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APRA consults on proposed revisions to its counterparty credit risk framework for ADIs

Friday 16 September 2016



The Australian Prudential Regulation Authority (APRA) has today released a consultation package on proposed revisions to its counterparty credit risk framework for authorised deposit-taking institutions (ADIs).

The Basel Committee on Banking Supervision (Basel Committee) has made amendments to its framework for counterparty credit risk. These changes are set out in:

  • Standardised approach for measuring counterparty credit risk exposures (SA-CCR), released in March 2014; and
  • Capital requirements for bank exposures to central counterparties – final standard, released in April 2014.

APRA proposes revisions to its counterparty credit risk framework to implement the Basel Committee changes. Specifically, APRA proposes to require all ADIs to use the SA-CCR methodology to measure counterparty credit risk exposures arising from over-the-counter (OTC) derivatives, exchange traded derivatives and long settlement transactions. At this time, APRA does not propose introducing the Basel Committee’s internal model method for counterparty credit risk into its framework. APRA also proposes that all ADIs will be required to hold capital for exposures to central counterparties in a manner consistent with the Basel Committee’s final standard.

APRA proposes to establish a dedicated ADI prudential standard for counterparty credit risk, Prudential Standard APS 180 Capital Adequacy: Counterparty Credit Risk (APS 180). The draft APS 180 released today contains APRA’s proposed new requirements for the SA-CCR and exposures to central counterparties. The draft APS 180 also includes APRA’s existing requirements for counterparty credit risk, which have been relocated from Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112). Together with draft APS 180, APRA has also released a revised draft of APS 112.

APRA proposes that the new requirements will take effect from 1 January 2018. APRA also proposes that an ADI that meets certain criteria may apply for approval to further extend its implementation date for SA-CCR until 1 January 2019.

In proposing revisions to its prudential framework for counterparty credit risk, APRA has sought to find an appropriate balance between the objectives of financial safety and efficiency, competition, contestability and competitive neutrality. APRA Chairman Wayne Byres said ‘APRA considers its proposals will deliver improved risk sensitivity in the measurement of counterparty credit risk exposures, whilst retaining an appropriate degree of simplicity. APRA has also proposed allowing extension of the implementation timeframe for SA-CCR for ADIs with immaterial counterparty credit risk exposures to ensure that such institutions are not unduly burdened by implementation but ultimately benefit from improvements in the framework.’

APRA is also taking this opportunity to consult on other minor amendments to APS 112 that will rectify minor deviations from the Basel framework identified during the Basel Committee’s Regulatory Consistency Assessment Programme (RCAP) review of Australia and address other minor omissions and errors. These proposed amendments are intended to improve Australia’s consistency with the internationally-agreed Basel Committee framework. These changes apply to all ADIs and are outlined in a letter released today.

APRA invites written submissions on its proposals by 11 November 2016. APRA intends to consult on proposed revisions to ADI reporting requirements and guidance materials relating to counterparty credit risk in the coming year.

The  ADI consultation packagesconsultation packages can be found on the APRA website.


Q: What is counterparty credit risk?

A: Counterparty credit risk is the risk that an entity suffers a loss in the event that a counterparty to a market-related transaction, such as an OTC derivative, defaults before the final settlement of the transaction's cash flows. Such transactions can have a positive or negative valuation, and counterparty credit risk arises only if there is a positive value for an entity at the time of the counterparty default.

Q: What are the key benefits of implementing the revised Basel framework for counterparty credit risk?

A: APRA considers there are important benefits associated with maintaining an appropriate degree of consistency with the Basel framework. The Basel Committee has revised its framework for measuring counterparty credit risk exposures to address known deficiencies in its existing framework. These include appropriately differentiating between margined and unmargined transactions and providing more meaningful recognition of netting benefits. Similarly, the Basel Committee’s final standard for exposures to central counterparties addresses shortcomings in the Committee’s interim standard, including improving calibration and risk sensitivity, placing an explicit cap on capital requirements for centrally cleared exposures relative to bilateral exposures and replacing the existing counterparty credit risk measurement methodology with the SA-CCR.

Q: How is APRA proposing to assess an application to defer implementation of SA-CCR to 1 January 2019?

A: APRA proposes that an extended implementation date for SA-CCR will be available by application to APRA for ADIs whose activity in OTC derivatives, exchange traded derivatives and long settlement transactions is such that the resulting counterparty credit risk exposure is not material. APRA will not consider an application for postponed implementation of SA-CCR from an ADI that is a clearing member of a central counterparty.

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Contact APRA Media Unit, on +61 2 9210 3636

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For more information contact APRA on 1300 558 849.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6.5 trillion in assets for Australian depositors, policyholders and superannuation fund members.