SAFCOM/JSE Derivatives: Quantification of the South African Default Fund
44 Pages Posted: 12 Apr 2013
Date Written: October 21, 2012
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: Suggested Citation