Reason for hope
One disappointing aspect of the Basel II deliberations has been the lack of any proposed change in the treatment of counterparty credit exposures. David Rowe argues that recent dialogue between the Basel Committee and industry representatives offers hope for an important improvement in this area
The original Basel I Accord was initiated in the mid-1980s just as long-dated derivatives were emerging as an important risk management tool. It was recognised that these contracts gave rise to credit exposure of indefinite future magnitude on the books of market-makers. At the time, such exposure was material but comparatively small. This, combined with the perceived urgency in implementing the Accord, resulted in the simple (I might say simplistic) mark-to-market plus add-on
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