SA-CCR — EAD composition (Art. 274(2))¶

The SA-CCR exposure value (EAD) is the final composition step of the counterparty-credit-risk chain: it scales the sum of the replacement cost (RC, Art. 275) and the potential future exposure (PFE, Art. 278) by the supervisory alpha multiplier of 1.4 and emits one EAD per netting set. The resulting figure is the only number that crosses into the rest of the credit-risk pipeline — every other SA-CCR intermediate (per-trade adjusted notional, supervisory delta, maturity factor, per-hedging-set add-on) is reconciliation metadata at this point.

This page documents:

• the Art. 274(2) verbatim formula and the calibration rationale for α = 1.4;
• the engine entry point and the alpha-override hook on CCRConfig;
• the downstream routing of the netting-set EAD into the unified SA / IRB exposure ladder via pipeline_adapter.ccr_rows_to_exposures; and
• the interaction with the Basel 3.1 output floor — SA-CCR EAD enters both the un-floored U-TREA leg and the standardised S-TREA leg of the TREA formula.

Regulatory citation¶

Primary source: PRA PS1/26 Counterparty Credit Risk (CRR) Part — Article 274 (Exposure value). The UK regime is a verbatim re-export of the onshored CRR text with the Basel 3.1 alpha retained at 1.4. The secondary calibration source is BCBS CRE52.1–52.5 (the underlying SA-CCR methodology).

Verbatim text — PRA PS1/26 Art. 274(2)¶

"Institutions shall calculate the exposure value of a netting set under the standardised approach for counterparty credit risk as follows:

Exposure value = α · (RC + PFE)

where:

• RC = the replacement cost calculated in accordance with Article 275; and
• PFE = the potential future exposure calculated in accordance with Article 278;
• α = 1.4, unless the counterparty is a non-financial counterparty or a pension scheme arrangement or an entity established to provide compensation to members of a pension scheme arrangement in case of default, in which case, α = 1."

— PRA PS1/26 Annex R, Counterparty Credit Risk (CRR) Part, p. 456 (source PDF: docs/assets/ps126app1.pdf).

Why α = 1.4 — calibration rationale¶

The 1.4 multiplier is a deliberate, asset-class-agnostic calibration uplift relative to the IMM EEPE methodology that SA-CCR replaces. SA-CCR is intentionally less risk-sensitive than IMM (it has no Monte-Carlo scenarios, no portfolio-level diversification, and a coarse five-asset-class add-on structure), so the regulator applies a flat scalar at the end of the chain to recover a counterparty-level exposure broadly in line with what an internal model would have produced for the same netting set. The 1.4 value is inherited verbatim from BCBS CRE52.1 and from the original Basel III IMM-EAD calibration that pre-dates SA-CCR — it represents the same "alpha" that IMM users multiply by EEPE to get EAD under Art. 284(4).

The Art. 274(2) carve-out to α = 1 for non-financial counterparties, pension scheme arrangements, and pension-default compensation entities removes the calibration uplift for end-user counterparties whose CVA exposure profile is materially lower than the inter-bank book that SA-CCR was originally calibrated for. This carve-out aligns with the EMIR (Regulation (EU) No 648/2012) Article 2 point-(9) / point-(10) definitions referenced verbatim in the PS1/26 text.

Engine entry point¶

from rwa_calc.engine.ccr.sa_ccr import compute_ead

def compute_ead(
    netting_sets: pl.LazyFrame,
    config: CCRConfig | None = None,
) -> pl.LazyFrame:
    """SA-CCR exposure value per CRR Art. 274(2): EAD = α × (RC + PFE).

    Pure composition layer that consumes pre-computed netting-set-grain
    columns ``rc_unmargined`` (Art. 275) and ``pfe_addon`` (Art. 278). α
    defaults to 1.4 (Art. 274(2)) but may be overridden via
    ``config.alpha``. Returns the input frame with a new ``ead_ccr``
    column."""

