Exposures to central counterparties · RiskAtoms Academy

By the end you will be able to

1Say what makes a CCP qualifying, and compute the capital on trade exposures to it.
2Explain how client clearing is treated, for the clearing member and for the client.
3Compute a clearing member's capital for its default fund contribution from K_CCP, with its floor.
4Compare a qualifying with a non-qualifying CCP, and add the bank's cleared trades to its counterparty RWA.

Why it matters

RiskAtoms Bank plc's balance sheet hedges are sterling swaps with notionals of £35.2bn, far bigger than all four bilateral netting sets. They are cleared, and so are the trading desk's futures, options and forward. Module 4.1 left them out of its RWA. They come to £0.42m. If the clearing house lost its qualifying status, the same trades would need £70.00m.

Core explanation

Two exposures to one clearing house

Illustrative dataRiskAtoms Bank plc's capital book

The same made-up UK bank as Level 3: £67bn of assets and £4bn of equity at 31 December 2025, in £ millions. Module 4.1 adds its regulatory layer: own funds, deductions, risk-weighted assets by risk type, buffers, the leverage exposure and MREL, computed from the Level 3 credit, trading, derivatives and operational risk books. Every figure is illustrative, not any bank's data.

Pro forma. The book applies Basel 3.1, the 2017 finalisation of Basel III, to the 31 December 2025 balance sheet. On that date the bank still reported under the old UK CRR. The UK applies Basel 3.1 from 1 January 2027, and the internal model approach for market risk from 1 January 2028 (PRA PS1/26, paras 1.23 and 1.24). So the book shows the bank as it would look under the new rules.

The counterparty data. The four OTC derivative netting sets of the Level 3 derivatives book (M3.4: Counterparty credit risk): Halvergate Moor Manufacturing (HAL, a manufacturer), Corriemoor Bank (COR), Saltney Capital (SAL, a hedge fund) and Ebbsworth Pension Trustees (EBB), all invented. Module 4.1 gave them SA-CCR exposure of £36.9m and counterparty credit risk RWA of £31.2m. That figure is SA-CCR on these four netting sets only, at Basel's α of 1.4.

What it leaves out. The trades the bank clears through central counterparties (£0.42m of RWA, L4.4.04: Exposures to central counterparties) and the counterparty risk on its repo funding (£12.7m of RWA if each repo stood alone, nothing once netted with the reverse repos, L4.4.03: The internal model method and SFTs).

The cleared trades. The trading desk's 2-year swap, UK index futures and puts, Brent futures and FX forward (M3.2: Market risk), and the macro and structural hedges of the banking book (M3.6: Interest rate risk in the banking book and ALM), taken to be cleared through qualifying CCPs. The default fund example uses Wexcombe Vale Clearing House, the invented CCP of L3.4.08: Central counterparties.

Which CCPs qualify

L3.4.08: Central counterparties showed how a CCP stands between buyer and seller, collects margin and keeps a default fund. For capital, the question is whether it is a qualifying CCP: licensed for the products it clears and supervised under rules consistent with the CPMI-IOSCO Principles for Financial Market Infrastructures (CRE50). A bank still needs adequate capital for CCP exposures either way (CRE54.3), and if a CCP stops qualifying it may keep the QCCP treatment for three months (CRE54.6). A clearing member has two kinds of exposure to a QCCP.

Trade exposures: 2%

Trade exposures are what the CCP owes the bank on its trades now and could owe later, plus margin posted. They are measured with SA-CCR, with an MPoR of at least ten days for OTC derivatives (CRE54.8), and weighted at 2% (CRE54.7): a percentage of a percentage (M-A01: Percentages). Initial margin the bank posts is an exposure too, unless a custodian holds it bankruptcy remote from the CCP, in which case it carries nothing (CRE54.21). The bank's cleared trades form four netting sets:

Netting set	Trades	Add-on	RC	EAD	RWA at 2%
Sterling interest rate swaps: the desk's 2-year swap and the m3-6 hedges	89	9.080	0.000	12.712	0.2542
UK index futures and the exchange-traded UK index puts	2	0.583	0.949	2.145	0.0429
Brent futures	1	0.443	0.000	0.620	0.0124
The desk's FX forward (sell $26m in 3 months)	1	0.240	0.000	0.336	0.0067
Trade exposures				15.812	0.3162

£ millions. The swap sets exchange variation margin daily, so RC is zero. The bought index puts are paid for and worth £0.949m to the bank: that is the equity set's RC. The futures settle daily, so their M is the ten-day floor.

