SA-CCR and CVA Capital

The capital a bank holds against its counterparties

Every derivative a bank holds creates two capital charges for counterparty risk. The first covers the counterparty defaulting, and its exposure measure under Basel is the standardised approach for counterparty credit risk, SA-CCR. The second covers losses from the counterparty’s credit getting worse before any default — the volatility of CVA — and has its own framework. Together they turn netting, margining and hedging decisions into capital numbers, which is why a CSA negotiation is also a capital negotiation.

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What the lesson covers

1. What it is
2. How it works
3. Why it’s used
4. CVA capital
5. Risks to watch

Key terms

• SA-CCR — The Basel standardised approach for counterparty credit risk: EAD = 1.4 × (replacement cost + potential future exposure).
• Replacement cost — The loss if the counterparty defaulted today: the netting set’s value less collateral held, floored at zero.
• Potential future exposure — The add-on for possible growth in exposure, scaled by a multiplier that credits excess collateral.
• Hedging set — The group of trades within an asset class, such as interest rate trades in one currency, whose positions may offset.
• Supervisory factor — The prescribed volatility multiplier by asset class, such as 0.5% for interest rates or 4% for FX.
• BA-CVA and SA-CVA — The basic and standardised approaches to capital for CVA risk under final Basel III.

Every key term, A to Z

In practice

Counterparty risk and capital teams compute SA-CCR and CVA capital daily, and XVA desks charge their cost to trades as KVA. Netting agreements, CSAs and the choice to clear are all assessed partly on their capital effect.

Read next

• XVA and Counterparty Risk — Why the same swap is never quite the same price twice
• The ISDA Architecture — The paperwork that makes every other product possible
• Collateral and the CSA — The cash and bonds that back an OTC exposure

In the app, SA-CCR and CVA Capital carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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Educational content only. Nothing here is financial advice, an offer to trade, or a recommendation to buy or sell any instrument.