Source: src/rwa_calc/engine/ccr/sa_ccr.py::compute_ead.

The function is a pure composition layer — it does not re-derive RC or PFE, it merely combines them. The inputs are:

The output column is:

Alpha override — CCRConfig.alpha¶

The α value defaults to 1.4 when config is None. When a CCRConfig instance is supplied, compute_ead reads float(config.alpha) and applies it to every row uniformly. This is the engine hook for the Art. 274(2) α = 1 carve-out (non-financial counterparties / pension schemes) — firms wiring the carve-out branch must invoke compute_ead twice, once with α = 1.4 on the in-scope netting sets and once with α = 1 on the carve-out netting sets, then concatenate the resulting frames. The current orchestrator at engine/ccr/pipeline_adapter.py::ccr_rows_to_exposures applies the default α = 1.4 to all netting sets — the per-counterparty carve-out gate is a documented engine gap (see the "Pending" note below).

CCRConfig is defined at src/rwa_calc/contracts/config.py with alpha: Decimal = Decimal("1.4") as the default field value.

Downstream routing into the SA / IRB exposure ladder¶

SA-CCR EAD is not a terminal output — it is an input to the standard credit-risk pipeline. The orchestrator at engine/ccr/pipeline_adapter.py::ccr_rows_to_exposures shapes each netting-set-grain ead_ccr value into a synthetic exposure row that mirrors the unified RAW_EXPOSURE_SCHEMA. From that point on the row is indistinguishable from an on-balance-sheet loan as far as the Classifier, CRM processor, and SA / IRB calculators are concerned.

Synthetic exposure row contract¶

The ccr_rows_to_exposures function emits one row per netting set with the following provenance-bearing fields:

Plus the SA-CCR provenance columns kept for reconciliation: addon_aggregate, addon_by_asset_class (struct of the five Art. 277(1) classes), pfe_multiplier, pfe_addon, rc_unmargined, and ead_ccr. These let the COREP exports reconcile a single RWA value back to its α × (RC + PFE) decomposition without re-running the SA-CCR chain.

Pipeline ordering — orchestrator view¶

RawCCRBundle
  → apply_legal_enforceability_gate   (Art. 272(4); see legal-enforceability.md)
  → ccr_rows_to_exposures             (chains the SA-CCR pipeline, this page)
      └─ compute_ead                  (Art. 274(2))            ← this page's entry point
  → synthetic exposure row (RAW_EXPOSURE_SCHEMA shape)
  → concat with on-balance-sheet exposures (how="diagonal_relaxed")
  → Classifier                        (resolves counterparty class)
  → CRMProcessor                      (no-op: drawn_amount already net of collateral via RC)
  → SA / IRB / Slotting Calculators   (risk-weight lookup, RWA = EAD × RW)
  → OutputAggregator                  (firm-level totals + output floor)

The how="diagonal_relaxed" concat in the orchestrator means any RAW_EXPOSURE_SCHEMA columns absent from the synthetic CCR row (e.g. loan_to_value, property_type) are filled with nulls. The downstream Classifier and CRM processor are CCR-unaware — they consume the CCR row identically to any other exposure.

Why the SA-CCR row is CRM-passthrough¶

The replacement-cost calculation at Art. 275 already nets the counterparty's posted collateral (V − C), so by the time ead_ccr emerges, no further collateral haircut applies at the CRM stage. The CRM processor's _initialize_ead step therefore sees drawn_amount = ead_ccr and produces ead_pre_crm = ead_ccr unchanged — there is no double-count of collateral. CRM guarantees and credit derivatives purchased on the CCR counterparty itself would still flow through the standard CRM substitution branch if supplied, but the CCR netting agreement's own collateral pool is already consumed by Art. 275.

