| 7.6. | CCR exposure or EAD is measured at the level of the netting set as defined in Chapter 4 of this framework and 7.61 to 7.71 of this framework. A qualifying internal model for measuring counterparty credit exposure must specify the forecasting distribution for changes in the market value of the netting set attributable to changes in market variables, such as interest rates, foreign exchange rates, etc. The model then computes the bank’s CCR exposure for the netting set at each future date given the changes in the market variables. For margined counterparties, the model may also capture future collateral movements. Banks may include eligible financial collateral as defined in 9.37 of the Minimum Capital Requirements for Credit Risk and 9.2 of this framework in their forecasting distributions for changes in the market value of the netting set, if the quantitative, qualitative and data requirements for internal models method are met for the collateral.
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| 7.7. | Banks that use the internal models method must calculate credit RWA as the higher of two amounts, one based on current parameter estimates and one based on stressed parameter estimates. Specifically, to determine the default risk capital requirement for counterparty credit risk, banks must use the greater of the portfolio-level capital requirement (not including the credit valuation adjustment, or CVA, charge in Chapter 11 of this Framework) based on Effective expected positive exposure (EPE) using current market data and the portfolio level capital requirement based on Effective EPE using a stress calibration.24 The stress calibration should be a single consistent stress calibration for the whole portfolio of counterparties. The greater of Effective EPE using current market data and the stress calibration should not be applied on a counterparty by counterparty basis, but on a total portfolio level.
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| 7.8. | To the extent that a bank recognizes collateral in EAD via current exposure, a bank would not be permitted to recognize the benefits in its estimates of loss given-default (LGD). As a result, the bank would be required to use an LGD of an otherwise similar uncollateralized facility. In other words, the bank would be required to use an LGD that does not include collateral that is already included in EAD.
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| 7.9. | Under the internal models method, the bank need not employ a single model. Although the following text describes an internal model as a simulation model, no particular form of model is required. Analytical models are acceptable so long as they are subject to supervisory review, meet all of the requirements set forth in this section and are applied to all material exposures subject to a CCR-related capital requirement as noted above, with the exception of long settlement transactions, which are treated separately, and with the exception of those exposures that are immaterial in size and risk.
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| 7.10. | Expected exposure or peak exposure measures should be calculated based on a distribution of exposures that accounts for the possible non-normality of the distribution of exposures, including the existence of leptokurtosis (“fat tails”), where appropriate.
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| 7.11. | When using an internal model, exposure amount or EAD is calculated as the product of alpha times Effective EPE, as specified below (except for counterparties that have been identified as having explicit specific wrong way risk – see 7.48):
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| | EAD = α × EffectiveEPE (Equation 1)
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| 7.12. | Effective EPE is computed by estimating expected exposure (EEt) as the average t exposure at future date t, where the average is taken across possible future values of relevant market risk factors, such as interest rates, foreign exchange rates, etc. The internal model estimates EE at a series of future dates t1, t2, t3 ...25 Specifically, “Effective EE” is computed recursively using the following formula, where the current date is denoted as t0 and Effective EEt0 equals current exposure:
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| | EffectiveEEtk = max(EffectiveEEtk-1, EEtk (Equation 2)
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| 7.13. | In this regard, “Effective EPE” is the average Effective EE during the first year of future exposure. If all contracts in the netting set mature before one year, EPE is the average of expected exposure until all contracts in the netting set mature. Effective EPE is computed as a weighted average of Effective EE, using the following formula where the weights Δtk= tk - tk-1 allows for the case when future exposure is calculated at dates that are not equally spaced over time:
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| 7.14. | Alpha (α) is set equal to 1.4.
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| 7.15. | SAMA may require a higher alpha based on a bank’s CCR exposures. Factors that may require a higher alpha include the low granularity of counterparties; particularly high exposures to general wrong-way risk; particularly high correlation of market values across counterparties; and other institution specific characteristics of CCR exposures.
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