What is EPE in Basel?

What is EPE in Basel?

Effective Expected Positive Exposure (EPE) with stressed parameters. 2. To determine the counterparty credit risk capital charge as defined in the. Basel III document, para 99 – inserting para 105 in Annex 4 of the Basel. framework, banks must use as the default risk capital charge the greater of.

What is PSE in risk?

Pre-settlement risk is the possibility that one party in a contract will fail to meet its obligations under that contract, resulting in default before the settlement date. This default by one party would prematurely end the contract and leave the other party to experience loss if they are not insured in some way.

What is a counterparty credit risk?

Counterparty credit risk is the risk arising from the possibility that the counterparty may default on amounts owned on a derivative transaction.

How is counterparty risk different from credit risk?

Credit risk is the risk for holding a risky bond. Counterparty risk is the risk that the counterparty will not be able to meet its contractual obligations if the credit event occur.

What is EPE model?

An EPE model is designed to produce a distribution of possible exposure values at future time horizons for a particular counterparty. This distribution of exposures is currently used to determine the regulatory capital through application of the regulatory capital metric “effective expected positive exposure” (EEPE).

What is incurred CVA?

Incurred CVA is an accounting value adjustment that helps to ensure that the asset value and the capital of a firm are appropriately reduced to reflect the expected losses as a result of a counterparty’s credit quality.

What is PSR limit?

PSR Limits. Pre-settlement risk (PSR) is the risk that a counterparty to a transaction, such as a forward contract, will not settle his/ her end of the deal. PSR limits are based on the worst case loss that is likely to occur if the counterparty defaults prior to the settlement of a transaction.

How do you evaluate counterparty risk?

Evaluating Counterparty Risk: Whom Can You Trust?

1. Step 1: Prepare.
2. Step 2: Analyze Overall Financial Exposure.
3. Step 3: Identify Significant Counterparty Relationships.
4. Step 4: Identify Counterparties At Risk.
5. Step 5: Identify All Legal and Contractual Relationships with Significant Counterparties.

How is counterparty risk mitigated in futures markets?

One of the most effective ways to reduce counterparty risk is to trade only with high-quality counterparties with high credit ratings such as AAA etc. This will ensure better CRM and decreasing the chances of future losses.

How is initial margin related to counterparty credit risk?

For the purposes of the calculation of counterparty credit risk capital requirements, initial margin does not include contributions to a CCP for mutualised loss sharing arrangements (ie in case a CCP uses initial margin to mutualise losses among the clearing members, it will be treated as a default fund exposure).

How is the mpor negated in a margin agreement?

That multiplier will, however, be negated by the capping. The anomaly would be magnified if there were some disputes under the margin agreement, ie where the margin period or risk (MPOR) would be doubled to 20 days but, again, negated by the capping to an unmargined calculation.

Why is initial margin not included in CCP?

For the purposes of this Annex, initial margin does not include contributions to a CCP for mutualised loss sharing arrangements (ie in case a CCP uses initial margin to mutualise losses among the clearing members, it will be treated as a default fund exposure).

What does initial margin mean for clearing members?

Initial margin means a clearing member’s or client’s funded collateral posted to the CCP to mitigate the potential future exposure (PFE) of the CCP to the clearing member arising from the possible future change in the value of their transactions.