Select language:

This graphic is explained in the accompanying text Calculation of the Credit Equivalent (CEQ) 

Use

The credit equivalent amount is calculated for derivative financial instruments using the mark-to-market method (§10, Principle I) for all approaches. Derivatives are products that are derived from spot transactions. Since the value of these products is primarily derived from the price, price fluctuations, and price expectations of the underlying instrument, the objective is to find an equivalent amount for the risk of this derivative that is comparable to the risk of an on-balance sheet loan. The credit equivalent amount is calculated using the following formula:

Market value + assessment basis x add-on factor = credit equivalent amount

Integration

The documentation about the exposure at default (EAD) describes how the process of calculating the CEQ is integrated in the overall process for calculating the EAD.

Features

The credit equivalent amount is calculated as follows, regardless of whether the derivatives involved are financial derivatives or credit derivatives.

  The product class is checked.

  The add-on risk category is derived.

  The add-on factor is calculated

  The assessment basis is calculated.

  The add-on amount is calculated.

  The credit equivalent amount is calculated.

Activities

The steps described above are mapped in Business Content in module SC_CREDITEQUIVALENT in environment SC_POOL_1. The module contains separate queries for each localization type.

For more information about this module, see the Implementation Guide (IMG) under Bank Analyzer ® Processes and Methods ® Credit Risk ® Credit Exposure ® Module Editor ® Edit Modules.

You make the settings for the assessment basis in the fifth condition of module SC_CREDITEQUIVALENT and configure these settings in the derivations. In Business Content, the assessment basis has been defined as the same as the market value_Udl, nominal value, or drawing.

You configure the add-on risk category and the assessment basis category, which refers to the assessment basis that you have set in the module, using bank-specific characteristics. The following derivations have been implemented in Business Content as examples:

  SC_ASSESSM_CAT for the derivation of the assessment basis category

  SC_ADDON_RISK_CAT for the derivation of the add-on risk category

For more information about these settings, see Derivation.

Example

Function Modules

Add-On Factors: /BA1/R2_API_AOF and /BA1/R2_API_AOF_CD

Function modules /BA1/R2_API_AOF and /BA1/R2_API_AOF_CD are called up in the module; these modules calculate the add-on factors for financial derivatives and credit derivatives.

Price Calculator: /BA1/R2_API_FVS 

The price calculator (fair value server) is called from the data enrichment process only. This improves system performance, since the price calculator needs to be started only once per transaction in the entire calculation process. The credit equivalent amount module does not call the price calculator unless this call is unsuccessful and no market value could be found that could be used to calculate the credit equivalent amount. Function module /BA1/R2_API_FVS is called for this purpose.

Credit Derivatives

The following tables illustrate how the credit derivatives TRS (total return swap), CDS (credit default swap), and CLN (credit-linked notes) are handled in the EAD calculation process. The table refers to the relevant product class as well as the calculation base that is considered. For the functions described here, this means that the only credit derivatives that are considered are those for which the calculation base is the same as the credit equivalent amount:

EAD Calculation Base for Credit Derivatives in the Trading Book

Credit Derivative

Protection Seller = Risk Buyer

 

Protection Buyer = Risk Seller

 

Credit Default Swap (CDS)

Derivative transactions = credit equivalent amount

 

Derivative transactions = credit equivalent amount

 

Total Return Swap (TRS)

Derivative transactions = credit equivalent amount

 

Derivative transactions = credit equivalent amount

 

Credit Linked Note (CLN)

Not relevant for counterparty credit risk (treated in the same way as balance sheet assets)

 

Not relevant for counterparty credit risk (treated in the same way as cash collateral)

 

 

EAD Calculation Base for Credit Derivatives in the Banking Book

Credit Derivative

Protection Seller = Risk Buyer

 

Protection Buyer = Risk Seller

 

Credit Default Swap (CDS)

Traditional off-balance-sheet transactions = nominal amount

 

Not relevant for EAD calculation (treated in the same way as received guarantee)

 

Total Return Swap (TRS)

Traditional off-balance-sheet transactions = nominal amount

 

Not relevant for EAD calculation (treated in the same way as received guarantee)

 

Credit Linked Note (CLN)

Balance sheet assets = book value/key date drawing

 

Not relevant for EAD calculation (treated in the same way as financial collateral in the form of cash collateral)

 

 

 

 

Was this page helpful to you?