Hi
According to the International Convergence of Capital Measurement and Capital Standards - A Revised Framework
- Comprehensive Version: paragraph 707:
707. The counterparty credit risk charge for single name credit derivative transactions in
the trading book will be calculated using the following potential future exposure add-on
factors:
There will be no difference depending on residual maturity.
The definition of “qualifying” is the same as for the “qualifying” category for the treatment of
specific risk under the standardised measurement method in paragraph 711(i) and 711(ii).
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** The protection seller of a credit default swap shall only be subject to the add-on factor where
it is subject to closeout upon the insolvency of the protection buyer while the underlying is still
solvent. Add-on should then be capped to the amount of unpaid premiums.
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1) I'd like to understand the rationale behing the last part (in red above) of paragraph 707. Why the add-on factor will be used only by the protection seller if there is a closeout clause ? In this case, the counterparty credit risk for the protection seller will be EAD = MtM + Add-on amount ?
2) If the contract does not have a closeout clause, it means that the counterparty risk in this case will be the MtM value ?
3)
According to the International Convergence of Capital Measurement and Capital Standards - A Revised Framework
- Comprehensive Version: paragraph 707:
707. The counterparty credit risk charge for single name credit derivative transactions in
the trading book will be calculated using the following potential future exposure add-on
factors:
There will be no difference depending on residual maturity.
The definition of “qualifying” is the same as for the “qualifying” category for the treatment of
specific risk under the standardised measurement method in paragraph 711(i) and 711(ii).
----------------------------------------------------------------------------------------------------------------------------------
** The protection seller of a credit default swap shall only be subject to the add-on factor where
it is subject to closeout upon the insolvency of the protection buyer while the underlying is still
solvent. Add-on should then be capped to the amount of unpaid premiums.
--------------------------------------------------------------------------------------------------------------------------------------
1) I'd like to understand the rationale behing the last part (in red above) of paragraph 707. Why the add-on factor will be used only by the protection seller if there is a closeout clause ? In this case, the counterparty credit risk for the protection seller will be EAD = MtM + Add-on amount ?
2) If the contract does not have a closeout clause, it means that the counterparty risk in this case will be the MtM value ?
3)
