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ead

Calculate exposure at default (EAD) value for each portfolio

Since R2024a

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Syntax

outEADResults = ead(saccrObject)

Description

example

outEADResults = ead(saccrObject) computes exposure at default (EAD) value for each portfolio using the saccr object. For more information, see Exposure at Default.

You can use the aggregate and aggregateByCounterparty functions with the outEADResults.

Examples

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Open Live Script

Use a saccr object and the ead function to calculate the exposure-at-default (EAD) for each portfolio.

Define the foreign exchange (FX) spot currency exchange rate table.

format("default");
Base = ["EUR";"GBP";"GBP"];
Quote = ["USD";"USD";"EUR"];
SpotRate = [1.0543;1.2195;1.1567];
FXSpotTable = table(Base,Quote,SpotRate)
FXSpotTable=3×3 table
    Base     Quote    SpotRate
    _____    _____    ________

    "EUR"    "USD"     1.0543 
    "GBP"    "USD"     1.2195 
    "GBP"    "EUR"     1.1567

Define the SA-CCR CRIF file.

SACCRCRIF = "SACCR_CRIF_Ports_7_8_9.csv";

Create a saccr object using the data from the SA-CCR CRIF file.

mySACCR = saccr(SACCRCRIF, DomesticCurrency="USD", FXSpot=FXSpotTable)
mySACCR = 
  saccr with properties:

                         CRIF: [42×19 table]
                NumPortfolios: 3
                 PortfolioIDs: [3×1 string]
              CounterpartyIDs: [3×1 string]
                   Portfolios: [3×1 saccr.Portfolio]
                   Regulation: "Basel_CRE52"
             DomesticCurrency: "USD"
                        Alpha: [3×1 double]
                  FXSpotRates: [3×3 table]
          TradeDecompositions: [5×2 table]
           CollateralHaircuts: [200×6 table]
        SupervisoryParameters: [19×7 table]
    MaturityBusinessDaysFloor: 10
          NumBusinessDaysYear: 250

You can then use the ead function with the saccr object. For more information, see Exposure at Default. 

outEADResults = ead(mySACCR)
outEADResults = 
  EADResults with properties:

       NumPortfolios: 3
        PortfolioIDs: [3×1 string]
     CounterpartyIDs: [3×1 string]
          Regulation: "Basel_CRE52"
    DomesticCurrency: "USD"
                 EAD: [3×1 double]
               Alpha: [3×1 double]
                  RC: [3×1 double]
                 PFE: [3×1 double]
          Multiplier: [3×1 double]
      AddOnAggregate: [3×1 double]
           RCResults: [1×1 saccr.RCResults]
          PFEResults: [1×1 saccr.PFEResults]
        ResultsTable: [3×17 table]


outEADResults.ResultsTable
ans=3×17 table
    PortfolioIDs    CounterpartyIDs     Regulation      DomesticCurrency       EAD        Alpha        RC           PFE        Multiplier    AddOnAggregate    AddOnIR    AddOnFX    AddOnCR     AddOnEQ       AddOnCO      Collateralized    UsedCollateral
    ____________    _______________    _____________    ________________    __________    _____    __________    __________    __________    ______________    _______    _______    _______    __________    __________    ______________    ______________

     "Port_007"       ""               "Basel_CRE52"         "USD"          3.7394e+05     1.4              0     2.671e+05     0.80408        3.3218e+05       49780        0        65013     2.1536e+05        2028.6        true              true      
     "Port_008"       ""               "Basel_CRE52"         "USD"          2.3608e+06     1.4     1.1555e+06    5.3077e+05           1        5.3077e+05       83467        0            0      4.473e+05             0        true              true      
     "Port_009"       "Exchange"       "Basel_CRE52"         "USD"          3.1006e+05     1.4              0    2.2147e+05           1        2.2147e+05           0        0            0              0    2.2147e+05        true              false

Input Arguments

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SA-CCR object, specified as a saccr object. You create a saccr object using saccr.

