PRA proposed, via CP17/19, changes to the supervisory statement (SS12/13) on counterparty credit risk. The changes are intended to clarify expectations about treatment of model limitations and assumptions under Part Three, Title II, Chapter 6 (counterparty credit risk) of the Capital Requirements Regulation (CRR). The consultation closes on October 25, 2019. PRA proposes that the draft changes to SS12/13 would take effect from the publication of the final policy.
CP17/19 is relevant to all firms to which Capital Requirements Directive (CRD) IV applies. Draft amendments to SS12/13, which add a new chapter (4A), have been set out in the Appendix. The proposed expectations of PRA are related to the following:
- Monitoring of model limitations and assumptions—PRA proposed that all model limitations and assumptions that may affect the output of the internal model method should be included in a single, central inventory, with an assessment of their potential impact on the key model outputs of exposure and capital requirements. PRA proposed that firms should estimate the potential impact of limitations and assumptions on model outputs on a periodic basis and that firms should hold capital against them where the potential impact is material.
- Setting a minimum level for certain exposures in the presence of excess collateral—PRA proposed that firms should consider the model limitations that arise as a result of transactions covered by excess collateral and that, if appropriate, they should hold more capital in respect of these transactions. Having considered various methods to address the issue of increased model risk, PRA proposed that the modeled exposure in the presence of excess collateral should not be lower than the level of a floor. For reasons of simplicity and consistency with the standardized approach, PRA proposed a floor functionally similar to the standardized approach for measuring counterparty credit risk (SA-CCR) multiplier but recalibrated for use in internal model method.
The proposals set out in CP17/19 have been designed in context of the current UK and EU regulatory framework. PRA has assessed that the proposals will not be affected in the event that UK leaves EU with no implementation period in place.
Keywords: Europe, UK, Banking, Counterparty Credit Risk, CRR, CRD IV, CP 17/19, SS 12/13, Internal Models, SA-CCR, Capital Requirements, PRA
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