Banks Act, 1990 (Act No. 94 of 1990)

Regulations

Regulations relating to Banks

Chapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof

23. Credit risk: monthly return

Directives and interpretations for completion of monthly return concerning credit risk (Form BA 200)

Subregulation (19) Calculation of counterparty credit exposure in terms of the internal model method

Subregulation (19)(h) Matters related to minimum required capital and reserve funds for credit valuation adjustments (CVA) for a bank that obtained approval for the internal model method for the measurement of the bank's exposure to counterparty credit risk and the internal models approach for the measurement of specific risk as part of the bank's exposure to market risk

Purchase

(h)

Matters related to minimum required capital and reserve funds for credit valuation adjustments (CVA) for a bank that obtained approval for the internal model method for the measurement of the bank's exposure to counterparty credit risk and the internal models approach for the measurement of specific risk as part of the bank's exposure to market risk

(i)

A bank that obtained the approval of the Registrar for the use of the internal model method for the measurement of the bank's exposure to counterparty credit risk and the internal models approach for the measurement of specific risk as part of the bank's exposure to market risk shall calculate the relevant additional required amount of capital and reserve funds by modelling the impact of changes in the counterparties' credit spreads on the CVAs of all relevant OTC derivative counterparties, together with all relevant eligible CVA hedges, using the bank's value-at-risk (VaR) model for bonds, which VaR model is restricted to changes in the counterparties' credit spreads and does not model the sensitivity of CVA to changes in other market factors, such as changes in the value of the reference asset, commodity, currency or interest rate of a derivative, provided that—

(A)

regardless of its accounting valuation method used to determine CVA, the additional required amount of capital for CVA shall for each relevant counterparty be based on the formula specified below, in which formula the first factor within the sum represents an approximation of the market implied marginal probability of a default occurring between times t[., and th acknowledging that market implied default probability or risk neutral probability represents the market price of buying protection against a default, which may differ from the actual probability of a default.

23(19)(h)(i)(A)

where:

ti	is the time of the i-th revaluation time bucket, starting from to=0

tT	is the longest contractual maturity across the netting sets with the counterparty

si	is the credit spread of the counterparty at tenor ti, used to calculate the CVA of the counterparty, provided that the bank shall use—

(i)	the CDS spread of the relevant counterparty whenever it is available; or

(ii)	an appropriate proxy spread that is based on the rating, industry and region of the counterparty when the relevant CDS spread is not available

LGDMKT

is the loss given default of the counterparty, which shall be based on—

(i)	the spread of a market instrument of the relevant counterparty; or

(ii)	the appropriate proxy spread that is based on the rating, industry and region of the counterparty when a counterparty instrument is not available

The aforesaid LGDMKT is different from the LGD used to determine the IRB and CCR default risk requirement, as this LGDMKT is a market assessment rather than an internal estimate

EEi	is the expected exposure to the counterparty at revaluation time ti, as defined in paragraph (a) above, where exposures of different netting sets for such counterparty are added, and where the longest maturity of each netting set is given by the longest contractual maturity inside the netting set;

[Regulation 23(19)(h)(i)(A) EEi substituted by section 3(p) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021]

Di	is the default risk-free discount factor at time ti, where Do = 1

(ii)	When a bank's approved VaR model—

(A)	is based on credit spread sensitivities for specific tenors, the bank shall base each relevant credit spread sensitivity on the formula specified below:

23(19)(h)(ii)(A)-1

This derivation assumes positive marginal default probabilities before and after time bucket ti and is valid for i˂T.

For the final time bucket i = T, the corresponding formula is:

23(19)(h)(ii)(A)-2

(B)	uses credit spread sensitivities to parallel shifts in credit spreads, which shall for purposes of these Regulations be referred to as regulatory CS01, the bank shall use the formula specified below, which derivation assumes positive marginal default probabilities;

23(19)(h)(ii)(B)

(iii)

Any hedge used and managed by the bank to mitigate its exposure to CVA risk, shall be included in the bank's calculation of the relevant required amount of capital for CVA risk in accordance with the relevant requirements specified in subregulation (15)(b).