CALCULATION OF COUNTERPARTY CREDIT RISK Division 1 - General
83. Part 6A, Division 4 added Part 6A, after section 226O-
Add
“Division 4 - Exposures to CCPs6
226Q. Application of Division 4
(1) Unless otherwise stated, the requirements set out in this Division apply to all locally incorporated authorized institutions, regardless of the approach adopted by the institutions for calculating their credit risk for non-securitization exposures.
(2) To avoid doubt, exposures to CCPs arising from delayed or failed settlement of-
(a) cash transactions in securities (other than repo-style transactions), foreign exchange or commodities; and (b) cash-settled derivative contracts,
are not subject to the requirements of this Division but are subject to the capital treatment set out in Part 4, 5 or 6, as the case requires, for transactions settled on a versus-payment basis or a basis other than the delivery-versus-payment basis.
226R. Interpretation - Division 4 (1) In this Division-
initial margin ( ), in relation to the calculation of regulatory capital for exposures to CCPs and clearing members-
(a) subject to paragraph (b), means a clearing member’s or a client’s funded collateral posted to a CCP to mitigate the potential future exposure of the CCP to the clearing
6 The requirements in this Division are subject to the finalised CCP proposals to be issued by the Basel
member arising from the possible future change in the value of the clearing member’s transactions or the client’s transactions, as the case may be; and
(b) does not include-
(i) any default fund contributions made by the clearing member; and
(ii) any funded collateral posted by the clearing member or client that can be used by the CCP to mutualize losses among clearing members;
non-qualifying central counterparty ( ) means a CCP that is not a qualifying CCP;
offsetting transaction ( ), in relation to a clearing member of a CCP and a client of the clearing member, means a transaction between the clearing member and the CCP which is for the purpose of offsetting a transaction between the clearing member and the client when the clearing member acts on behalf of the client as an
intermediary between the client and the CCP;
qualifying central counterparty ( ) means a CCP-
(a) that has been licensed by a [CCP regulator]
to operate as a CCP and, with respect to products offered by the CCP, is permitted by the CCP regulator to operate as such;
(b) that is based and prudentially supervised in a jurisdiction where the CCP regulator
substantially enforces on a continuous basis the “Principles for Financial Market
Infrastructures” issued by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions, as in force from time to time; and
for its default fund contribution to the CCP in accordance with the methodology and requirements set out in [paragraphs 116 and 117] of Annex 4 (as amended by the
document entitled “Capitalisation of Bank Exposures to Central Counterparties” issued by the Basel Committee in [ ] 2012) to the document entitled “International
Convergence of Capital Measurement and Capital Standards – A Revised Framework (Comprehensive Version)” published by the Basel Committee in June 2006;]
variation margin ( ) means a clearing member’s or client’s funded collateral posted on a daily or intraday basis to a CCP based on price movements of the clearing member’s transactions or client’s transactions, as the case may be.
(2) For the purposes of this Division-
(a) an authorized institution’s default risk exposure to a CCP includes any initial margin or variation margin that is payable by the CCP to the institution;
(b) any reference to bilateral master agreement in section 226A(2) must be construed to mean a netting agreement employed by a CCP that provides legally enforceable rights of set-off; and
(c) the references to agreement in the definition of valid bilateral netting agreement in section 2(1) must be construed to mean a netting agreement employed by a CCP that provides legally enforceable rights of set-off.
226S. Calculation of default risk exposures
(1) An authorized institution must calculate its default risk exposure to a CCP, a clearing member or a client in respect of OTC derivative transactions, credit derivative contracts and SFTs using the same methodology as it would be required to use if the transactions or contracts- (a) were not cleared by CCPs, or
(b) were not CCP-related transactions.
(2) Where an authorized institution’s transaction with a CCP is a derivative contract traded on an exchange, the institution must calculate its default risk exposure in respect of the contract using the same methodology as it would be required to use if the contract were an OTC derivative transaction or a credit derivative contract, as the case requires.
(3) An authorized institution may treat the default risk exposure to a CCP, in respect of payment transactions or spot transactions, as zero if the CCP’s default risk
exposures to all clearing members are fully collateralized on a daily basis.
