Apr 4, 2016

Regulatory Guide to Understanding Bank Capital and Margin Requirements

Extensions and revisions of bank capital and margin requirements have given rise to increased interest in capital calculations and the methods employed. Developed by Dr. Serguei Issakov, Global Head of Quantitative Research at Numerix, the below features two diagrams which map out the landscape of bank capital and margin requirements.

In this chart we list the three components of capital calculation for bilateral trades applying to Market Risk, Counterparty Credit Risk, and CVA Capital. Capital for centrally cleared trades, as well as margin for bilateral trades are also represented. For each type of capital and margin the standardized and internal model approaches are examined. In each box we link to the latest regulatory guidance, indicate the year when a particular requirement was issued and where appropriate the dates when the requirements are in effect. We also include what disclosure reports particular capital requirements have to be reported in.

METHOD CAPITAL for bilateral trades CAPITAL for centrally cleared trades MARGIN (IM/VM) for bilateral trades       [In effect: 1 Sep 2016 -  1 Sep 2020
Market Risk CCR (default risk) CVA
Standardized Approach FRTB SA-TB d352 (Jan 2016) In effect: 1 Jan 2019 SA-CCR bcbs279 (2014) In effect: 1 Jan 2017 Basel III CVA bcbs189 (2011) Current Standard

BA-CVA d325 (July 2015) Issued for comments by 1 Oct 2015

FRTB SA-CVA d325 (July 2015) Issued for comments by 1 Oct 2015
bcbs282 (2014) In effect: 1 Jan 2017 BCBS/IOSCO d317 (March 2015)

ISDA SIMM (June 2015, March 2016)

 
Reports MR1* CCR1*, CCR3* CCR2* CCR8*  
Internal Model Approach (IMA) FRTB IMA MR-TB d352 (Jan 2016) In effect: 1 Jan 2019 Basel II IMM
Current Standard
Basel III IMM CVA bcbs189
Current Standard **
 
bcbs282 (2014)
In effect: 1 Jan 2017
BCBS / IOSCO
d317 (March 2015)
Reports MR2*, MR3* CCR7* CCR2* CCR8*  
 

*MR1, MR2, MR3, CCR1, CCR2, CCR3, CCR7, CCR8 are reports to disclosure capital requirements – from: Methodology & Basel Pillar 3 disclosure reports (d309 (2015)) – in effect in year-end 2016 financial report

**BCBS d362: Basel Committee proposes measures to reduce the variation in credit risk-weighted assets

This second chart outlines the current market considerations for Capital Value Adjustment (KVA) and Margin Value Adjustment (MVA). KVA and MVA reflect the cost of capital and margin, respectively, throughout the whole life of a portfolio. KVA and MVA in the second diagram correspond to the regulatory capital and margin definitions in the first diagram. Note, Margin requirements for CCPs are not unified across CCPs and not presented.

METHOD KVA for bilateral trades KVA for centrally cleared trades MVA for bilateral trades
Market Risk CCR (default risk) CVA
Analytic capital/margin calculation on future dates KVA for standard market risk capital KVA for standard CCR capital​ KVA for standard CVA capital KVA for standard capital for exposure to CCP MVA for standard margin

 
IMA/Simulation based capital/margin on future dates KVA for simulated market risk capital – regulatory IMA, economic KVA for simulated CCR capital – regulatory IMA, economic KVA for simulated CVA capital – regulatory IMA, economic KVA for simulated capital for exposure to CCP – regulatory IMA, economic MVA for simulated margin – regulatory IMA, economic