RBI Widens Counterparty Credit Risk Capital Charge to More Derivatives
Why in the news
The Reserve Bank of India proposed a wider capital charge for Counterparty Credit Risk (CCR), bringing equity derivatives, precious metals (except gold) and other commodity derivatives into scope.
Key facts
- Present coverage: interest rate and exchange rate contracts and derivatives.
- Proposal: add equity, precious-metal (non-gold) and commodity derivatives, with credit conversion factors (CCF) to ensure adequate capital.
- Reasons: match Basel Committee (BCBS) guidance and reflect market changes since August 2008.
- Impact: clearing members of SEBI-recognised exchanges in equity and commodity derivatives must hold a CCR capital charge.
About CCR
- Risk that the other side of a trade fails its obligations before final settlement.
- Arises in derivatives (swaps, options, futures), securities lending and repo deals.
- Unlike plain credit risk (borrower default on a loan), the default can occur during the contract’s life.
Two kinds of loss
| Type | Meaning |
|---|---|
| Replacement cost | Cost of substituting the deal after a default, at prevailing prices |
| Potential Future Exposure (PFE) | Likely future loss as markets move during the contract |
Exam angle
- Regulator: RBI; global standard-setter: BCBS.
- CCR matters for capital adequacy.
- Excluded metal: gold.