Interaction with the Basel 3.1 output floor¶

The Art. 274(2) EAD contributes to both legs of the Basel 3.1 output-floor formula (TREA = max{U-TREA; x × S-TREA + OF-ADJ}) — it is a credit-risk RWA in both the un-floored and standardised computations:

• U-TREA leg (Art. 92(3)): the IRB-permissioned firm risk-weights the synthetic CCR row through IRB if the counterparty has an IRB model; otherwise SA. The resulting RWA enters U-TREA directly.
• S-TREA leg (Art. 92(3A)): the synthetic CCR row is re-run through the SA calculator (no IRB), producing an SA-equivalent RWA that enters S-TREA. The SA-CCR EAD itself does not change between the two legs — only the downstream risk-weight lookup changes.

The α = 1.4 multiplier therefore amplifies the floor impact for IRB firms whose IRB CCR EAD methodology (IMM, if permissioned) would produce a lower exposure number than SA-CCR. Conversely, an IRB firm using SA-CCR for its U-TREA leg sees identical EAD in both legs — only the risk weight differs.

See basel31/output-floor.md for the full TREA formula and the 4-year transitional schedule (PRA Art. 92(5): 60% → 65% → 70% → 72.5%).

Worked numeric example — CCR-A1 unmargined IR swap¶

The simplest end-to-end example uses the CCR-A1 acceptance scenario (tests/acceptance/ccr/test_ccr_a1_unmargined_ir_swap.py): one unmargined single-trade netting set containing a 1-year USD receive-fixed interest-rate swap with notional 100,000,000 USD, mark-to-market value 0, and no posted collateral.

Inputs to compute_ead (post per-trade SA-CCR chain, per-NS grain):

netting_set_id  = "NS_CCR_A1"
rc_unmargined   = max(V − C, 0) = max(0 − 0, 0) = 0.0                  (Art. 275(1))
pfe_addon       = multiplier × AddOn_aggregate
                = 1.0 × (SF_IR × |D_HS|)
                = 1.0 × (0.005 × 1.0 × 100m × 1.0 × MF_unmargined)
                = 1.0 × (0.005 × 100,000,000 × 1.0)                     (≥ 250 BD → MF = 1.0)
                = 500,000.00                                            (Art. 278)

Apply Art. 274(2) with default α = 1.4:

ead_ccr         = α × (rc_unmargined + pfe_addon)
                = 1.4 × (0.0 + 500,000.00)
                = 700,000.00                                            (Art. 274(2))

The synthetic exposure row emitted by ccr_rows_to_exposures for CCR-A1 is then:

exposure_reference     = "ccr__NS_CCR_A1"
exposure_type          = "ccr_netting_set"
risk_type              = "CCR_DERIVATIVE"
ccr_method             = "sa_ccr"
source_netting_set_id  = "NS_CCR_A1"
drawn_amount           ≈ 699,760.39           (= ead_ccr)
ead_ccr                ≈ 699,760.39
rc_unmargined          = 0.0
pfe_addon              ≈ 499,828.85
pfe_multiplier         = 1.0
addon_aggregate        ≈ 499,828.85
addon_by_asset_class   = {interest_rate: 499,828.85, fx: 0, credit: 0,
                          equity: 0, commodity: 0}
counterparty_reference = "CP_CCR_A1"
maturity_date          = 2027-01-15
currency               = "USD"

Downstream the Classifier assigns this row to the INSTITUTION class at CQS 2 (per the scenario fixture's counterparty rating), the SA calculator looks up RW = 50% (CRR Art. 121 Table 3), and the aggregator rolls RWA = 50% × 699,760.39 ≈ 349,880.20 into the firm-level total. Under Basel 3.1 the same row would route through Art. 121 Bucket B at RW = 40% instead — but the EAD value of 699,760.39 is identical under both frameworks (α = 1.4 is unchanged between CRR and Basel 3.1).

