Basel Committee on Banking Supervision Consults on Hedging of Counterparty Credit Risk Exposures

The Basel Committee on Banking Supervision has published a consultation on technical amendments on the hedging of counterparty credit risk exposures. The interpretative issues addressed relate to the circumstance where a bank has a derivative exposure and uses a guarantee or credit default swap to hedge the CCR arising from the derivative counterparty. While the CCR rules include a specific approach for the recognition of collateral, the recognition of guarantees or credit derivatives, such as CDSs, is not explicitly addressed, suggesting that banks may use the substitution approach of the credit risk mitigation framework. To address this inconsistency, the Basel Committee proposes amendments to the credit risk and CCR standards, which aim to better align the treatment of guarantees and credit derivative protection with the treatment of eligible collateral in the CCR framework. The proposed amendments do not affect the need for banks to check whether the requirements in CRE22.81 and CRE40 are met and need to be applied accordingly. Responses may be submitted until January 31, 2025.

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