(4) For the purposes of subsections (1) and (2), if a netting set with a qualifying CCP falls within the description in section 226L(2) and an authorized institution uses the IMM(CCR) approach or any of the methods under sections 76A(3) to (6), 96, 97, 123A(3) to (6), 202(2) and 209(3) to calculate the default risk exposure in respect of the netting set, the higher supervisory floor of 20 business days required under section 226L(2) does not apply to the calculation of the default risk exposure if, and only if, the netting set – (a) does not contain illiquid collateral or exotic
transactions; and
(b) does not contain any disputed transactions.
226T. Exposures of clearing members to qualifying CCPs
(1) An authorized institution that is a clearing member of a qualifying CCP must calculate the risk-weighted amount of its-
(a) default risk exposure to the CCP; and
(b) off-balance sheet exposure to the CCP arising from guarantees provided by the institution to its clients for any loss due to changes in the value of the clients’ transactions in the event that the CCP
(2) Subject to subsection (3), for the purposes of subsection (1), an authorized institution may calculate the risk-weighted amount taking into account any credit risk mitigation techniques (including recognized netting and margining) that are recognized under these Rules in the same manner as allowed for the calculation of the risk-weighted amount of its default risk exposures in respect of bilateral
transactions.
(3) An authorized institution must not under subsection (2) take into account the effect of any credit risk mitigation techniques applicable to an exposure [of the institution] if that effect has already been taken into account in the calculation of the default risk exposures in respect of the transactions or contracts concerned.
(4) An authorized institution is not required to hold regulatory capital for CVA risk in respect of transactions with a qualifying CCP.
(5) Subject to subsection (9), an authorized institution that is a clearing member of a qualifying CCP must use Formula 23K to calculate the regulatory capital for its default fund contribution (KAI) to the CCP.
FORMULA 23K
CALCULATION OF REGULATORY CAPITAL FOR DEFAULT FUND CONTRIBUTION BY AUTHORIZED
INSTITUTION THAT IS CLEARING MEMBER OF QUALIFYING CCP the clearing members with the 2 largest ANet
values and subscript i denotes clearing member
“i” but-
(i) for derivative contracts, ANet is an amount calculated by using the same formula as Formula 8 in section 95 as if the CCP were an authorized institution; exposure to the SFTs;
(B) C is the current market value of the collateral, which would fall within the definition of recognized
collateral in section 51(1) if the CCP were an authorized institution, received by the CCP; and
(C) He, Hc and Hfx are haircuts which would have the meanings given by Formula 2 in section 87 if the CCP were an authorized institution;
(b) N = number of clearing members;
(c) DFAI = prefunded default fund contribution from the authorized institution;
(d) DFCM= total of prefunded default fund contributions from all clearing members; and
(e) KCM* = aggregate capital requirement on default fund contributions from all clearing members prior to adjustments for granularity and concentration calculated in accordance with the methodology set out in [paragraph 116] of Annex 4 (as amended by the document entitled
“Capitalisation of Bank Exposures to Central Counterparties” issued by the Basel Committee in [ ] 2012) to the document entitled
“International Convergence of Capital
(6) An authorized institution must, if Formula 23K cannot work because the CCP does not have any prefunded default fund contributions, calculate KAI by allocating KCM* based on its proportionate unfunded default fund commitment instead of based on
CM AI
DF DF .
(7) An authorized institution must, if the authorized institution’s share of KCM* based on its proportionate unfunded default fund commitment is not determinable, allocate KCM* based on the size of the initial margin posted by it to the CCP.
(8) An authorized institution must recalculate KAI - (a) at least on a quarterly basis; and
(b) whenever there are material changes to- (i) the number or exposure of cleared
transactions; or
(ii) the financial resources of the CCP.
(9) The Monetary Authority may, if a CCP’s mutualized loss sharing arrangements would not allocate losses to its clearing members proportionate to their prefunded default fund contributions, and after consultation with the
authorized institution concerned, by notice in writing given to the institution require it to make adjustments specified in the notice to the allocation methodology set out in
subsection (5), (6) or (7), as the case may be, in order to reflect the loss allocation basis under the mutualized loss sharing arrangements.
(10) An authorized institution must comply with the
requirements of a notice given to it under subsection (9).
(11) For the purposes of the calculation of regulatory capital, an authorized institution must, if it fails OR [has failed] to obtain necessary data to calculate its KAI for a qualifying CCP, treat its default fund contribution to the CCP as default fund contribution to a non-qualifying CCP.
