| 105. | Calculation of the aggregate CCR and CVA risk capital charges for 6.1.A IMM and 6.1.b (Standardized Approach)
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As a summary, total counterparty exposure is an aggregate of 1) Default Rate calculated either through IMM, CEM or Standardized Approach and 2) Credit Value Adjustment which again can be calculated as per the IMM or Standardized Approach or CEM.
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This paragraph deals with the aggregation of the default risk capital charge and the CVA risk capital charge for potential mark-to-market losses. Note that outstanding EAD referred to in the default risk capital charges below is net of incurred CVA losses according to [new paragraph after Para 9 in Annex 4],1 which affects all items “i” below. In this paragraph, “IMM capital charge” refers to the default risk capital charge for CCR based on the RWAs obtained when multiplying the outstanding EAD of each counterparty under the IMM approach by the applicable credit risk weight (under the Standardized or IRB approach), and summing across counterparties. Equally, Current Exposures Method “(CEM) capital charge” or “SM capital charge” refer to the default risk capital charges where outstanding EADs for all counterparties in the portfolio are determined based on CEM or SM, respectively.
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| A. | Banks with IMM approval and market-risk internal-models approval for the specific interest-rate risk of bonds |
The total CCR capital charge for such a bank is determined as the sum of the following components:
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| i. | The higher of (a) its IMM capital charge based on current parameter calibrations for EAD and (b) its IMM capital charge based on stressed parameter calibrations for EAD. For IRB banks, the risk weights applied to OTC derivative exposures should be calculated with the full maturity adjustment as a function of PD and M set equal to 1 in the Basel Accord (paragraph 272), provided the bank can demonstrate to SAMA its specific VaR model applied in paragraph 98 contains effects of rating migrations. If the bank cannot demonstrate this to the satisfaction of SAMA, the full maturity adjustment function, given by the formula (1 – 1.5 x b)^-1 × (1 + (M – 2.5) × b)2 should apply.
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| ii. | The advanced CVA risk capital charge determined pursuant to paragraphs 98 to 103.
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| B. | Banks with IMM approval and without Specific Risk VaR approval for bonds The total CCR capital charge for such a bank is determined as the sum of the following components: |
| i. | The higher of (a) the IMM capital charge based on current parameter calibrations for EAD and (b) the IMM capital charge based on stressed parameter calibrations for EAD.
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| ii. | The standardized CVA risk capital charge determined by paragraph 104.
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| C. | All other banks |
The total CCR capital charge for such banks is determined as the sum of the following two components:
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| i. | The sum over all counterparties of the CEM or SM based capital charge (depending on the bank’s CCR approach) with EADs determined by paragraphs 91or 69 respectively.
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| ii. | The standardized CVA risk capital charge determined by paragraph 104.
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In addition, the following paragraph will be inserted after paragraph 9 in Annex 4.1
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“Outstanding EAD” for a given OTC derivative counterparty is defined as the greater of zero and the difference between the sum of EADs across all netting sets with the counterparty and the credit valuation adjustment (CVA) for that counterparty which has already been recognized by the bank as an incurred write-down (i.e. a CVA loss). This CVA loss is calculated without taking into account any offsetting debit valuation adjustments which have been deducted from capital under paragraph 75.3 RWAs for a given OTC derivative counterparty may be calculated as the applicable risk weight under the Standardized or IRB approach multiplied by the outstanding EAD of the counterparty. This reduction of EAD by incurred CVA losses does not apply to the determination of the CVA risk capital charge.
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1 Annex 5 of this document.
2 Where “M” is the effective maturity and “b” is the maturity adjustment as a function of the PD, as defined in paragraph 272 of the Basel Accord.
3 The incurred CVA loss deduced from exposures to determine outstanding EAD is the CVA loss gross of all debit value adjustments (DVA) which have been separately deducted from capital. To the extent DVA has not been separately deducted from a bank’s capital, the incurred CVA loss used to determine outstanding EAD will be net of such DVA.