Sensitivity to α — what happens if the carve-out fires¶

If the same netting set were against a pension-scheme counterparty qualifying for the Art. 274(2) α = 1 carve-out, the EAD would drop by a factor of 1.0 / 1.4 ≈ 0.714:

ead_ccr (carve-out)  = 1.0 × (0 + 499,828.85) ≈ 499,828.85
RWA (carve-out)      = 50% × 499,828.85       ≈ 249,914.43

— a 28.6% reduction in CCR-RWA on the same trade, which is the direct mechanical effect of removing the SA-CCR calibration uplift. The engine wiring for the carve-out gate is the pending follow-up noted above; the math itself is exercised by the CCRConfig.alpha override at the compute_ead boundary.

Pending — engine gaps documented here¶

The following items are not yet engine-wired but are documented for forward visibility:

1. Art. 274(2) α = 1 carve-out gate — per-netting-set dispatch on counterparty type (non-financial counterparty, pension scheme arrangement, pension-default compensation entity) is not yet implemented in ccr_rows_to_exposures. The math is exercised by the CCRConfig.alpha override hook on compute_ead; the gate itself awaits a follow-up batch.
2. Art. 274(2A) transitional alpha add-on — the legacy CVA-exempt phase-in (60% → 40% → 20% over 2027–2029) is not implemented. When it ships, it will be a post-compute_ead overlay that adds back EAD(α=1.4) − EAD(α=1) at the prescribed percentage for the in-scope legacy trades.
3. Art. 274(2B) leverage-ratio exclusion — the SA-CCR EAD that feeds the leverage-ratio numerator excludes the Art. 274(2A) transitional add-on. Out of scope until the alpha add-on ships.

References¶

• PRA PS1/26 Counterparty Credit Risk (CRR) Part — Article 274(2) — Exposure value = α · (RC + PFE), α = 1.4 default, α = 1 carve-out for non-financial counterparties / pension schemes.
• PRA PS1/26 Counterparty Credit Risk (CRR) Part — Article 274(2A) — transitional alpha add-on phase-in for legacy CVA-exempt trades (60% → 40% → 20% over 2027–2029).
• PRA PS1/26 Counterparty Credit Risk (CRR) Part — Article 274(2B) — alpha add-on excluded from leverage-ratio EAD.
• PRA PS1/26 Counterparty Credit Risk (CRR) Part — Article 275 — replacement cost RC (input to Art. 274(2)).
• PRA PS1/26 Counterparty Credit Risk (CRR) Part — Article 278 — potential future exposure PFE (input to Art. 274(2)).
• PRA PS1/26 Required Level of Own Funds (CRR) Part — Article 92(2A) / 92(3) / 92(3A) / 92(5) — output floor formula and transitional schedule (consuming the CCR EAD via the synthetic exposure row).
• BCBS CRE52.1 — Basel-level methodology underpinning α = 1.4.
• Regulation (EU) No 648/2012 (EMIR) Art. 2(9), Art. 2(10) — definitions of "non-financial counterparty" and "pension scheme arrangement" referenced by the Art. 274(2) carve-out.
• src/rwa_calc/engine/ccr/sa_ccr.py::compute_ead — engine implementation of EAD = α × (RC + PFE).
• src/rwa_calc/engine/ccr/pipeline_adapter.py::ccr_rows_to_exposures — orchestrator that drives the SA-CCR chain and shapes the netting-set EAD into the synthetic RAW_EXPOSURE_SCHEMA row.
• src/rwa_calc/contracts/config.py::CCRConfig — alpha: Decimal = Decimal("1.4") default and override hook.
• tests/acceptance/ccr/test_ccr_a1_unmargined_ir_swap.py — golden-value end-to-end CCR-A1 scenario underpinning the worked example above.
• Replacement cost (RC) — companion page for the Art. 275 input.
• PFE multiplier — companion page for the Art. 278 input.
• Hedging sets — companion page for the Art. 277 / Art. 277a partition that feeds the per-asset-class add-on.
• Output floor (Basel 3.1) — downstream consumption of the SA-CCR EAD in both U-TREA and S-TREA legs.