Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial Markets, 2nd Edition

17.5 Central Counterparties

The capital requirements for exposures to central counterparties (CCPs) have been outlined separately from the standard Basel III requirements.⁴⁶ Whilst CCPs are viewed as being of strong creditworthiness, it was viewed as important that exposures to them were not given zero capitalisation, as under Basel II. Clearly, a zero capital charge would create moral hazard problems and lead to the assumption that a CCP would never fail, even if this meant being bailed out as other financial institutions were in 2008.

17.5.1 Trade- and Default Fund-related Exposures

The capitalisation of an exposure to a central counterparty is complex as there are a variety of different financial resources that are at risk when trading with a CCP, such as initial margins and default (or reserve) fund contributions (Section 7.2.5). In addition, the BCBS make distinctions between different CCPs, which will have different levels of riskiness.

There are two types of exposure to a CCP that need capitalising, so-called trade-related and default fund-related. Trade-related exposures arise from the current mark-to-market exposure and both initial and variation margin contributions. Such an exposure is only at risk in case of the CCP failure (not the failure of other CCP members) and it is this component that is given the relatively low risk weight of 2% for a qualifying CCP.⁴⁷

It is the capitalisation of the default fund (described as the reserve fund previously in Chapter 7) that is ...