SAFCOM/JSE Derivatives: Quantification of the South African Default Fund

44 Pages Posted: 12 Apr 2013

See all articles by Antonie Kotze

Antonie Kotze

Financial Chaos Theory; Department of Finance and Investment Management

Date Written: October 21, 2012

Abstract

Exposure-at-default (EAD) is one of the most interesting and most difficult parameters to estimate in counterparty credit risk (CCR). Basel I offered only the non-internal Current Exposure Method (CEM) for estimating this quantity whilst Basel II further introduced the Standardised Method (SM) and an Internal Model Method (IMM) [Tu 10]. The Basel Committee on Banking Supervision, however, forces Central Counterparties (CCPs) to use the CEM when calculating their exposures to counterparties. We suggest that the CEM can be used in estimating the size of the default fund.

This discussion document explains how the CEM is used in quantifying the default fund. The soundness of the CEM answers is tested by implementing various other methods like Expected Shortfall (ES) and Value-at-Risk (VaR) in this regard. We use actual trading data as supplied by SAFCOM/JSE.

Keywords: Basel III, IOSCO, CEM, Current exposure method, Default fund, Counterparty credit risk, Value at risk, Expected shortfall

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

Suggested Citation

Kotze, Antonie, SAFCOM/JSE Derivatives: Quantification of the South African Default Fund (October 21, 2012). Available at SSRN: https://ssrn.com/abstract=2249135 or http://dx.doi.org/10.2139/ssrn.2249135

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

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