Basel III counterparty credit risk - Frequently asked questions

An updated version of this document was published in December 2012. http://www.bis.org/publ/bcbs237.htm Basel Committee on Banking Supervision Basel III counterparty credit risk - Frequently asked questions November 2012 (update of FAQs published in July 2012) An updated version of this document was published in December 2012. http://www.bis.org/publ/bcbs237.htm An updated version of this document was published in December 2012. http://www.bis.org/publ/bcbs237.htm This publication is available on the BIS website ( www.bis.org ). © Bank for International Settlements 2012. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN print: 92-9131-177-4 ISBN web: 92-9197-177-4 An updated version of this document was published in December 2012. http://www.bis.org/publ/bcbs237.htm An updated version of this document was published in December 2012.

http://www.bis.org/publ/bcbs237.htm Contents 1. Default counterparty credit risk charge .......................................................................... 1 1a. Effective Expected Positive Exposure (EPE) with stressed parameters ............... 1 1b. Collateralised counterparties and margin period of risk ........................................ 3 1c. Specific wrong-way risk ....................................................................................... 5 2. Credit Valuation Adjustment (CVA) risk capital charge.................................................. 5 2a. Standardised CVA capital charge ........................................................................ 7 2b. Advanced CVA capital charge ............................................................................. 8 2c. Eligible hedges .................................................................................................. 10 2d. Treatment of incurred CVA ................................................................................ 11 3. Asset value correlations .............................................................................................. 12 4. Other questions: ......................................................................................................... 13 Basel III counterparty credit risk - Frequently asked questions An updated version of this document was published in December 2012. http://www.bis.org/publ/bcbs237.htm An updated version of this document was published in December 2012. http://www.bis.org/publ/bcbs237.htm Basel III counterparty credit risk - Frequently asked questions The Basel Committee on Banking Supervision has received a number of interpretation questions related to the 16 December 2010 publication of the Basel III regulatory frameworks for capital and liquidity. To help ensure a consistent global implementation of Basel III, the Committee has agreed to periodically review frequently asked questions and publish answers along with any technical elaboration of the rules text and interpretative guidance that may be necessary. This document sets out the third set of frequently asked questions that relate to the 1 counterparty credit risk sections of the Basel III rules text. The questions and answers are grouped according to different relevant areas. FAQs that have been added since the publication of the previous version of this document are shaded yellow. 1. Default counterparty credit risk charge 1.1 With respect to identifying eligible hedges to the CVA risk capital charge, the Basel III provisions state that “tranched or nth-to-default CDSs are not eligible CVA hedges” (Basel III document, paragraph 99 - inserting paragraph 103 in Annex 4 of the Basel framework). Can the Basel Committee confirm that this does not refer to tranched CDS referencing a firm’s actual counterparty exposures and refers only to tranched index CDS hedges? Also, can the Committee clarify that Risk Protection Agreements, credit linked notes (CLN), short bond positions as credit valuation adjustment (CVA) hedges, and First Loss on single or baskets of entities can be included as eligible hedges? All tranched or nth-to-default credit default swaps (CDS) are not eligible. In particular, credit linked notes and first loss are also not eligible. Single name short bond positions may be eligible hedges if the basis risk is...

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