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Basel Committee’s Final Capital Standards for Bank Exposures to Central Counterparties (CCPs)

[Update:  We have prepared a blackline (available here) of the April 2014 final standards vs. the July 2012 interim standards.]  The Basel Committee has finalized its risk-based capital standards for bank exposures to central counterparties (CCPs).  The final standards will take effect on January 1, 2017. The interim standards that were published in July 2012 will continue to apply until that time.

Like the interim standards, the final standards distinguish between trade exposures and default fund exposures to CCPs and distinguish between exposures to qualifying CCPs (QCCPs) and non-QCCPs.  A QCCP is an entity that is licensed to operate as a CCP (including a license granted by way of confirming an exemption), and is permitted by the appropriate regulator/overseer to operate as such with respect to the products offered. This is subject to the provision that the CCP is based and prudentially supervised in a jurisdiction where the relevant regulator/overseer has established, and publicly indicated that it applies to the CCP on an ongoing basis, domestic rules and regulations that are consistent with the CPSS-IOSCO Principles for Financial Market Infrastructures.

Comparison with July 2012 Interim Standards

The final standards for bank exposures to CCPs retain many of the features from the interim standards, including the key definitional terms, scope of application, treatment of trade exposures to QCCPs, and the capital requirements for bank exposures to non-qualifying CCPs.   The final standards differ from the interim standards by:

  • Including a single approach for calculating capital requirements for a bank’s exposure that arises from its contributions to the mutualized default fund of a QCCP;
  • Employing the newly established standardized approach for counterparty credit risk (SA-CCR) [Davis Polk’s summary of the SA-CCR is available here], as opposed to the current exposure method (CEM), to measure the hypothetical capital requirement of a CCP;
  • Including an explicit cap on the capital charges applicable to a bank’s exposures to a QCCP — those charges will not exceed the charges that would otherwise be applicable if the CCP were a non-QCCP;
  • Specifying how to treat multi-level client structures whereby an institution clears its trades through intermediaries linked to a CCP; and
  • Incorporating responses to frequently asked questions posed to the Basel Committee

View Blackline of April 2014 Final Standards vs. July 2012 Interim Standards

Materials:  Basel Committee, Capital requirements for bank exposures to central counterparties – final standard (Apr. 2014) available here:  http://www.bis.org/publ/bcbs282.pdf

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