Entire Section

PIB A4.3.2

An Authorised Firm 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 PIB A4.3.6 to PIB A4.3.29.

PIB A4.3.3

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

PIB A4.3.4

[Not currently in use]

PIB A4.3.5 PIB A4.3.5

PIB A4.3.6 PIB A4.3.6

An Authorised Firm 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 PIB 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.

PIB A4.3.7

An Authorised Firm 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, [ Σ (E ) − Σ (C) + add-on]}

where:

E* = Exposure value after risk mitigation;

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

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 PIB Rule A4.3.8 below.

PIB A4.3.8 PIB A4.3.8

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

PIB A4.3.9

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

PIB A4.3.10

An Authorised Firm may calculate HE, HC, HS and HFX using own-estimate haircuts in accordance with Rules PIB A4.3.17 to PIB A4.3.23 if it has received approval from the DFSA to use the internal models approach for calculating the Market Risk Capital Requirement. If the Authorised Firm 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 DFSA, use the standard supervisory haircuts in Rules PIB A4.3.13 to PIB A4.3.16 for any portfolio which is immaterial in size and risk profile.

PIB A4.3.11

An Authorised Firm 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 Firm using VaR models in accordance with PIB section A4.5 to calculate E*.

PIB A4.3.12

An Authorised Firm 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 in PIB Rule 4.12.4.