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PIB A4.6 Guidance

1. Where settlement does not occur on the due date and neither party has released the relevant cash or Securities, an Authorised Firm faces Market Risk, namely the differential between the contract price of the Securities and their current value in the market. In this case an Authorised Firm also faces a Credit RiskExposure for the Unsettled Transaction, for which the Authorised Firm is required to hold regulatory capital. The relevant Credit RiskExposure should be included in the calculation of Credit RWA for the Authorised Firm.
2. An Authorised Firm is at risk for the whole amount of the contract (as well as any further movement in price) if it has delivered its leg of a contract before receipt of the other leg. In this case an Authorised Firm must calculate the Credit RiskRWA for the free delivery transaction.
3. For OTC Derivatives and other contracts, an Authorised Firm is exposed to settlement risk. For an OTC Derivative contract, the risk is that the price moves in an Authorised Firm's favour so that it makes a book profit but at maturity the Authorised Firm cannot realise that profit because the other party defaults. The amount at risk is therefore less than the Authorised Firm's nominal Exposure and is measured by calculating the proportion of the nominal Exposure considered to be at risk -the Credit Equivalent Amount.
Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]