Entire Section

  • Financial Derivatives

    • PIB A4.6.14

      For the purposes of calculating Credit RWA, a financial Derivative includes, but is not limited to OTC Derivatives and Credit Derivatives. Exposures dealt with under this section do not include Exposures to CCPs which qualify for a zero Exposure value.

      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A4.6.15 PIB A4.6.15

      For OTC Derivative transactions: Credit RWA = CEA x CRW.

      where:

      (a) contracts traded on exchanges, where they are subject to daily margining requirements, are excluded; and
      (b) CEA is calculated using the formula:
      CEA = the replacement cost of the OTC Derivative contract (obtained by marking to market) (in the case of a transaction with negative replacement cost, a value of zero) + PFCE.
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A4.6.15 Guidance

        Details of how to net the PFCE are given in PIB Rule A4.6.22.

        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A4.6.16

      (1) In case of Credit Derivatives including but not limited to total return swaps and credit default swaps, an Authorised Firm must determine its PFCE by multiplying the nominal amount of the instrument by the following percentages:
      (a) 5% where the reference obligation of the Credit Derivative is one that if it gave rise to a direct Exposure of the Authorised Firm would be a qualifying reference obligation; or
      (b) 10% where the reference obligation is one that if it gave rise to a direct Exposure of the Authorised Firm would not be a qualifying reference obligation.
      (2) For the purposes of this Rule, a "qualifying reference obligation" means any Security that is issued by any MDB, any Security (including one issued by a PSE) that has a Credit Quality Grade of 3 or better as set out in PIB section 4.12 based on the external credit assessment of at least one recognised external credit rating agency, and any unrated Security issued by a PSE which belongs to a country with a Credit Quality Grade of 1 as set out in PIB section 4.12.
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A4.6.17

      In the case of credit default swaps, an Authorised Firm which is a seller of credit protection may assign a PFCE of 0%, unless the protection is subject to close-out on the insolvency of the buyer.

      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A4.6.18 PIB A4.6.18

      In cases where a Credit Derivative provides protection in relation to "nth to default" amongst a number of underlying obligations, an Authorised Firm must apply a percentage in accordance with PIB Rule A4.6.16 applicable to the obligation with the nth lowest credit quality determined by whether it is one that if incurred by the Authorised Firm would be a qualifying reference obligation for the purposes of PIB Rule A4.6.16(1)(a).

      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A4.6.18 Guidance

        Where the Credit Derivative is a first to default transaction, the appropriate percentage for the PFCE will be determined by the lowest credit quality of the underlying obligations in the basket. If there are nonqualifying items in the basket, the percentage applicable to the non-qualifying reference obligations should be used. For second and any subsequent default transactions, underlying assets should continue to be allocated according to credit quality: i.e. for a second to default transaction, the applicable percentage figure is the percentage applicable to the second lowest credit quality.

        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A4.6.19

      For OTC Derivative transactions other than Credit Derivatives, PFCE is calculated by multiplying the NP of the contract by the appropriate percentage from the table below.

      Type of contract Residual maturity of contract
      <1 Year 1–5 Years >5 Years
      Single currency interest rate basis swaps 0.0% 0.0% 0.0%
      Interest rate Single currency interest rate swaps other than basis swaps
      Multiple currency basis swaps
      Forward-rate agreements
      Interest rate futures
      Interest rate Options purchased
      Derivatives referenced on an Investment Grade debt Item
      Other contracts of a similar nature to those in this box.
      0.0% 0.5% 1.5%
      Foreign exchange (including gold) except as referred to in A4.6.20 Cross-currency interest-rate swaps.

      Forward foreign exchange contracts.

      Currency futures.

      Currency Options purchased.

      Other contracts of a similar nature to those in this box, including gold.
      1.0% 5.0% 7.5%
      Equities Cash settled forward contracts

      Contracts of a nature similar to those in the interest rate and foreign exchange boxes.

      Derivatives referenced on a bond which is not an Investment Grade debt Item.
      6.0% 8.0% 10.0%
      Precious metals (except gold) Contracts of a nature similar to those in the interest rate and foreign exchange boxes concerning precious metals, except gold. 7.0% 7.0% 8.0%
      Commodities (except precious metals) and any other contracts Contracts of a nature similar to those in the interest rate or foreign exchange boxes concerning commodities other than precious metals. 10.0% 12.0% 15.0%
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A4.6.20

      If the contract is an OTC foreign exchange contract (not including gold) with an Original Maturity of 14 days or less: CEA = 0.

      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A4.6.21 PIB A4.6.21

      Where a contract price is based upon more than one underlying instrument, the higher of the relevant PFCE multipliers must be used.

      Netting of PFCE

      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A4.6.21 Guidance

        An Authorised Firm may calculate the PFCE arising under OTC derivative contracts on a net basis.

        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A4.6.22

      Where the conditions in in PIB section 4.13 are met, an Authorised Firm may calculate its net PFCE on OTC derivative contracts using the following formula:

      PFCE reduced = 0.4 x PFCE gross + 0.6 x NGR x PFCE gross

      where:

      (a) "PFCE reduced" is the reduced figure for PFCE for all contracts with a given Counterparty included in the Netting agreement;
      (b) "PFCE gross" is the sum of the figures for PFCE for all contracts with a given Counterparty which are included in the Netting agreement; and
      (c) "NGR" is the net-to-gross ratio, being the quotient of the net replacement cost for all contracts included in the Netting agreement with a given Counterparty (numerator) and the gross replacement cost for all contracts included in the Netting agreement with that Counterparty (denominator).
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A4.6.23

      For the purposes of PIB Rule A4.6.19, the applicable maturity date must be the maturity of the longest date.

      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]