The hedges are huge but mostly offset. The £19.2bn macro hedge pays fixed and the £16.0bn structural hedge receives fixed. After netting in the maturity buckets of L4.4.02: SA-CCR: the add-ons, the sterling set's effective notional is 1,816 and its add-on £9.08m; with no offset across buckets it would be £13.50m.

Client clearing

A bank that is a clearing member can clear for clients. Its exposure to each client is a bilateral trade, but because the CCP margins the client daily, the MPoR may be as short as five days (CRE54.12). If the bank cleared Halvergate's 7-year swap for it, the exposure would be £0.877m against £4.134m for the same swap bilateral and unmargined, 79% less. The client in turn weights its exposure 2% if its positions and collateral are protected if the member defaults, 4% if they are protected only against the member's default but not a joint default with another client (CRE54.14-54.16).

The default fund

The default fund is shared: if a member defaults and its margin is not enough, the other members' contributions pay (L3.4.09: The risks CCPs bring). The capital for it is risk sensitive. First the CCP's hypothetical capital, K_CCP: SA-CCR exposure to every member account, net of the margin and fund contributions it holds, at a 20% weight and 8% (CRE54.29, 54.33). Each member then holds its share in proportion to its prefunded contribution, K_CM, never less than a 2% weight on what it put in (CRE54.36): a floor in the sense of M-A11: Min, max, floors and caps.

At Wexcombe Vale Clearing House, the six member accounts have EAD of £8.862m, because the margin held covers almost everything. K_CCP = £0.1418m. The bank's contribution of £4.335m is a share of the £70m fund plus the CCP's £5m: K_CM = £0.0082m, just above the floor of £0.0069m, and RWA £0.102m: an implied weight of 2.36%.

Not qualifying, and the cap

A CCP that does not qualify is treated like any other counterparty. Trade exposures take its standardised risk weight (CRE54.41), here taken as 100%, and default fund contributions 1250% (CRE54.42): one pound of capital for each pound contributed. For the bank, £15.81m + £54.19m = £70.00m, against £0.419m. Whatever the formulas give, a QCCP never costs more than a non-qualifying one would: the cap of CRE54.40. It does not bind here.

Sort itWhat weight?

RiskAtoms Bank plc is a clearing member of a qualifying CCP unless stated. Sort each exposure.

The bank's trade exposure to the QCCP on its cleared swaps
Initial margin the bank posted, held by a custodian and bankruptcy remote from the CCP
A client's exposure through the bank, protected only if the bank alone defaults
A client's exposure through the bank, fully protected and portable
The bank's default fund contribution to a CCP that has lost its qualifying status more than three months ago

The formal version

Exposures to CCPs (CRE54.7, 54.29, 54.33, 54.36, 54.40-54.42; the K_CCP and K_CM expressions are images on bis.org and were read as text in CRR Article 308(2) and in Euronext Clearing's note on the Basel III framework, March 2022):

\begin{aligned} \text{RWA}_{\text{trade}} &= 2\% \times \text{EAD}_{\text{trade}}, \qquad \text{EAD}_{\text{trade}} \text{ by SA-CCR, MPoR} \ge 10 \text{ days} \\ K_{\text{CCP}} &= \sum_i \text{EAD}_i \times \text{RW} \times \text{capital ratio}, \qquad \text{RW} \ge 20\%, \quad \text{capital ratio} = 8\% \\ K_{\text{CM}_i} &= \max\Big(K_{\text{CCP}} \times \frac{\text{DF}_i^{\text{pref}}}{\text{DF}_{\text{CCP}} + \text{DF}_{\text{CM}}^{\text{pref}}},\ 8\% \times 2\% \times \text{DF}_i^{\text{pref}}\Big), \qquad \text{RWA}_{\text{DF}} = 12.5 \times K_{\text{CM}_i} \\ \text{RWA}_{\text{QCCP}} &= \min\big(\text{RWA}_{\text{trade}} + \text{RWA}_{\text{DF}},\ \text{RW}_{\text{CCP}}\,\text{EAD}_{\text{trade}} + 1250\% \times \text{DF}_i\big) \end{aligned}

$\text{EAD}_i$ : the CCP's SA-CCR exposure to member account $i$ (house and each client account separately, CRE54.30) with a ten-day MPoR, the member's initial margin and prefunded contribution counting as collateral (CRE54.33).
$\text{DF}_i^{\text{pref}}$ : the bank's prefunded contribution; $\text{DF}_{\text{CM}}^{\text{pref}}$ : all members' prefunded contributions; $\text{DF}_{\text{CCP}}$ : the CCP's own prefunded resources that rank with or ahead of them in the waterfall (CRE54.36).
$\text{RW}_{\text{CCP}}$ : the CCP's standardised risk weight as an ordinary counterparty (CRE54.41). The last line is the cap of CRE54.40.

