Basel Committee consults on derivatives-related reforms to capital adequacy framework

The Basel Committee today released two consultative papers on the treatment of derivatives-related transactions under the capital adequacy framework.

The non-internal model method for capitalising counterparty credit risk exposures outlines a proposal to improve the methodology for assessing the counterparty credit risk associated with derivative transactions. The proposal would, when finalised, replace the capital framework's existing methods - the Current Exposure Method (CEM) and the Standardised Method. It improves on the risk sensitivity of the CEM by differentiating between margined and unmargined trades. The proposed non-internal model method updates supervisory factors to reflect the level of volatilities observed over the recent stress period and provides a more meaningful recognition of netting benefits. At the same time, the proposed method is suitable for a wide variety of derivatives transactions, reduces the scope for discretion by banks and avoids undue complexity.

Capital treatment of bank exposures to central counterparties sets out proposals for calculating regulatory capital for a bank's exposures to central counterparties (CCPs). This proposal has been developed in close cooperation with the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO). It is designed to replace an interim treatment for bank exposures to CCPs issued by the Basel Committee in July 2012.

Stefan Ingves, Chairman of the Basel Committee and Governor of Sveriges Riksbank, said "these two proposals continue the Committee's work to finalise the post-crisis overhaul of the capital framework, as well as contributing to broader G20 efforts to encourage central clearing and so improve the resilience of derivatives markets."

The Basel Committee welcomes comments on this consultative document. Comments on the proposals should be submitted by Friday 27 September 2013 by e-mail to: baselcommittee@bis.org. Alternatively, comments may be sent by post to: Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the website of the Bank for International Settlements unless a comment contributor explicitly requests confidential treatment.