On 1 June 2011, the Basel Committee on Banking Supervision (BCBS) published a press release announcing that it has finalised the Basel III capital treatment for counterparty credit risk (CCR) in bilateral trades.

In December 2010, the BCBS published the Basel III rules relating to, among other things, capital requirements for CCR exposures (BCBS189) (see Legal update, BCBS publishes text of Basel III rules). These rules included capital rules for credit value adjustment (CVA) risk that included standardised and advanced methods. The BCBS defines CVA as "the risk of loss caused by changes in the credit spread of a counterparty due to changes in its credit quality". The level and reasonableness of the Basel III standardised CVA risk capital charge published in December 2010 was subject to a final impact study, due to be completed in the first quarter of 2011.

The BCBS has now completed the impact study. It has concluded that the December 2010 proposals for the standardised CVA risk capital charge could be unduly punitive for certain low-rated counterparties. It has therefore decided to reduce the weight applied to CCC-rated counterparties from 18% to 10%.

The BCBS has issued a revised version of BCBS189, including the relevant change (in paragraph 104). The press release states that all other aspects of the regulatory capital treatment for CCR and CVA risk remain unchanged from the December 2010 version of the rules.

The press release also states that the BCBS intends to finalise its proposals relating to capitalisation of bank exposures to central counterparties (CCPs) by the end of 2011. It consulted on these proposals in December 2010 and had originally intended to finalise its proposals by the end of September 2011 (see Legal update, BCBS consults on the capitalisation of bank exposures to CCPs).

For more information on Basel III, see Practice note, Basel III: an overview and for more information on the BCBS' ongoing initiatives, including the capitalisation of bank exposures to CCPs, see Practice note, Basel Committee on Banking Supervision: ongoing initiatives.

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