Try it

Start at Wexcombe Vale Clearing House. Cut K_CCP towards zero: the floor takes over at a 2% weight. Raise it to the top of the slider, £5m: the default fund is weighted at 83.33%. Cut the members' fund to £55m and the weight passes 100%, to 104.17%. Then switch the CCP to not qualifying.

Try itCapital for exposures to a CCP

The CCP is…

K_CCP, the CCP's hypothetical capital (£m)£0.14m

The bank's prefunded contribution DF_i (£m)£4.34m

All members' prefunded contributions DF_CM (£m)£70m

The CCP's own resources in the waterfall DF_CCP (£m)£5m

Trade exposure EAD (the cleared trades under SA-CCR): £15.81m.

Trade exposures

£0.316m

Default fund

£0.102m

Trade RWA = 2% × EAD£0.316m

K_CCP × DF_i ÷ (DF_CCP + DF_CM)£0.0082m

Floor 8% × 2% × DF_i£0.0069m

K_CM (pro rata binds)£0.0082m

Default fund RWA = 12.5 × K_CM£0.102m

Implied risk weight on DF_i2.36%

Total RWA£0.419m

A QCCP: £0.419m in all. Were it not qualifying, £70.00m.

Worked example

RiskAtoms Bank plc's exposures to CCPs

£ millions. Trade exposures by SA-CCR (L4.4.01: SA-CCR: replacement cost and the multiplier, L4.4.02: SA-CCR: the add-ons); default fund at Wexcombe Vale.

From cleared trades to RWA

Step 1 of 5

1
Sterling swaps
$\begin{aligned} D_1 &= 544.7, \quad D_2 = -2{,}155.1, \quad D_3 = 0.0 \quad (\text{MF} = 0.3,\ 89 \text{ trades}) \\ \text{EN} &= \sqrt{D_1^2 + D_2^2 + 1.4\,D_1 D_2} = 1{,}815.9 \\ \text{AddOn} &= 0.5\% \times 1{,}815.9 = 9.080 \\ \text{EAD} &= 1.4 \times (0 + 9.080) = 12.712 \\ \text{RWA} &= 2\% \times 12.712 = 0.2542 \end{aligned}$

Extra for this lessonAssumptions in this example

Each cleared product is one netting set at a qualifying CCP, with daily variation margin and the bank's initial margin held bankruptcy remote. Each Wexcombe Vale member account is represented by a 10-year par swap with the same PV01. The non-qualifying trade weight of 100% is assumed.

Regulatory lens

Basel: CRE54, from the Committee's April 2014 standard on bank exposures to CCPs, which took effect on 1 January 2017; version effective 1 January 2023. Jurisdictions as at 3 November 2026 as at 3 Nov 2026.

In the EU

CRR Article 306(1)(a) weights trade exposures to a QCCP at 2%. Article 308(2) sets the capital for a prefunded default fund contribution as max(K_CCP × DF_i ÷ (DF_CCP + DF_CM), 8% × 2% × DF_i), with K_CCP, DF_CCP and DF_CM reported to members by the CCP under Article 50c of EMIR.

In the UK

From 1 January 2027 the PRA's α of 1 (Counterparty Credit Risk (CRR) Part, Art 274(2)) applies to non-financial counterparties and pension schemes, not to CCPs: the bank's trade exposures keep α = 1.4. A clearing member's exposure to a non-financial client such as Halvergate would take α = 1: £0.626m instead of £0.877m.

Spark Atoms

Spark AtomA charge that rises when the fund is thin

K_CM is the CCP's hypothetical capital spread over the prefunded resources. A CCP that holds little margin against risky positions has a large K_CCP; if its fund is small too, each member's share rises. The implied weight on the bank's contribution is 2.36% at Wexcombe Vale, close to the 2% floor, because its margin covers almost all of its exposures.

Spark AtomThree months' grace

A CCP can lose its qualifying status, for example if its supervisor no longer applies the CPMI-IOSCO principles. Banks then have three months before the non-qualifying treatment applies (CRE54.6). For this bank that is the difference between £0.42m and £70.00m of RWA.

