of a clearing member, and enters into a transaction with the clearing member acting as a financial intermediary i. The client must be in a position to provide to the national supervisor, if requested, an independent, written and reasoned legal opinion that concludes that, in the event of legal challenge, the relevant courts and administrative authorities would find that the client would bear no losses on account of the insolvency of an intermediary clearing member or of any other clients of such intermediary under relevant law:. In such circumstances, the client positions and collateral with the CCP will be transferred at market value unless the client requests to close out the position at market value.

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Where a client enters into a transaction with the CCP, with a clearing member guaranteeing its performance, the client's exposures to the CCP may receive the treatment in paragraph if the above conditions are met. OSFI recognises the potential operational challenges around meeting the requirements in paragraph a. In light of these, Canadian banks who meet the following requirements will be deemed to be in compliance with paragraph a. The client must have conducted sufficient legal review and undertake such further review as necessary to ensure continuing enforceability to verify and have a well-founded basis to conclude that, in the event of legal challenge, the relevant courts and administrative authorities would find that such arrangements mentioned in paragraph a would be legal, valid, binding and enforceable under the relevant laws of the relevant jurisdiction s.

Where the bank is a client of the clearing member and the requirements in paragraphs or are not met, the bank will capitalise its exposure including potential CVA risk exposure to the clearing member as a bilateral trade.

Credit Risk Valuation: Methods, Models and Applications (Springer Finance)

In all cases, any assets posted or collateral must, from the perspective of the bank posting such collateral, receive the risk weights that otherwise applies to such assets or collateral under the capital adequacy framework, regardless of the fact that such assets have been posted as collateral. Where assets or collateral of a clearing member or client are posted with a CCP or a clearing member and are not held in a bankruptcy remote manner, the bank posting such assets or collateral must also recognise counterparty credit risk based upon the assets or collateral being exposed to risk of loss based on the creditworthiness of the entity Footnote 30 holding such assets or collateral.

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Collateral posted by the clearing member including cash, securities, other pledged assets, and excess margin, also called over collateralisation , that is held by a custodian Footnote 31 , and is bankruptcy remote from the CCP, is not subject to a capital requirement for counterparty credit risk exposure to such bankruptcy remote custodian. Collateral posted by a client, that is held by a custodian, and is bankruptcy remote from the CCP, the clearing member and other clients, is not subject to a capital requirement for counterparty credit risk.

The methodology for determining the capital charge for default fund exposures to qualifying CCPs is set out below. To apply for the waiver to use the Alternative approach to calculating capital requirements for default fund exposures to QCCPs, OSFI is requesting that banks provide the following for each of the CCPs for which it is applying for the waiver:. Confirmation from the bank that using the Alternative approach will not result in any implementation issues from the bank's perspective e.

Both the risk sensitive waterfall approach and the alternative approach are temporary approaches which will be subject to a replacement at a future date. Where a default fund is shared between products or types of business with settlement risk only e. OTC derivatives, exchange traded derivatives or SFTs, all of the default fund contributions will receive the risk weight determined according to the formulae and methodology set forth below, without apportioning to different classes or types of business or products.

However, where the default fund contributions from clearing members are segregated by product types and only accessible for specific product types, the capital requirements for those default fund exposures determined according to the formulae and methodology set forth below must be calculated for each specific product giving rise to counterparty credit risk.

In case the CCP's prefunded own resources are shared among product types, the CCP will have to allocate those funds to each of the calculations, in proportion to the respective product specific EAD. Whenever a bank is required to capitalise for exposures arising from default fund contributions to a qualifying CCP, clearing member banks will apply a risk weight to their default fund contributions. This risk weight will be determined according to a risk sensitive formula that considers i the size and quality of a qualifying CCP's financial resources, ii the counterparty credit risk exposures of such CCP, and iii the application of such financial resources via the CCP's loss bearing waterfall, in the case of one or more clearing member defaults.

The clearing member bank's risk sensitive capital requirement for its default fund contribution K CMi must be calculated using the formulae and methodology set forth below. This calculation may be performed by a CCP, bank, supervisor or other body with access to the required data, as long as the conditions in paragraph are met. This is calculated using the formula for K CCP :. The holding periods for SFT calculations in Chapter 5 — Credit Risk Mitigation remain even if more than trades are within one netting set, i.

Footnote 34 Moreover, for the purposes of this calculation, the NGR must be calculated on a counterparty by counterparty basis i. After this transitional period, the fallback approach established in paragraph will apply. The PFE calculation under the CEM for options and swaptions that are transacted through a CCP is adjusted by multiplying the notional amount of the contract by the absolute value of the option's delta, which is calculated according to paragraphs 1 and 2 Appendix of this chapter.


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The netting sets that are applicable to regulated clearing members are the same as those referred to in paragraph For all other clearing members, they need to follow the netting rules as laid out by the CCP based upon notification of each of its clearing members. The national supervisor can demand more granular netting sets than laid out by the CCP. This scenario is incorporated in the following risk-sensitive formula:. In such case, the clearing members unfunded default fund commitments are expected to bear such loss and the exposure for a clearing member bank is, due to the potential failure of other members to make additional default fund contributions when called, expected to be greater than the exposure if all default funds had been prefunded Footnote If a part of the CCP's ownfinancialresourcesavailabletocoverlossesisusedafterallclearing members' default fund contributions DF CM are used to cover losses, then this part of the CCP's contribution to losses should be included as part of the total default fund DF.

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If that is not the case and a part of CCP's own financial resources is used in combination, on a pro rata or formulaic basis, with the clearing members' default fund contributions DF CM to cover CCP losses, then this equation needs to be adapted, in consultation with national supervisors, such that this part of CCP contribution is treated just like a clearing member's default fund contribution.

