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

17.6 Summary

In this chapter we have described regulatory approaches to counterparty risk, in particular focusing on the regulatory capital requirements according to the Basel II and III guidelines. We have considered the different approaches available to compute counterparty risk capital charges, from the simple add-on rules to the more sophisticated internal model approach, to estimating capital based on EPE multiplied by a factor known as alpha. We have discussed repo-style transactions and the treatment of collateral within the various approaches of the Basel II framework. The treatment of double default effects of hedged (or partially hedged) exposures has also been examined. The more recent requirements of Basel III have also been addressed. This includes large additions to the capital framework, such as capitalisation of CVA volatility and exposures to central counterparties. Basel III also contains many smaller changes to the regulatory regime, such as stressed EEPE and backtesting requirements, which have been covered in detail.

We have now discussed all the important aspects of counterparty credit risk, CVA and related subjects. The next chapter deals with the role of the CVA desk within an institution. This is the group with the responsibility to combine the many aspects to achieve the optimal management of counterparty risk and CVA under the many constraints such as an institution's risk appetite, risk mitigants, funding, accounting rules and regulatory capital requirements. ...