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Conditions
for zero H
170.
For repo-style transactions where the following
conditions are satisfied, and
the
counterparty
is a core market participant, supervisors may
choose not to apply the
haircuts
specified
in the comprehensive approach and may instead
apply a haircut of zero. This
carve-out
will not be available for banks using the
modelling approaches as described
in
paragraphs
178 to 181 (i).
(a)
Both the exposure and the collateral are cash or
a sovereign security or PSE
security qualifying
for a 0% risk weight in the standardised
approach;
(49)
(b)
Both the exposure and the collateral are
denominated in the same
currency;
(c)
Either the transaction is overnight or both the
exposure and the collateral are
marked-to-market
daily and are subject to daily
remargining;
(d)
Following a counterparty’s failure to remargin,
the time that is required
between
the last
mark-to-market before the failure to remargin
and the liquidation50 of
the
collateral
is considered to be no more than four business
days;
(e)
The transaction is settled across a settlement
system proven for that type of
transaction;
(f)
The documentation covering the agreement is
standard market documentation
for
repo-style
transactions in the securities
concerned;
(g)
The transaction is governed by documentation
specifying that if the
counterparty
fails
to satisfy an obligation to deliver cash or
securities or to deliver margin
or
otherwise
defaults, then the transaction is immediately
terminable; and
(h)
Upon any default event, regardless of whether
the counterparty is insolvent
or
bankrupt,
the bank has the unfettered, legally enforceable
right to immediately
seize
and liquidate the collateral for its
benefit.
(49) Note that where a supervisor
has designated domestic-currency claims on its
sovereign or central bank to be eligible for a
0% risk weight in the standardised approach,
such claims will satisfy this
condition.
(50) This does not require the
bank to always liquidate the collateral but
rather to have the capability to do so within
the given time
frame.
171.
Core
market participants may include, at the
discretion of the national
supervisor,
the
following entities:
(a)
Sovereigns, central banks and
PSEs;
(b)
Banks and securities firms;
(c)
Other financial companies (including insurance
companies) eligible for a 20%
risk
weight
in the standardised approach;
(d)
Regulated mutual funds that are subject to
capital or leverage
requirements;
(e)
Regulated pension funds; and
(f)
Recognised clearing
organisations.
172.
Where a supervisor applies a specific carve-out
to repo-style transactions in
securities
issued by its domestic government, then other
supervisors may choose to allow
banks
incorporated in their jurisdiction to adopt the
same approach to the same
transactions.
Treatment
of repo-style transactions covered under master
netting agreements
173.
The effects of bilateral netting agreements
covering repo-style transactions will
be
recognised
on a counterparty-by-counterparty basis if the
agreements are legally enforceable in each
relevant jurisdiction upon the occurrence of an
event of default and regardless of whether the
counterparty is insolvent or bankrupt. In
addition, netting agreements
must:
(a)
provide the non-defaulting party the right to
terminate and close-out in a
timely
manner
all transactions under the agreement upon an
event of default, including in
the
event of insolvency or bankruptcy of the
counterparty;
(b)
provide for the netting of gains and losses on
transactions (including the value
of
any
collateral) terminated and closed out under it
so that a single net amount is
owed
by one party to the other;
(c)
allow for the prompt liquidation or setoff of
collateral upon the event of default;
and
(d)
be, together with the rights arising from the
provisions required in (a) to (c)
above,
legally
enforceable in each relevant jurisdiction upon
the occurrence of an event of
default
and regardless of the counterparty's insolvency
or bankruptcy.
174.
Netting across positions in the banking and
trading book will only be
recognised
when
the netted transactions fulfil the following
conditions:
(a) All transactions
are marked to market
daily;(51) and
(b)
The collateral instruments used in the
transactions are recognised as
eligible
financial
collateral in the banking book.
(51) The holding period for the
haircuts will depend as in other repo-style
transactions on the frequency of
margining.
175.
The formula in paragraph 147 will be adapted to
calculate the capital
requirements
for
transactions with netting
agreements.
176.
For banks using the standard supervisory
haircuts or own-estimate haircuts,
the
framework
below will apply to take into account the impact
of master netting agreements.
E* = max {0, [(Σ(E) –
Σ(C)) + Σ (Es x Hs) +Σ (Efx x
Hfx)]}
(52)
where:
E*
= the exposure value after risk
mitigation
E =
current value of the exposure
C =
the value of the collateral
received
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
Hfx
= haircut appropriate for currency
mismatch
(52) The starting point for this
formula is the formula in paragraph 147 which
can also be presented as the following:
E* = max {0, [(E – C) + (E x He) +
(C x Hc) + (C x
Hfx)]}.
177.
The intention here is to obtain a net exposure
amount after netting of the
exposures
and
collateral and have an add-on amount reflecting
possible price changes for the
securities
involved
in the transactions and for foreign exchange
risk if any.
The
net long or short position of each security
included in the netting agreement will be
multiplied by the appropriate haircut. All other
rules regarding the calculation of haircuts
stated in paragraphs 147 to 172 equivalently
apply for banks using bilateral netting
agreements for repo-style
transactions.
Use
of models
178.
As an alternative to the use of standard or
own-estimate haircuts, banks may
be
permitted
to use a VaR models approach to reflect the
price volatility of the exposure
and
collateral
for repo-style transactions, taking into account
correlation effects between
security
positions.
This
approach would apply to repo-style transactions
covered by bilateral
netting
agreements
on a counterparty-by-counterparty basis. At the
discretion of the national
supervisor,
firms are also eligible to use the VaR model
approach for margin lending
transactions,
if the transactions are covered under a
bilateral master netting agreement
that
meets
the requirements of paragraphs 173 and 174.
The
VaR models approach is available to banks that
have received supervisory recognition for an
internal market risk model under the Market Risk
Amendment. Banks which have not received
supervisory recognition for use of models under
the Market Risk Amendment can separately apply
for supervisory recognition to use their
internal VaR models for calculation of potential
price volatility for repo-style transactions.
Internal models will only be accepted when a
bank can prove the quality of its model to the
supervisor through the backtesting of its output
using one year of historical data.
Banks
must meet the model validation requirement of
paragraph 43 of Annex 4 to use VaR for
repo-style and other SFTs. In addition, other
transactions similar to
repostyle
transactions
(like prime brokerage) and that meet the
requirements for repo-style
transactions,
are also eligible to use the VaR models approach
provided the model used
meets
the operational requirements set forth in
Section I.F of Annex 4.
179.
The quantitative and qualitative criteria for
recognition of internal market risk
models
for
repo-style transactions and other similar
transactions are in principle the same as
under
the
Market Risk Amendment.
With
regard to the holding period, the minimum will
be 5- business days for repo-style transactions,
rather than the 10-business days under the
Market Risk Amendment. For other transactions
eligible for the VaR models approach, the 10-
business day holding period will be retained.
The
minimum holding period should be adjusted
upwards for market instruments where such a
holding period would be inappropriate given the
liquidity of the instrument
concerned.
180.
(Deleted)
181.
The calculation of the exposure E* for banks
using their internal model will be
the
following:
E*
= max {0, [(ΣE – ΣC) + VaR output from internal
model]}
In
calculating capital requirements banks will use
the previous business day’s VaR
number.
181
(i). Subject to supervisory approval, instead of
using the VaR approach, banks may
also
calculate
an expected positive exposure for repo-style and
other similar SFTs, in
accordance
with
the Internal Model Method set out in Annex 4 of
this Framework.
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