Alternatively, where the above allocation method fails because of the fact that the CCP does not have prefunded default fund contributions, the following hierarchy of conservative allocation method applies:. The CCP, bank, supervisor or other body with access to the required data, must make a calculation of K CCP , DF CM , and DF CCP in such a way to permit the supervisor of the CCP to oversee those calculations, and it must share sufficient information of the calculation results to permit each clearing member to calculate their capital requirement for the default fund and for the bank supervisor of such clearing member to review and confirm such calculations.

K CCP should be calculated on a quarterly basis at a minimum; although national supervisors may require more frequent calculations in case of material changes such as the CCP clearing a new product. The CCP, bank, supervisor or other body that did the calculations should make available to the home supervisor of any bank clearing member sufficient aggregate information about the composition of the CCP's exposures to clearing members and information provided to the clearing member for the purposes of the calculation of K CCP , DF CM , and DF CCP.

Such information should be provided no less frequently than the home bank supervisor would require for monitoring the risk of the clearing member that it supervises. K CCP and K CMi must be recalculated at least quarterly, and should also be recalculated when there are material changes to the number or exposure of cleared transactions or material changes to the financial resources of the CCP.

Banks must apply the Standardised Approach for credit risk in the main framework, according to the category of the counterparty, to their trade exposure to a non-qualifying CCP. For the purposes of this paragraph, the default fund contributions of such banks will include both the funded and the unfunded contributions which are liable to be paid should the CCP so require.

Where there is a liability for unfunded contributions i. The capital requirement for failed trades and non-DvP transactions outlined in this Chapter applies in addition to i. Banks should continue to develop, implement and improve systems for tracking and monitoring the credit risk exposures arising from unsettled and failed transactions as appropriate for producing management information that facilitates action on a timely basis.

Transactions settled through a delivery-versus-payment system DvP Footnote 38 , providing simultaneous exchanges of securities for cash, expose firms to a risk of loss on the difference between the transaction valued at the agreed settlement price and the transaction valued at current market price i. Transactions where cash is paid without receipt of the corresponding receivable securities, foreign currencies, gold, or commodities or, conversely, deliverables were delivered without receipt of the corresponding cash payment non-DvP, or free-delivery expose firms to a risk of loss on the full amount of cash paid or deliverables delivered.

The current rules set out specific capital charges that address these two kinds of exposures. The following capital treatment is applicable to all transactions on securities, foreign exchange instruments, and commodities that give rise to a risk of delayed settlement or delivery. This includes transactions through recognised clearing houses and central counterparties that are subject to daily mark-to-market and payment of daily variation margins and that involve a mismatched trade Footnote Repurchase and reverse-repurchase agreements as well as securities lending and borrowing that have failed to settle are excluded from this capital treatment Footnote In cases of a system wide failure of a settlement, clearing system or central counterparty, a national supervisor may use its discretion to waive capital charges until the situation is rectified.

Failure of a counterparty to settle a trade in itself will not be deemed a default for purposes of credit risk under this guideline.

In applying a risk weight to failed free-delivery exposures, banks using the IRB approach for credit risk may assign PDs to counterparties for which they have no other banking book exposure on the basis of the counterparty's external rating. For DvP transactions, if the payments have not yet taken place five business days after the settlement date, firms must calculate a capital charge by multiplying the positive current exposure of the transaction by the appropriate factor, according to the Table 1 below.

A reasonable transition period may be allowed for firms to upgrade their information system to be able to track the number of days after the agreed settlement date and calculate the corresponding capital charge. For non-DvP transactions i. This means that a bank under the IRB approach will apply the appropriate IRB formula set out in this guideline, for the exposure to the counterparty, in the same way as it does for all other banking book exposures.

Similarly, banks under the standardised approach will use the standardised risk weights set forth in this guideline. For OTC derivative with non-linear risk profiles including options and swaptions , for which the underlying is a debt instrument or a payment leg, the size of the risk position is equal to the delta equivalent effective notional value of the financial instrument or payment leg multiplied by the modified duration of the debt instrument or payment leg. If v is denominated in a currency other than the reference currency, the derivative must be converted into the reference currency by multiplication with the relevant exchange rate.

Return to footnote 1 referrer. Return to footnote 2 referrer. In the present document, the terms "exposure at default" and "exposure amount" are used together in order to identify measures of exposure under both an IRB and a standardised approach for credit risk. Return to footnote 3 referrer.

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Whether the second CCP's collateral contribution to the first CCP is treated as initial margin or a default fund contribution will depend upon the legal arrangement between the CCPs. National supervisors should be consulted to determine the treatment of this initial margin and default fund contributions. Return to footnote 4 referrer. For the purposes of this definition, the current exposure of a clearing member includes the variation margin due to the clearing member but not yet received.

Return to footnote 5 referrer.

Credit Risk Valuation : Methods, Models, and Applications

Transactions for which the probability of default is defined on a pooled basis are not included in this treatment of CCR. Return to footnote 6 referrer. Return to footnote 7 referrer. They do not revise or replace the rules that apply to recognition of netting within the OTC derivatives, repo-style transaction, and margin lending transaction product categories under this guideline. The rules in this guideline continue to apply for purposes of regulatory capital recognition of netting within product categories under IMM or other relevant methodology.

Return to footnote 8 referrer. In theory, the expectations should be taken with respect to the actual probability distribution of future exposure and not the risk-neutral one. Supervisors recognise that practical considerations may make it more feasible to use the risk-neutral one.