NOVARUM :: Counterparty Credit Risk

Counterparty Credit Risk

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Counterparty credit risk managers use a variety of CCR metrics drawn from the expected and maximum positive exposure profiles to measure the magnitude of credit utilization, calculate CVA, and report regulatory RWAs.

Given that the future magnitude of CCR is uncertain, counterparty credit risk managers use current, expected, and potential risk metrics to measure credit utilization. These include:

• Current replacement cost, assuming an immediate event of default by the counterparty;

• Peak expected positive exposure, defined as the global maximum of the average positive simulated replacement costs; and

• Peak maximum positive exposure, defined as the global maximum of the maximum positive simulated replacement costs.

Under U.S. GAAP and IAS accounting rules, CVA is calculated by applying the implied market credit spread of the counterparty to the expected positive exposure profile.

Under the Basel II Capital Accords, CCR is expressed as the weighted average of EPE through time, with RWAs determined by multiplying the EPE by a risk weighting reflecting the creditworthiness of the counterparty.

The variety of metrics used to report CCR underscores the complexity of this unique category of retained credit risk.