Counterparty
Counterparty is generally an opposing party , group , organization or team that represents an opposing point of view or especially in contract law or finance the contractor .
etymology
In Regulation (EU) No. 575/2013 (Capital Adequacy Regulation) , which has been in force in all EU member states since January 2014 , the English word counterparty was not precisely translated as ' counterparty ' but rather as 'counterparty'. As a result, the German word counterparty acquired a new meaning as a synonym for 'counterparty': In the banking sector in particular , this is any natural or legal person with whom a credit institution conducts banking transactions for which a consideration is contractually agreed.
term
The term counterparty is used very frequently in the Capital Adequacy Regulation that has been in force in all EU member states since January 2014 , but it avoids a legal definition . However, the scope of the term counterparty can be interpreted from the system of the Capital Adequacy Ordinance.
Subcategories counterparty are partly in the Regulation (EU) No 648/2012 (Market Infrastructure Regulation). Specified: It is the "financial counterparty" ( financial counterparty ), the 'non-financial counterparty' ( ' non-financial counterparty ") and the" central Counterparty ”(ie the central counterparty , abbreviated CCP from English central counterparty ) with the special form“ qualified central counterparty ”(ie qualified central counterparty, abbreviated QCCP from English qualifying central counterparty ). "Financial counterparty" is according to Art. 2 No. 1 of the Market Infrastructure Ordinance "a legal person who acts between the counterparties of the contracts traded on one or more markets and thus acts as a buyer for each seller or as a seller for each buyer". Specifically, Art. 2 No. 8 of the Market Infrastructure Ordinance lists approved CRR credit institutions , CRR investment firms , insurance companies , reinsurance companies , institutions for company pension schemes and investment funds . The “non-financial counterparties” include all companies not belonging to the “financial counterparties” (Art. 2 No. 9 Market Infrastructure Ordinance). A central counterparty (“central counterparty”) is a company that is connected between the buyer and seller of a financial product after a transaction has been concluded. The central counterparty buys the financial product from the seller on the agreed terms and sells it to the buyer on the same terms. The original transaction between the buyer and the seller of the financial instrument is consequently divided into two independent transactions. The central counterparty assumes the settlement risk when processing the financial transaction. According to Article 14 of the Market Infrastructure Ordinance, a “qualified central counterparty” is only approved for clearing functions.
Banking supervisory regulations
Art. 196 Kapitaladäquanzverordnung (abbreviation CRR) must bilateral netting agreements for repurchase agreements , securities or commodities-or -leihgeschäfte or other capital market transactions are taken into account with a counterparty if, according to Art. 205 CRR certain conditions are met. A credit security provided by a counterparty is treated like a claim that exists in the context of a derivative transaction (buy position) against the counterparty and is due on the day the risk position is determined (Art. 279a CRR). According to Art. 291 (1a) CRR, a “general correlation risk ” arises if there is a positive correlation between the default probability of counterparties and general market risk factors. A “special correlation risk” exists if, due to the nature of the transactions with a counterparty, the counterparty's probability of default correlates positively with the future replacement value from the transactions with this existing counterparty (Art. 291 (1b) CRR).
According to Art. 381 CRR, the credit valuation adjustment (CVA) means “the adjustment of the valuation of a portfolio with a counterparty to the valuation at mean market value”. This adjustment reflects the market value of the credit risk of the counterparty vis-à-vis the evaluating institution. It is therefore a matter of value adjustments of receivables on derivatives due to the counterparty risk. The credit rating adjustment involves the risk that the positive replacement value will decrease because the risk premium for the counterparty increases without the counterparty defaulting. This risk is increased visible in credit spreads (English credit spreads ) of the counterparty. The current market value can be calculated in favor of the counterparty using the credit spread from a hypothetical credit default swap . The CVA risk does not include transactions with central counterparties (Art. 382 No. 3 CRR), non-financial counterparties (Art. 382 No. 4a CRR) and with counterparties to which a risk weight of 0% is assigned (Art. 382 No. 4d CRR). One speaks of CVA when the counterparty's default risk (in the case of positive market values) has to be taken into account, and DVA ( Debit Valuation Adjustment ) when the own credit risk (in the case of negative market values) has to be taken into account. The DVA does not play a role in counterparty risk.
Counterparty Credit Risk or Counterparty Risk
Similar to the replacement of the term “counterparty” by “counterparty”, the counterparty risk is referred to as “counterparty default risk” within the meaning of the Capital Adequacy Ordinance . A well-known case of occurrence of this risk was the bankruptcy of Herstatt Bank in June 1974. As on 26 June 1974, the Federal Financial Supervisory Authority (now the BaFin ) which the Herstatt Bank granted banking license according to § 35 para 2 no. 4. KWG withdrew, At the same time, it ordered the company to be wound up and ordered it to suspend its payments immediately until further notice . This so-called moratorium on raising funds meant that the Herstatt Bank was no longer allowed to make payments to credit institutions that were due even if they had already provided their consideration.
