Counterparty, operational and large exposures

Counterparty credit risk, SA-CCR

Elmthwaite Bank plc (invented) is a UK bank with £20,000m of assets. It computes counterparty credit risk with SA-CCR at 31 December 2025, α = 1.4. Two of its netting sets are margined under CSAs with daily variation margin and a ten-day margin period of risk. In £ millions:

C3 has not yet called any variation margin: its exposure is under the threshold. No collateral has been posted by Elmthwaite other than the variation margin to C2.

Lessons: L4.4.01: SA-CCR: replacement cost and the multiplier

Counterparty credit risk, SA-CCR

C1 is a UK food manufacturer, a non-financial counterparty with no CSA, so the netting set is unmargined. Its three sterling swaps with Elmthwaite have all started (S = 0):

The trades are worth £5.0m to Elmthwaite. At inception C1 posted £1.5m of cash as an independent amount, which Elmthwaite still holds. Supervisory duration discounts at 5% a year; the interest rate supervisory factor is 0.5%.

Lessons: L4.4.02: SA-CCR: the add-ons · L4.4.01: SA-CCR: replacement cost and the multiplier

Counterparty credit risk, SA-CCR

C3, the hedge fund of Problem 1, has three trades with Elmthwaite, margined under its CSA with a 10-business-day MPoR (V = £4.0m, TH £8m, MTA £1m, no initial margin, no variation margin yet):

The sizes are the adjusted notionals: units times the index level for T4 and T5, the dollar leg in pounds for T6. Supervisory parameters (CRE52.72, Table 2): equity index factor 20%, correlation 80%, option volatility 75%; FX factor 4%.

Lessons: L4.4.02: SA-CCR: the add-ons · L4.4.01: SA-CCR: replacement cost and the multiplier

Counterparty credit risk, IMM (illustrative) and SFTs

The model. Elmthwaite is weighing an application to use the internal model method. This is illustrative: it has no permission. For its only candidate netting set, which runs well past a year, the model gives expected exposure on a quarterly grid over the first year, current calibration, in £ millions:

On the stressed calibration the model gives effective EPE of £6.20m for the same set.

The repo. Separately, Elmthwaite's treasury lends £80m of cash to a European bank for a week under a reverse repo, with daily remargining, and takes euro government bonds (rated AA, 1–3 years) worth £84m as collateral. The ten-day supervisory haircuts are 2% for the bonds and 8% for the currency mismatch; repo-style trades use a five-business-day holding period.

Lessons: L4.4.03: The internal model method and SFTs

Counterparty credit risk, CCPs

Elmthwaite is a clearing member of a qualifying CCP and clears its own interest rate swaps there. In £ millions:

Initial margin Elmthwaite posts is held by a custodian and is bankruptcy remote. If the CCP were not qualifying, its standardised risk weight as an ordinary counterparty would be 100%.

Lessons: L4.4.04: Exposures to central counterparties

Operational risk capital

Elmthwaite's income statement items for the business indicator, in £ millions (trading and banking book lines are net P&L):

Its operational losses of £20,000 or more, net of recoveries, by accounting year, in £ millions: 2016 6.2, 2017 7.4, 2018 5.9, 2019 8.8, 2020 9.6, 2021 31.5, 2022 7.1, 2023 8.3, 2024 6.7, 2025 8.5. Use the PRA's sterling buckets (£880m and £26bn, coefficients 12%, 15% and 18%).

Lessons: L4.4.05: Operational risk: the standardised approach

Operational risk capital

The operational risk team tests three changes to Problem 6's figures, each on its own. The first two change the loss component, so they are measured on Basel's ILM, as L4.4.06: Operational risk capital in practice does; in the UK and EU, where the ILM is 1, they change no Pillar 1 capital.

• Exclusions. Four losses are candidates for exclusion from the loss data set, listed in part (a). The 2021 figure of £31.5m includes a £24m settlement.
• The threshold. Elmthwaite is in bucket 2, so its supervisor could raise the loss data threshold to €100,000 (£86,957 at €1.15 per £). Events with net losses from £20,000 up to that amount total £9.0m over the ten years.
• A sale. On 31 December 2025 Elmthwaite sold its pensions administration business, with the PRA's permission to remove it from the BI. It earned fee income of £60m, £62m, £64m in 2023 to 2025 and paid fee expense of £10m a year. It had no interest-earning assets and no other income or expense.

Lessons: L4.4.06: Operational risk capital in practice

Credit risk, large exposures

Elmthwaite's Tier 1 capital is £1,200m. Its largest exposures at 31 December 2025, in £ millions:

• P, a property company: a loan of £180m, against which P has pledged £30m of cash on deposit with Elmthwaite.
• P2, owned 70% by P: a loan of £90m and an undrawn committed facility of £100m (standardised CCF 40%).
• S, a building contractor that earns 60% of its gross receipts from P2 and could not replace that work quickly: a loan of £25m.
• Q, a UK bank (not a G-SIB): money market placements of £250m and a reverse repo lending £150m of cash against gilts, E* = 0.
• V, a retailer: a loan of £140m, £60m of it guaranteed by the UK government.
• The UK government and the Bank of England: gilts and reserves of £1,500m.
• A bond fund: Elmthwaite holds £60m of units in a £400m fund that holds bonds issued by q (£100m), bonds of r, a utility (£40m), bonds of 26 other issuers, £10m each (£260m).

All the protection is eligible under the standardised approach. Q, P, P2, S and V are not connected in any other way.

Lessons: L4.4.07: Large exposures