Fed's Pykhtin: new risk measure less punitive than CEM

Basel Committee's new standardised approach to counterparty risk exposures will replace much-criticised CEM measure in a trio of rules

Michael Pykhtin

A new standardised way of modelling counterparty risk will produce higher capital numbers than internal models, according to a senior official from the Federal Reserve Board – but it will be more risk-sensitive than the two approaches it replaces, including the decades-old current exposure method (CEM). The CEM has been a bugbear for banks since regulators slotted it into a number of more recent prudential rules, including the leverage ratio.

The standardised approach to counterparty credit risk