Part III Investment Banking, 17 Derivatives, Clearing, and Exposures to CCPs

Subject(s):

Credit risk — Derivatives — Securities clearing system — Basel 3 — Basel committee on Banking Supervision

This chapter discusses requirements for derivatives, clearing and exposures to CCPs. In September 2009, as one of the primary policy responses to the crisis, G20 leaders at the Pittsburgh summit decided to promote central clearing of derivatives, and legislation is now in place to provide a framework for compelling banks to do this. However, clearing increases the risk exposures of banks providing that clearing service, since the bank retains the risks arising from the original derivative transaction, and adds to them any risks arising from the clearing process. In general, a bank will measure its derivative exposures using one of three methods: the Internal Model Method; the Standardized Method; or the Current Exposure Method. The risk weight is that which applies to the counterparty under the Standardized Approach (SA) or internal ratings-based approach for credit risk. However, these approaches will be replaced by the SA-CCR under Basel 3.