Data Types: object

Output Arguments

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Exposure at default (EAD) results, returned as an EADResults object. The EADResults object has the following properties:

  • NumPortfolios

  • PortfolioIDs

  • CounterpartyIDs

  • Regulation

  • DomesticCurrency

  • EAD

  • Alpha

  • RC

  • PFE

  • Multiplier

  • AddOnAggregate

  • RCResults

  • PFEResults

  • ResultsTable has NumPortfolios rows and the following columns:

    • PortfolioIDs

    • CounterpartyIDs

    • Regulation

    • DomesticCurrency

    • EAD

    • Alpha

    • RC

    • PFE

    • Multiplier

    • AddOnAggregate

    • AddOnIR

    • AddOnFX

    • AddOnCR

    • AddOnEQ

    • AddOnCO

    • Collateralized — Logical indicating whether the portfolio is collateralized with a collateral set.

    • UsedCollateral — Logical indicating whether the collateral, if any, successfully reduced the EAD. This flag indicates whether uncollateralized or collateralized values were used in computing the EAD.

You can use the aggregate and aggregateByCounterparty functions with the EADResults object.

More About

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Exposure at Default

The exposure at default (EAD) is the amount a bank or financial institution risks losing if a counterparty defaults.

The formula for computing EAD is

EAD = alpha * (RC + PFE)

where:

  • alpha — This value captures the model risk and the positive correlation between exposure and counterparty credit quality. It was set to 1.4 by the Basel committee but adjusted to 1 by US and European authorities until 2029 for better market reflection.

  • RC — The replacement cost represents the loss if a counterparty defaults and its transactions are immediately closed out. For more information, see RC.

  • PFE — The amount for potential future exposure is calculated using a multiplier and an add-on aggregated over all asset classes, reflecting future rather than immediate exposure. For more information, see addOn and pfe.

Under the SA-CCR framework, EAD is calculated considering the PFE and add-on factors for different derivative contracts. EAD represents the maximum potential loss a bank could face if a counterparty defaults, considering the derivative contracts' future exposure. The EAD calculation determines the PFE for each netting set, a group of derivative contracts with legally enforceable netting agreements, and multiplies it by relevant add-on factors, based on the contracts' specific risk characteristics. These factors account for the derivative type, contract maturity, collateral, or netting agreements, capturing potential exposure increase due to market volatility, credit risk, and wrong-way risk.

EAD, a crucial component in determining counterparty credit risk capital requirements, represents the capital a bank needs to cover potential losses from counterparty default. Incorporating EAD in counterparty credit risk calculation provides a more accurate, risk-sensitive counterparty exposure measure, considering the PFE and specific risk characteristics of derivative contracts, enabling appropriate capital allocation for potential losses.

EAD is an input to several calculations in the Basel framework and other regulatory workflows:

  • CapitalRatio = Capital /(MarketRisk_RWA + CreditRisk_RWA(PD, LGD,EAD) + OperationalRisk_RWA)

  • Counterparty limit management

  • Large Exposure / Single Counterparty Credit Limits (SCCL)

  • Leverage ratio

  • Net stable funding ratio

  • Capital valuation adjustment (KVA)

References

[1] Bank for International Settlements. "CRE52 - Standardised Approach to Counterparty Credit Risk." June 2020. Available at: https://www.bis.org/basel_framework/chapter/CRE/52.htm.

[2] Bank for International Settlements. "CRE22 - Standardised Approach: Credit Risk Migration." November 2020. Available at: https://www.bis.org/basel_framework/chapter/CRE/22.htm.

[3] Bank for International Settlements. "Basel Committee on Banking Supervision: The Standardised Approach for Measuring Counterparty Credit Risk Exposures." April 2014. Available at: https://www.bis.org/publ/bcbs279.pdf.

Version History

Introduced in R2024a

See Also

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