Key takeaways

A qualifying CCP is licensed for its products and supervised under rules consistent with the CPMI-IOSCO principles (CRE50). A bank may keep the QCCP treatment for three months after a CCP stops qualifying (CRE54.6).
Trade exposures to a QCCP: SA-CCR EAD with an MPoR of at least ten days, at 2%. The bank's cleared trades: EAD £15.81m, RWA £0.316m. Bankruptcy-remote initial margin carries nothing.
Client clearing: the member's exposure to a client may use a five-day MPoR (£0.877m against £4.134m bilateral); the client weights its exposure 2% or 4%.
Default fund: K_CM = max(K_CCP × DF_i ÷ (DF_CCP + DF_CM), 8% × 2% × DF_i). At Wexcombe Vale, £0.0082m of capital, RWA £0.102m.
In all £0.42m, added to Module 4.1's £31.2m. A non-qualifying CCP would cost £70.00m, with 1250% on the fund; QCCP capital is capped at that.

Reaction

Check what stuck

Question 1 · objective 1

A clearing member has £50m of trade exposure to a qualifying CCP. What are its RWA, in £m?

£m

Question 2 · objective 3

K_CCP is £10m. The bank's prefunded contribution is £5m, all members' contributions £180m and the CCP's own resources £20m. What is K_CM, in £m?

£m

Question 3 · objective 4

The same £5m contribution is to a CCP that is not qualifying. What RWA does it carry, in £m?

£m

Question 4 · objective 2

A client's trades are cleared through a member, and are protected if the member defaults, but not if the member and another client default together. What risk weight does the client apply to its exposure?

A4%B2%C0%DThe member's bilateral risk weight

Question 5 · objective 1

The bank posts initial margin to the CCP, held by a custodian and bankruptcy remote from the CCP. What capital does that margin carry?

ANone for counterparty credit riskB2% of its valueC1250% of its valueDThe CCP's standardised risk weight

Glossary

Qualifying CCP (QCCP): Qualifying CCP (QCCP): a CCP licensed to operate as one for the products it clears, and supervised in a jurisdiction whose rules are consistent with the CPMI-IOSCO Principles for Financial Market Infrastructures (CRE50).
Trade exposures: Trade exposures: the current and potential future exposure of a clearing member or client to a CCP from derivatives and SFTs, and the initial margin it has posted (CRE50).
Default fund: Default fund: members' funded or unfunded contributions to the CCP's mutualised loss-sharing arrangements, whatever the CCP calls them (CRE50).
K_CCP: K_CCP: the CCP's hypothetical capital: the SA-CCR exposure to each member account, weighted at 20% and multiplied by 8% (CRE54.29).
K_CM: K_CM: a clearing member's capital for its prefunded default fund contribution: its pro rata share of K_CCP, with a floor at a 2% risk weight (CRE54.36).
Client clearing: Client clearing: a clearing member clears trades for a client. It treats its exposure to the client like a bilateral trade, with a margin period of risk of at least five days (CRE54.12).
Bankruptcy remote: Bankruptcy remote: held by a custodian so that it is out of reach of the CCP's creditors if the CCP fails. Initial margin posted this way carries no counterparty capital (CRE54.21).
CRE54.40 cap: CRE54.40 cap: a bank's total capital for its exposures to a QCCP never exceeds what it would hold if the CCP were not qualifying.

Deep Dives & Origins

Deep Dives

Basel Committee on Banking Supervision, Capital requirements for bank exposures to central counterparties, April 2014: the standard that replaced the 2012 interim rules and set today's treatment. Intermediate.
L3.4.09: The risks CCPs bring: what concentrating risk in CCPs does to the system, and default waterfalls. Foundation.

Origins

Basel Committee on Banking Supervision, CRE54: Capitalisation of bank exposures to central counterparties, paras 54.1-54.42, version effective 1 January 2023 (Swiss SIF copy).
Basel Committee on Banking Supervision, CRE50: Counterparty credit risk definitions and terminology, definitions of QCCP, trade exposures and default fund (Swiss SIF copy).
Basel Committee on Banking Supervision, Capital requirements for bank exposures to central counterparties, April 2014 (bcbs282).
Regulation (EU) No 575/2013 (CRR), Articles 306 and 308, as amended by Regulation (EU) 2024/1623.
Euronext Clearing, Capital requirement for bank exposures to central counterparties: Basel III framework, March 2022.
Prudential Regulation Authority, PRA Rulebook: Counterparty Credit Risk (CRR) Part, Article 274, version from 1 January 2027.

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