Journal of Credit Risk

Risk.net

Credit exposure under the new standardized approach for counterparty credit risk: fixing the treatment of equity options

Michael Kratochwil

  • The paper addresses issues of the new standardized approach for Counterparty Credit Risk (SA-CCR) regarding the treatment of equity options and explores measures for improvement.
  • We show that the calibration of the SA-CCR for equities is overly conservative and does not align with historically observed volatilities.
  • A recalibration and alignment of the SA-CCR supervisory parameters for equity derivatives with the standardized approach for market risk (SA-TB) improves risk sensitivity.
  • We provide empirical evidence, that the incorporation of economic delta adjustments for path-dependent options should be considered by regulators.

The new standardized approach for measuring counterparty credit risk exposures (SA-CCR) will replace the existing regulatory standard methods for exposure quantification. There is ongoing discussion with respect to the calibration and appropriate treatment of nonlinear products under the SA-CCR. The calibration of supervisory parameters for equity derivatives has been a particular bone of contention. Further, the SA-CCR struggles with the adequate reflection of nonstandard options. Our paper provides empirical evidence that the SA-CCR parameters are not aligned with historically observed volatilities.We explore a potential alignment of the SA-CCR with the new standardized approach for market risk (SA-TB) as well as the application of economic delta adjustments for path-dependent equity products. Our results demonstrate that an alignment of SA-CCR and the SA-TB could lead to a significantly improved risk assessment for equity derivatives.

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