Technical Appendix To: From SA-CCR to RSA-CCR: Making SA-CCR Self-Consistent and Appropriately Risk-Sensitive by Cashflow Decomposition in a 3-Factor Gaussian Market Model

Abstract

The full-text version of this paper can be found at: https://ssrn.com/abstract=3329538.

SA-CCR has major issues including: lack of self-consistency for linear trades; lack of appropriate risk sensitivity (zero positions can have material add-ons; moneyness is ignored); dependence on economically-equivalent confirmations. We show that SA-CCR is, by re-construction, based on a 3-factor Gaussian Market Model with particular calibration to volatility and inter-bucket correlation structure. Hence we proposed RSA-CCR (Berrahoui, Islah and Kenyon, 2019) based on cashflow decomposition and this 3-factor Gaussian Market Model. RSA-CCR solves the issues with SA-CCR for linear trades and is calibrated to SA-CCR apart from avoiding SA-CCR's issues.

This Technical appendix provides background material, proofs and technical details behind RSA-CCR not present in the source paper (Berrahoui, Islah and Kenyon 2019). There is some duplication to make this appendix more readable.

Keywords: Capital, Regulation, SA-CCR, Counterparty Credit Risk, Basel III

JEL Classification: C60, K23, G01, G10, G18, G38