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Impact of the new Basel guidelines

Focus: Counterparty Credit Risk

On April 30th, the Basel Committee published new guidelines for the management of counterparty credit risk (CCR) as BCBS 574. Market participants are invited to provide feedback by August 28th, 2024.

Counterparty credit risk refers to the risk of a counterparty defaulting on derivatives or securities financing transactions (SFTs). CCR is driven both by changing market values of transactions as well as declining creditworthiness of counterparties, which poses a complex risk management challenge.

Institutions are requested to base their CCR management on a solid foundation of capabilities and dedicated processes – from the onboarding of new counterparties, through regular monitoring to efficient closeout – emphasizing the importance of reliable technological infrastructure and data management.

Supervisory attention on counterparty credit risk is growing

While credit risk mitigation practices such as daily exchange of variation margin and initial margin are often deemed to widely eliminate CCR, Basel stresses the importance of a more considerate handling, motivated by recent events such as the default of Archegos Capital and the rising volatility on the commodity markets following Russia’s war in Ukraine in 2022.

We generally see increased focus on the topic, not least since the European Central Bank published its “Sound Practices in CCR Governance and Management” last year, preceded by an extensive, targeted horizontal review and making CCR an explicit priority in 2022. Active contribution to BCBS 574 by competent authorities (e.g. FINMA) and former publications on the topic (e.g. PRA and FI) demonstrate that CCR management is of great supervisory importance in all jurisdictions.

The six segments of CCR management according to BCBS 574

In view of rising supervisory expectations, it is advisable to thoroughly assess and understand the impact of BCBS 574 on CCR measurement, mitigation, limitation, and reporting in your institution. For a first step, please consult our cheat sheet, which focuses on the most important aspects of the six segments of the Basel guidelines:

  • Due diligence and monitoring
  • Credit risk mitigation
  • Exposure measurement
  • Governance
  • Infrastructure, data, and risk systems
  • Closeout practices

Please find our cheat sheet for download at the top.