Credit exposure under the new standardized approach for counterparty credit risk: fixing the treatment of equity options

Michael Kratochwil

Abstract

The new standardized approach for measuring counterparty credit risk exposures (SA-CCR) will replace the existing regulatory standard methods for exposure quantification. There is ongoing discussion with respect to the calibration and appropriate treatment of nonlinear products under the SA-CCR. The calibration of supervisory parameters for equity derivatives has been a particular bone of contention. Further, the SA-CCR struggles with the adequate reflection of nonstandard options. Our paper provides empirical evidence that the SA-CCR parameters are not aligned with historically observed volatilities.We explore a potential alignment of the SA-CCR with the new standardized approach for market risk (SA-TB) as well as the application of economic delta adjustments for path-dependent equity products. Our results demonstrate that an alignment of SA-CCR and the SA-TB could lead to a significantly improved risk assessment for equity derivatives.