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
Date Written: May 17, 2013
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: Suggested Citation