The financial crisis from 2007 onwards clearly showed that institutions significantly underestimated the counterparty risk for derivatives . That is why the G20 summit in September 2009 called for derivatives to be cleared via central counterparties (CCP). The counterparties to credit institutions - this can also be other credit institutions - are subject to the risk that they will fail to meet their obligations from due consideration - for whatever reason - in pending transactions up to the mutual fulfillment date, while their own obligation has already been fulfilled ( Herstatt risk ) . A loss occurs when the market value of a transaction was positive at the time the counterparty defaulted. In contrast to credit risk, where only the lender takes a risk, counterparty risk is a bilateral risk of loss. In order to minimize this financial risk, a bank may not enter into a business relationship with a counterparty without having assessed its creditworthiness (Art. 286 (2a) CRR). In the case of the probability of default , the counterparty is mentioned as the risk carrier , as its default represents the counterparty risk.
The counterparty default risk (also counterparty default risk ; Art. 272 (1) CRR) is the “risk of the counterparty defaulting a transaction before the final settlement of the payments associated with this transaction”. This legal definition is based on the default definition of Art. 178 CRR. According to this provision, default is considered to have been given if it is unlikely that the debtor will settle his liabilities in full or a major liability of the debtor is more than 90 days overdue. If the counterparty does not make payments or deliveries when they are due , a counterparty default risk arises.
The counterparty credit risk comprises banking operations from an advance performance (or settlement risk) and a replacement risk together. The advance performance risk arises when payments or deliveries of financial instruments have been made and the counterparty has not received the contractual consideration. The replacement risk arises from the time the transaction is concluded until its fulfillment in the amount of the difference between the price on the day of the deal and a possible price increase (for purchases) or a possible price decline (for sales) while the transaction is pending.
Credit lines
The requirement to check the creditworthiness of counterparties is associated with an internal bank credit decision . The result of this credit decision is the granting of internal bank credit lines , up to the amount of which a bank is prepared to conclude business with a counterparty. A distinction is made between two credit lines. Within the line of credit for the settlement risk ( "settlement limit") are spot transactions accounted for which the other party must provide at least two trading days after the transaction their return. A further credit line is provided for the replacement risk (“pre-settlement limit”), in which futures , swaps , derivatives or similar contracts in which the delivery of the underlying is postponed beyond two trading days are booked. The limit is called the “pre-settlement limit” because the counterparty can default before the settlement date. The nominal value or the expected replacement costs are posted .
Backing with own funds
The counterparty risk can be reduced by engaging a central counterparty, avoiding positive correlations, netting , loan collateral or hedging .
The counterparty default risk is taken into account in the risk position with the expected positive replacement value. This is the “time-weighted average of the expected replacement values”. In addition to the existing capital charge for the over-the-counter derivatives, it leads to a further capital charge for the risk of loss from the counterparty default risk, assessed using the CVA.
Others
From the point of view of non-bank customers, credit institutions can be viewed as practically safe counterparties in all banking transactions with a negligible risk of default. In the case of insurance , the counterparty default risk exists for risks of type 1 (in particular reinsurance , derivatives and securitisations ), for risks of complementary type 2 ( claims against policyholders , insurance intermediaries and from property liens ).
Individual evidence
- ↑ counterparty. In: Duden. Retrieved October 28, 2018 .
- ↑ Art. 2 No. 1 Regulation (EU) No. 648/2012 (Market Infrastructure Regulation) .
- ↑ Art. 14 Regulation (EU) No. 648/2012 (Market Infrastructure Regulation) .
- ↑ Preliminary remarks Section 81 of the Capital Adequacy Ordinance.
- ↑ Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Requirements , 2006, p. 288
- ↑ The probability of default is defined as the probability of a counterparty defaulting over the course of a year (Art. 4 Para. 1 No. 54 CRR)
- ↑ Björn Lorenz / Petr Knobloch / Detlef Heinzel, Modernes Risk Management , 2002, p. 19.
- ↑ Daniel Gaschler: Basel III - The effects of the new capital definition for banks , 2013, p. 37
- ↑ Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Requirements , 2006, p. 291.
- ↑ Stefan Grundmann: Bank contract law 1: Organization of the credit system and bank-customer relationship , in: Großkommentar HGB , 5th edition, 2016, p. 6.
