Current Exposure Method for CCP's Under Basel III

Risk Governance and Control: Financial Markets & Institutions, Volume 3, 2013

Posted: 11 Apr 2013 Last revised: 1 Jul 2013

See all articles by Antonie Kotze

Antonie Kotze

Financial Chaos Theory; Department of Finance and Investment Management

Paul du Preez

Johannesburg Securities Exchange

Date Written: May 17, 2013

Abstract

Exposure-at-default is one of the most interesting and most difficult parameters to estimate in counterparty credit risk. Basel I offered only the non-internal Current Exposure Method for estimating this quantity whilst Basel II further introduced the Standardized Method and an Internal Model Method. Under new Basel III rules a central counterparty is defined as being a financial institution. New principles set out by the Basel Committee on Banking Supervision forces Central Counterparties in using the Current Exposure Method when estimating the credit exposures to Clearing Member banks notwithstanding its shortcomings. The Current Exposure Method relies on the Value-at-Risk methodology and its characteristics are discussed in this note. We will particularly investigate exposures to SAFCOM, the South African clearing house and point to a mathematical discrepancy on how netting is effected through the Basel accord.

Keywords: Exposure at default, CEM, Current Exposure Method, Value at Risk, VaR, Counterparty Credit Risk, CCR, Central Counterparty, CCP, Basel, Basel III, Internal Model Methods

JEL Classification: C15, E44, G15, G18, G21, G28

Suggested Citation

Kotze, Antonie and du Preez, Paul, Current Exposure Method for CCP's Under Basel III (May 17, 2013). Risk Governance and Control: Financial Markets & Institutions, Volume 3, 2013. Available at SSRN: https://ssrn.com/abstract=2249132 or http://dx.doi.org/10.2139/ssrn.2249132

Antonie Kotze (Contact Author)

Financial Chaos Theory ( email )

PO Box 16185
Doornfontein, 2028
South Africa

HOME PAGE: http://www.quantonline.co.za/

Department of Finance and Investment Management ( email )

PO Box 524
Auckland Park
Johannesburg, Gauteng 2006
South Africa

HOME PAGE: http://www.uj.ac.za

Paul Du Preez

Johannesburg Securities Exchange ( email )

United States

HOME PAGE: http://www.jse.co.za

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