Prefunded Contributions To The Default Fund Of A QCCP
An Authorised Person acting as a clearing member must calculate its Credit RWA for its prefunded contributions to the default fund of a QCCP in accordance with the steps set out in Rules A4.9.16 and A4.9.17 below.
A4.9.16 PRU A4.9.16
An Authorised Person must first calculate the hypothetical capital requirement of the QCCP (KCCP) due to its counterparty credit risk exposures to all of its clearing members and their clients in accordance with the following formula:
RW = a risk weight of 20%;
Capital ratio= 10%;
EADi = the exposure amount of the QCCP to clearing member i, including both the clearing member's own transactions and client transactions guaranteed by the clearing member, and all values of collateral held by the QCCP held over all clearing member accounts (including the clearing member's prefunded default fund contribution) against these transactions, relating to the valuation at the end of the regulatory reporting date before the margin called on the final margin call of that day is exchanged.
Guidance1. Where clearing members provide client clearing services, and client transactions and collateral are held in separate sub-accounts to the clearing member's proprietary business, each such client sub-account should enter the sum separately, i.e. the member EAD in the formula above is then the sum of the client sub-account EADs and any house sub-account EAD. This will ensure that client collateral cannot be used to offset the exposures of the QCCP to clearing members' proprietary activity in the calculation of KCCP. If any of these sub-accounts contains both derivatives and SFTs, the EAD of that sub-account is the sum of the derivative EAD and the SFT EAD. If the default fund contributions of the member (DFi) are not split with regard to client and house sub-accounts, they must be allocated per subaccount according to the respective fraction the initial margin of that subaccount has in relation to the total initial margin posted by or for the account of the clearing member.(2) For derivatives, EADi is calculated as the bilateral trade exposure the QCCP has against clearing member i using the approach in Rule A4.6.14. All collateral held by a QCCP to which that QCCP has a legal claim in the event of default of a member or client, including default fund contributions of that member (DFi), is used to offset the exposure of the QCCP to that member or client, through inclusion in the potential future exposure multiplier in accordance with Rule A4.6.14.(3) For SFTs, EAD is equal to max(EBRMi – IMi – DFi; 0), where: a. EBRMi denotes the exposure value to clearing member i before risk mitigation. For the purposes of this calculation, variation margin that has been exchanged (before the margin called on the final margin call of that day) enters into the mark-to-market value of the transactions;b. IMi is the initial margin collateral posted by clearing member i with the QCCP;c. DFi is the prefunded default fund contribution by clearing member i that will be applied upon such clearing member's default, either along with or immediately following such member's initial margin, to reduce the QCCP loss.
A4.9.17 PRU A4.9.17
An Authorised Person must next calculate the capital requirement for each clearing member in accordance with the following formula:
KCMi = the capital requirement on the default fund contribution of clearing member i;
DFprefCM = the total prefunded default fund contributions from clearing members;
DFCCP = the prefunded own resources of the CCP (e.g. contributed capital, retained earnings, etc.), which are contributed to the default waterfall, where these are junior or pari passu to prefunded member contributions; and
DFprefi = the prefunded default fund contributions provided by clearing member i.
Guidance1. If the Regulator is not provided with a calculation of KCCP, DFprefCM and DFCCP or if the Regulator is not able to confirm those calculations, the treatment set out in Rule A4.9.18 shall apply to the calculation made by the relevant Authorised Person to the default fund of a QCCP.2. KCCP should be calculated on a quarterly basis at a minimum, although the Regulator may require more frequent calculations in case of material changes (such as the QCCP clearing a new product). If the Authorised Person or Regulator performed the calculations, it should make available to any other Authorised Person which acts as a clearing member sufficient aggregate information about the composition of the exposures of the QCCP to clearing members and information provided to the Authorised Person for the purposes of the calculation of KCCP, DFprefCM and DFCCP.3. Such information should be provided a least on a quarterly basis. KCCP and KCMi should be recalculated at least quarterly, and should also be recalculated when there are material changes to the number or exposure of cleared transactions or material changes to the financial resources of the QCCP.