Standardised Approach for Counterparty Credit Risk

SUMMARY

The client, a major banking group specialised in the provision of online banking and trading services, was in the process of launching new derivative products for its retail clients and required assistance with calculating the capital requirements for counterparty credit risk under the new standardised approach. This project was a continuation of similar work which Avantage Reply performed prior for this client, regarding the mark-to-market approach.

CUSTOMER GOALS

With limited time until the new CRR2 would come into force, the bank wanted to understand the exact steps and processes involved in calculating the following:

• How to apply the Standardised Approach for Counterparty Credit Risk (SA-CCR) for the new derivative products?
• How to calculate the Credit Valuation Adjustment (CVA) charge for the new products?

CHALLENGES

The main challenges were two-fold:

• The products had not been finalised at the time of the engagement, so a number of assumptions had to be made of the final state and processes to be conducted by the bank;
• In order to give the bank enough time to implement the calculations before the CRR2 implementation deadline, the team had to deliver a month worth of work into just two weeks.

SOLUTION

The team had delivered the following:

• A comprehensive excel tool showcasing the calculation steps for a variety of risk categories (i.e. FX, equity, commodity, interest rate);
• A detailed explanatory memo describing each step of the calculation, the reasoning and assumptions behind it;
• A workshop to answer any additional questions from the client.