New definition of credit risk on financial derivatives proposed by the Bank of Russia

The new improved methodology for the assessment of credit risk on financial derivatives is presented in the draft Regulation. The methodology will be used for the calculation of required reserves by banks with a universal licence, except those employing the IRB-approach to calculate counterparty credit risk.

This methodology applies to all exchange-traded and OTC derivatives of banks with a universal licence. The calculation of the risk position in based on the following parameters of derivatives: type of underlying asset, presence / absence of netting, margin or collateral. This improves risk sensitivity due to a better fine-tuning.

Given the Bank of Russia’s statement that new and complicated BCBS standards do not apply to banks with a basic licence as part of the implementation of the concept on proportional regulation, these banks will continue to apply the existing methodology for assessing credit risk on derivatives.

The Bank of Russia plans to introduce the new methodology for the calculation of counterparty credit risk on derivatives starting 1 January 2020.