- The Basel Committee has published final guidelines for counterparty credit risk management.
- The guidelines include key practices critical to resolving long-standing industry weaknesses in counterparty credit risk management.
- The Committee will monitor implementation of the guidelines on an ongoing basis.
The Basel Committee on Banking Supervision issued final guidelines for counterparty credit risk (CCR) management, which include key practices critical to resolving long-standing industry weaknesses in CCR management such as the need to:
(i) conduct comprehensive due diligence of counterparties both at initial onboarding and on an ongoing basis;
(ii) develop a comprehensive credit risk mitigation strategy to effectively manage counterparty exposures;
(iii) measure, control and limit CCR using a wide variety of complementary metrics; and
(iv) build a strong CCR governance framework.
The guidelines provide a supervisory response to the significant shortcomings that have been identified in banks’ management of CCR, including the lessons learned from recent episodes of non-bank financial intermediary (NBFI) distress.
Banks and supervisors are encouraged to take a risk-based and proportional approach in the application of the guidelines, taking into account the degree of CCR generated by banks’ lines of business, their trading and financing activities and the complexity of such CCR exposures.
One section discusses close out practices. Banks closing out counterparties should know that the potential costs of such actions can be high. Closeout of counterparties involves business, legal and risk staff carrying out actions properly, as banks serving notice on counterparties should not breach legal provisions in agreements such as the International Swaps and Derivatives Association Master Agreement, the related credit support annex (CSA), the International Capital Market Association’s Global Master Repurchase Agreement or the Global Master Securities Lending Agreement.
Liquidation of trades invariably leads to the realization of mark-to-market losses and the need for new replacement trades. The costs to the bank of carrying out a closeout are material and should be known.