(12) An authorized institution must calculate the risk-weighted amount of its default fund contribution as the product of KAI and 12.5.
226U. Exposures of clearing members to clients
(1) An authorized institution that is a clearing member of a CCP must calculate the risk-weighted amount of its default risk exposure and CVA risk-weighted amount in respect of its clients arising from CCP-related transactions and the risk-weighted amount of its off-balance sheet exposures arising from guarantees of clients’ performance in
accordance with Division 3 of Part 6A and Part 4, 5 or 6, as the case requires, as if the transactions cleared by the CCP were bilateral transactions between the institution and the clients, regardless of whether the institution guarantees the performance of the clients or acts as an intermediary between the clients and the CCP.
(2) Where an authorized institution-
(a) is a clearing member of CCP; and
(b) has entered into a transaction, being the CCP-related transactions for a derivative contract traded on an exchange, with its client under a bilateral agreement between the institution and its client, the institution must calculate the risk-weighted amount of its default risk exposure and CVA risk-weighted amount in respect of the client arising from the derivative contract as if the derivative contract were an OTC derivative
transaction.
226V. Exposures of clients to clearing members (1) Where an authorized institution-
(a) is a client of a clearing member of a CCP; and (b) enters into a CCP-related transaction (in this section
referred to as the relevant transaction) with the clearing member that acts as a financial
intermediary between the institution and the CCP, the institution must, subject to subsections (3) and (4),
clearing member arising from the relevant transaction in accordance with Division 3 of Part 6A and Part 4, 5 or 6, as the case requires.
(2) Where an authorized institution-
(a) is a client of a clearing member of a CCP; and (b) has entered into a transaction, being the
CCP-related transaction for a derivative contract traded on an exchange, with the clearing member under a bilateral agreement between the institution and the clearing member,
the institution must calculate the risk-weighted amount of its default risk exposure and CVA risk-weighted amount in respect of the clearing member arising from the derivative contract as if it were an OTC derivative transaction.
(3) An authorized institution may, if the CCP is a qualifying CCP and all the conditions set out in subsection (5) are met, calculate the risk-weighted amount of its exposure to the clearing member arising from the relevant transaction in accordance with section 226T(1) to (4) as if its exposure were to the CCP.
(4) An authorized institution may, if the CCP is a qualifying CCP and all the conditions set out in subsection (5) are met other than the condition set out in subsection (5)(a)(iii), calculate the risk-weighted amount of its exposure to the clearing member arising from the relevant transaction in accordance with section 226T(1) to (4) as if its exposure were to the CCP except that the applicable risk-weight must be 4% instead of 2%.
(5) The conditions that must be met for the relevant transaction of an authorized institution to receive the treatment
mentioned in subsection (3) are-
(a) the offsetting transaction for the relevant transaction is identified by the CCP as a client transaction and the collateral for supporting the offsetting
transaction is held by the CCP or the clearing member, or both, as applicable, under arrangements that prevent any losses to the institution due to- (i) the default or insolvency of the clearing
member;
(ii) the default or insolvency of the clearing member’s other clients; and
(iii) the joint default or joint insolvency of the clearing member and any of its other clients;
(b) the institution has obtained independent, written and reasoned legal advice that concludes that, in the event of a legal challenge, the relevant court or administrative authority would find that the institution would bear no losses on account of the insolvency of the clearing member or of any other clients of the clearing member under-
(i) the law of the jurisdictions in which the institution, the clearing member and the CCP are incorporated or the equivalent locations in the case of non-corporate
entities, and if a branch of the institution, the clearing member or the CCP is involved, then also under the law of the jurisdiction in which the branch is located;
(ii) the law that governs the individual transactions and collateral; and (iii) the law that governs any contract or
agreement necessary to meet the condition [mentioned] in paragraph (a); and
(c) relevant laws, regulations, rules, contractual or administrative arrangements provide that offsetting transactions with a clearing member are highly likely to continue to be indirectly transacted through the CCP, or by the CCP, if the clearing member defaults or becomes insolvent, and in such circumstances, the institution’s positions and
collateral with the CCP will be transferred at market value unless the institution requests to close out the positions at market value.
