On January 31. the UK Financial Services Authority (FSA) issued guidance FG12/03 with respect to certain aspects of counterparty credit risk management by central counterparties (CCPs). The guidance focuses on risk models and associated governance, processes and procedures. The FSA notes that other aspects related to counterparty credit risk management, such as participant entry criteria, while viewed by the FSA as equally important, are being discussed in other regulatory fora.

This guidance explains the FSA’s review process undertaken when considering CCPs’ counterparty credit risk management. The FSA points out that its guidance is designed to be consistent with the Principles for Financial Market Infrastructure, of the Committee on Payment and Settlement Systems and Technical Committee of the International Organization of Securities Commissions and may be revised when these principles are finalized. It will also be revised to be consistent with the Technical Standards for CCP Requirements to be issued by the relevant European supervisory authorities after the EU regulations on OTC derivatives, central counterparties and trade repositories are finalized.

The FSA guidance focuses on eight “high level areas”: risk management governance and counterparty credit risk control framework, initial margin models, variation margin calculation, default fund, stress testing, wrong way risk and concentration risk, collateral, and validation and back-testing

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