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Counterparty credit risk: Difference between revisions
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movement of underlying market factors.}} | movement of underlying market factors.}} | ||
==Section I: Definitions and general terminology== | |||
Transaction types include: | Transaction types include: | ||
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Netting Sets: | Netting Sets: | ||
{{box|Netting Set is a group of transactions with a single counterparty that are subject to a legally enforceable [[bilateral netting arrangement]] and for which netting is recognised for {{tag|Regulatory Capital}} purposes under the provisions of paragraphs 96(i) to 96(v) of this Annex, this Framework text on credit risk mitigation techniques, or the Cross-Product Netting Rules set forth in this Annex. ''Each transaction that is not subject to a legally enforceable bilateral netting arrangement that is recognised for regulatory capital purposes should be interpreted as its own netting set for the purpose of these rules''.}} | {{box|Netting Set is a group of transactions with a single counterparty that are subject to a legally enforceable [[bilateral netting arrangement]] and for which netting is recognised for {{tag|Regulatory Capital}} purposes under the provisions of paragraphs 96(i) to 96(v) of this Annex, this Framework text on credit risk mitigation techniques, or the Cross-Product Netting Rules set forth in this Annex. '''''Each transaction that is not subject to a legally enforceable bilateral netting arrangement that is recognised for regulatory capital purposes should be interpreted as its own netting set for the purpose of these rules'''''.}} | ||
The interpretation of the italicised section is key. | The interpretation of the italicised section is key. | ||
==Section II: Scope of Application == | |||
This section provides that "The methods for computing the exposure amount under the standardised approach for credit risk or {{tag|EAD}} under the [[internal ratings-based]] ({{tag|IRB}}) approach to credit risk described in this Annex are applicable to {{tag|SFT}}s and {{tag|OTC}} derivatives. | |||
{{box|Such instruments generally exhibit the following abstract characteristics: | |||
*The transactions generate a current exposure or market value. | |||
*The transactions have an associated random future market value based on market variables. | |||
*The transactions generate an exchange of payments or an exchange of a financial instrument (including commodities) against payment. | |||
*The transactions are undertaken with an identified counterparty against which a unique probability of default can be determined.}} | |||
{{Box|Other common characteristics of the transactions to be covered may include the | |||
following: | |||
*Collateral may be used to mitigate risk exposure and is inherent in the nature of some transactions. | |||
*Short-term financing may be a primary objective in that the transactions mostly consist of an exchange of one asset for another (cash or securities) for a relatively short period of time, usually for the business purpose of financing. '''''The two sides of the transactions are not the result of separate decisions but form an indivisible | |||
whole to accomplish a defined objective'''''. | |||
*Netting may be used to mitigate the risk. | |||
*Positions are frequently valued (most commonly on a daily basis), according to market variables. | |||
• Remargining may be employed.}} | |||
{{bipruanatomy}} | {{bipruanatomy}} | ||