226W. Exposures of clients to qualifying CCPs
(b) enters into a transaction with the CCP; and
(c) has its performance under the transaction mentioned in paragraph (b) guaranteed by the clearing member mentioned in paragraph (a),
the institution must, subject to subsection (2), calculate the risk-weighted amount of its default risk exposure and CVA risk-weighted amount in respect of the clearing member arising from the transaction in accordance with Division 3 of Part 6A and Part 4, 5 or 6, as the case requires.
(2) An authorized institution may calculate the risk-weighted amount of its exposure to the CCP arising from the
transaction in accordance with section 226T(1) to (4) if all the conditions set out in section 226V(5) are met.
226X. CCP ceases to be qualifying CCP
(1) Where a CCP ceases to be a qualifying CCP-
(a) subject to subsection (2), an authorized institution may, for a period of not more than 3 months commencing on the cesser (relevant period) continue to calculate its default risk exposure in respect of transactions cleared by the CCP as if the CCP were a qualifying CCP; and
(b) the institution may, at any time before the expiration of the relevant period, and must, on and after the expiration of the relevant period, calculate its default risk exposures in respect of transactions cleared by the CCP as a non-qualifying CCP unless and until the CCP again becomes a qualifying CCP.
(2) The Monetary Authority may, by notice in writing given to an authorized institution, require the institution to calculate its default risk exposure to a CCP that has ceased to be a qualifying CCP in accordance with the requirements applicable to a non-qualifying CCP from such date, or the occurrence of such event, as is specified in the notice.
(3) An authorized institution given a notice under subsection (2) must comply with the requirements of the notice.
226Y. Exposures to non-qualifying CCPs
(1) An authorized institution that is a clearing member of a non-qualifying CCP must calculate the risk-weighted amount of-
(a) its default risk exposure to the CCP; and
(b) its off-balance sheet exposure to the CCP arising from guarantees provided by the institution to its clients for any loss due to changes in the value of the clients’ transactions in the event that the CCP defaults,
in accordance with Part 4.
(2) An authorized institution must allocate a risk-weight of 1250% to its default fund contribution to a non-qualifying CCP and, for that purpose, the institution’s default fund contribution must include the funded and unfunded contributions that the institution is liable to pay if the non-qualifying CCP requires the institution to do so.
(3) An authorized institution is not required to hold regulatory capital for CVA risk in respect of transactions with a non-qualifying CCP.
226Z. Treatment of posted collateral
(1) Subject to subsections (2), (3) and (4), where an authorized institution has posted collateral with a CCP or a clearing member and the collateral is not held in a bankruptcy remote manner, the institution must, in respect of the collateral, calculate the risk-weighted amount of its credit exposure to the person holding the collateral by assigning a risk-weight applicable to that person in accordance with Part 4, 5 or 6, as the case requires.
(2) Where an authorized institution is a clearing member and has posted collateral for transactions with a CCP, the institution is not required to, in respect of the collateral,
(a) the collateral is held by a custodian; and
(b) the collateral is bankruptcy remote from the CCP.
(3) Where an authorized institution is a client and has posted collateral for transactions with a CCP, the institution is not required to, in respect of the collateral, hold regulatory capital for the credit exposure to the person holding the collateral if-
(a) the collateral is held by a custodian; and
(b) the collateral is bankruptcy remote from the CCP, the clearing member concerned and the other clients of the clearing member.
(4) Where an authorized institution is a client and has posted collateral for transactions with a CCP and-
(a) the CCP is a qualifying CCP;
(b) the collateral is held by the CCP on the institution’s behalf; and
(c) the collateral is not held on a bankruptcy remote basis,
the institution must allocate to its credit exposure to the CCP in respect of the collateral-
(d) a risk-weight of 2% if all the conditions [mentioned]
in section 226V(5) are met; or
(e) a risk-weight of 4% if all the conditions mentioned in section 226V(5) are met other than the condition mentioned in section 226V(5)(a)(iii).
(5) To avoid doubt, an authorized institution that has posted an asset as collateral must hold regulatory capital for the credit risk or market risk, whichever is applicable, of the asset itself calculated in accordance with Part 4, 5, 6, 7 or 8, as the case requires, as if it had not been posted as collateral and, if the collateral is held by another person, as if the collateral were held by the institution.
(6) In this section-
custodian ( ) means a trustee, agent, pledgee, secured creditor or any other person that holds property (referred to in this definition as the
“property holder”) in a way-
(a) that does not give the property holder a beneficial interest in the property; and
(a) that does not give the property holder a beneficial interest in the property; and