• Calculation of E* for collateralised transactions other than OTC Derivative transactions and long settlement transactions

    • PRU A4.3.2

      An Authorised Person using the FCCA to calculate E* must adjust both the amount of the Exposure to the Counterparty and the value of any Collateral received in support of that Counterparty to take into account possible future fluctuations in the value of either due to market movements, by using the methods and haircuts set out in Rules A4.3.6 to A4.3.29.

    • PRU A4.3.3

      An Authorised Person must calculate the appropriate haircuts to be applied using one of the following methods:

      (a) standard supervisory haircuts; or
      (b) own-estimate haircuts.

    • PRU A4.3.4

      [Reserved]

    • PRU A4.3.5 PRU A4.3.5

      (1) As an alternative to the use of standard supervisory haircuts or own-estimate haircuts, an Authorised Person may, subject to the Regulator's approval, use VaR models to reflect the price volatility of the Exposure and Collateral for SFTs which are covered by a qualifying bilateral Netting agreement. The requirements relating to the use of this approach are set out in Section A4.5.
      (2) An Authorised Person may seek the Regulator's approval referred to in (1) only if it has already received the Regulator's approval to use the internal models approach for calculating the Market Risk Capital Requirement.

      • Guidance

        Approval for the use of the internal model approach is governed by Section 5.11 of Chapter 5 (Market Risk).

    • PRU A4.3.6 PRU A4.3.6

      An Authorised Person using standard supervisory haircuts or own-estimate haircuts under the FCCA must calculate E* for any collateralised transaction not covered by a qualifying bilateral Netting agreement or a qualifying cross-product Netting agreement other than OTC Derivative transactions or long settlement transactions, using the following formula:

      E* = max {0, [E (or EAD)(1 + HE) - C(1 - HC - HFX)]}

      where;

      E* = Exposure value after risk mitigation;

      E = fair value of the Exposure calculated in accordance with Section 4.9;

      HE = haircut appropriate to the Exposure;

      C = fair value of the eligible financial Collateral received;

      HC = haircut appropriate to the Collateral, or if the Collateral is a basket of assets, the weighted sum of the haircuts appropriate to the assets in the basket where each weight is the proportion of the asset in the basket in units of currency; and

      HFX = haircut appropriate for currency mismatch between the Collateral and Exposure.

      • Guidance

        Where the residual maturity of the Collateral is shorter than the residual maturity of the Exposure, the Authorised Person must substitute PA calculated in accordance with Rules 4.13.14 to 4.13.16 for C(1 - HC - HFX).

    • PRU A4.3.7

      An Authorised Person using standard supervisory haircuts or own-estimate haircuts under the FCCA must calculate E* for any collateralised transaction covered by a qualifying bilateral Netting agreement or qualifying cross-product Netting agreement other than OTC Derivative transactions or long settlement transactions, using the following formula:

      𝐸 = Max {0, [∑(𝐸) − ∑(𝐶) + add-on]}

      where:

      E* = Exposure value after risk mitigation;

      E = fair value of the Exposure calculated in accordance with Section 4.9 of these Rules;

      C = fair value of eligible financial Collateral received; and

      add-on = the add-on amount to reflect the market price volatility and foreign exchange volatility, calculated in accordance with Rule A4.3.8 below.

    • PRU A4.3.8 PRU A4.3.8

      An Authorised Person must calculate the add-on using one of the following approaches:

      (a) the approach according to the following formula:

      add-on = ∑(𝐸𝑆 . 𝐻𝑆 ) + ∑(𝐸𝐹𝑋. 𝐻𝐹𝑋)

      where:

      ES = absolute value of the net position in a given Security;

      HS = haircut appropriate to ES

      EFX = absolute value of the net position in a currency different from the settlement currency; and

      HFX = haircut appropriate for currency mismatch between the Collateral and Exposure;

      or
      (b) the approach using VaR models, provided the Authorised Person has received approval from the Regulator as referred to in Rule A4.3.5.

      • Guidance

        Approval for the use of the internal model approach is governed by Section 5.11 of Chapter 5.

    • PRU A4.3.9

      Subject to Rules A4.3.10 to A4.3.12, an Authorised Person must determine HE, HC, HS and HFX referred to in Rules A4.3.6 to A4.3.8, in accordance with the standard supervisory haircuts in the table forming part of Rule A4.3.13.

    • PRU A4.3.10

      An Authorised Person may calculate HE, HC, HS and HFX using own-estimate haircuts in accordance with Rules A4.3.17 to A4.3.23 if it has received approval from the Regulator to use the internal models approach for calculating the Market Risk Capital Requirement. If the Authorised Person chooses to use own-estimate haircuts, it must do so consistently for determining haircuts for all eligible financial Collateral and all portfolios, except that it may, with the approval of the Regulator, use the standard supervisory haircuts in Rules A4.3.13 to A4.3.16 for any portfolio which is immaterial in size and risk profile.

    • PRU A4.3.11

      An Authorised Person may apply a value of zero to HE, HC and HS in the case of a qualifying SFT with a core market participant. This approach is not available to an Authorised Person using VaR models in accordance with Section A4.5 to calculate E*.

    • PRU A4.3.12

      An Authorised Person may apply a value of zero to HE, HC and HS in the case of an SFT where both the Exposure and Collateral are Securities issued by central governments where a value of zero has been prescribed by the banking regulator of that jurisdiction and Exposures to the central government of that jurisdiction have a Credit Quality Grade of 1 as set out in the table Rule 4.12.4.