For the purposes of calculating
Credit RWA, a financial Derivativeincludes, but is not limited to OTC Derivativesand Credit Derivatives. Exposuresdealt with under this section do not include Exposuresto CCPs which qualify for a zero Exposurevalue.
PIB A4.6.15 PIB A4.6.15
Derivativetransactions: Credit RWA= CEAx CRW.
where:(a) contracts traded on exchanges, where they are subject to daily margining requirements, are excluded; and(b)
CEAis calculated using the formula: CEA= the replacement cost of the OTC Derivativecontract (obtained by marking to market) (in the case of a transaction with negative replacement cost, a value of zero) + PFCE.
PIB A4.6.15 Guidance
Details of how to net the PFCE are given in PIB Rule A4.6.22.
PIB A4.6.16(1) In case of
Credit Derivativesincluding but not limited to total return swaps and credit default swaps, an Authorised Firmmust determine its PFCE by multiplying the nominal amount of the instrument by the following percentages:(a) 5% where the reference obligation of the Credit Derivativeis one that if it gave rise to a direct Exposureof the Authorised Firmwould be a qualifying reference obligation; or(b) 10% where the reference obligation is one that if it gave rise to a direct Exposureof the Authorised Firmwould not be a qualifying reference obligation.(2) For the purposes of this Rule, a "qualifying reference obligation" means any Securitythat is issued by any MDB, any Security(including one issued by a PSE) that has a Credit Quality Gradeof 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 Securityissued by a PSE which belongs to a country with a Credit Quality Gradeof 1 as set out in PIB section 4.12.
In the case of credit default swaps, an
Authorised Firmwhich 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.
PIB A4.6.18 PIB A4.6.18
In cases where a
Credit Derivativeprovides protection in relation to "nth to default" amongst a number of underlying obligations, an Authorised Firmmust apply a percentage in accordance with PIB Rule A4.6.16applicable to the obligation with the nth lowest credit quality determined by whether it is one that if incurred by the Authorised Firmwould be a qualifying reference obligation for the purposes of PIB Rule A4.6.16(1)(a).
PIB A4.6.18 Guidance
Credit Derivativeis 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.
Derivativetransactions 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
Interest rate futures
Derivativesreferenced on an Investment Gradedebt 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.
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.
Derivativesreferenced on a bond which is not an Investment Gradedebt 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%
If the contract is an OTC foreign exchange contract (not including gold) with an
Original Maturityof 14 days or less: CEA= 0.
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.
PIB A4.6.21 Guidance
Authorised Firmmay calculate the PFCE arising under OTC derivative contracts on a net basis.
Where the conditions in in PIB section 4.13 are met, an
Authorised Firmmay 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
Counterpartyincluded in the Nettingagreement;(b) "PFCE gross" is the sum of the figures for PFCE for all contracts with a given Counterpartywhich are included in the Nettingagreement; and(c) "NGR" is the net-to-gross ratio, being the quotient of the net replacement cost for all contracts included in the Nettingagreement with a given Counterparty(numerator) and the gross replacement cost for all contracts included in the Nettingagreement with that Counterparty(denominator).
For the purposes of PIB Rule A4.6.19, the applicable maturity date must be the maturity of the longest date.