Standardized approach (counterparty credit risk)
The Standardized approach for counterparty credit risk is the capital requirement framework under Basel III addressing counterparty risk.
It was published by the Basel Committee in March 2014.
The framework replaced both non-internal model approaches: the current exposure method and the standardised method.
It is intended to be a "risk-sensitive methodology", i.e. conscious of asset class and hedging, that differentiates between margined and non-margined trades and recognizes netting benefits; considerations insufficiently addressed under the preceding frameworks.
SA-CCR calculates the exposure at default of derivatives and "long-settlement transactions" exposed to counterparty credit risk.
It builds EAD as a "Replacement Cost", were the counterparty to default today; combined with an "Add On" with its appropriate multiplier, essentially potential future exposure.
For the former: exposure is aggregated by counterparty, and then netted-off with haircutted- collateral.
For the latter: per asset class, trade exposures - as reduced by hedging - are aggregated to “hedging sets”; these are then aggregated to "netting sets", and offset by the counterparty's collateral.
The SA-CCR EAD is an input to the bank's regulatory capital calculation where it is combined with the counterparty's PD and LGD to derive RWA;
banks thus incorporate SA-CCR into their KVA calculations.
Because of its two-step aggregation, capital allocation between trading desks is challenging; thus making it difficult to fairly calculate each desk's Risk-adjusted return on capital. Various methods are then proposed here.
SA-CCR is also input to other regulations such as the leverage ratio and the net stable funding ratio.
