- Credit risk — Derivatives — Financial regulation
This chapter sets out rules that result in certain exposures being treated as having a greater degree of risk than their actual mark to market value. In order to explain this, consider a bank which owns 100 of shares in A, but also has a derivative in place with X under which it is entitled to be paid the value of 100 shares in A. Both positions give rise to the same risk as to the future price of A, and both will be valued by reference to the value of the shares in A. However, if the value of the shares in A increases, the bank's credit exposure to X will increase. The rules set out in this chapter seek to capture this extra level of risk by treating the value of the derivative as being slightly higher than its mark to market value; thereby requiring a slightly higher level of capital to be held against it. This is the counterparty credit risk requirement (CCR).
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