On January 16, the China Banking Regulatory Commission (CBRC) issued a notice on measuring derivatives counterparty default risk. The notice will come into effect on January 1, 2019 for commercial banks whose outstanding derivative transactions have a notional amount of no less than RMB500 billion (USD$77.7 billion) or account for more than 30% of the total assets.
CBRC consulted on the rules in November 2016, which were drafted according to the standardized approach for measuring counterparty credit risk issued by the Basel Committee on Banking Supervision in March 2014. The notice is aimed at strengthening commercial banks’ ability to manage risks stemming from derivative trading and sets out formulae for calculating counterparty risk exposure comprising replacement cost and potential future exposure. The notice requires that a commercial bank enter into a netting agreement with its counterparty and allow the bank to calculate its credit exposure on a net basis provided that the enforceability of the netting agreement is confirmed by a written legal opinion required under article 4(2) of the notice.