| 5.6. | For the transaction types listed in 5.3 above, banks must calculate their counterparty credit risk exposure, or exposure at default (EAD),3 using one of the methods set out in 5.7 to 5.8 below. The methods vary according to the type of the transaction, the counterparty to the transaction, and whether the bank has received SAMA approval to use the method (if such approval is required).
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| 5.7. | For exposures that are not cleared through a central counterparty (CCP) the following methods must be used to calculate the counterparty credit risk exposure:
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| | (1) | Standardized approach for measuring counterparty credit risk exposures (SACCR), which is set out in Chapter 6 of this framework. This method is to be used for exposures arising from OTC derivatives, exchange-traded derivatives and long settlement transactions. This method must be used if the bank does not have approval to use the internal models method (IMM).
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| | (2) | The simple approach or comprehensive approach to the recognition of collateral, which are both set out in the credit risk mitigation chapter of the standardized approach to credit risk (see Chapter 9 on the mitigation techniques for exposures risk-weighted under the standardized approach of the Minimum Capital Requirements for Credit Risk). These methods are to be used for securities financing transactions (SFTs) and must be used if the bank does not have approval to use the IMM.
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| | (3) | The value-at-risk (VaR) models approach, which is set out in paragraphs 73-76 of Chapter 9 of the Minimum Capital Requirements for Credit Risk. For banks applying the IRB approach to credit risk, the VaR models approach may be used to calculate EAD for SFTs, subject to SAMA approval, as an alternative to the method set out in (2) above.
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| | (4) | The IMM, which is set out in Chapter 7 of this framework. This method may be used, subject to SAMA approval, as an alternative to the methods to calculate counterparty credit risk exposures set out in (1) and (2) above (for all of the exposures referenced in those bullets).
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| 5.8. | For exposures that are cleared through a CCP, banks must apply the method set out Chapter 8 of this framework. This method covers:
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| | (1) | the exposures of a bank to a CCPs when the bank is a clearing member of the CCP;
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| | (2) | the exposures of a bank to its clients, when the bank is a clearing members and act as an intermediary between the client and the CCP; and
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| | (3) | the exposures of a bank to a clearing member of a CCP, when the bank is a client of the clearing member and the clearing member is acting as an intermediary between the bank and the CCP.
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| 5.9. | Exposures to central counterparties arising from the settlement of cash transactions (equities, fixed income, spot foreign exchange and spot commodities), are excluded from the requirements of Chapter 8 of this framework. They are instead subject to the requirements of chapter 25 of the Minimum Capital Requirements for Credit Risk.
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| 5.10. | Under the methods outlined above, the exposure amount or EAD for a given counterparty is equal to the sum of the exposure amounts or EADs calculated for each netting set with that counterparty, subject to the exception outlined in 5.11 below.
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| 5.11. | The exposure or 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 the Regulatory Adjustments or “Filter” chapter of Section A of SAMA's Final Guidance Document Concerning Implementation of Capital Reforms Under Basel III Framework4. This reduction of EAD by incurred CVA losses does not apply to the determination of the CVA risk capital requirement.
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