Article 429a

Description
Exposure value of derivatives
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1. Institutions shall determine the exposure value of contracts listed in Annex II and of credit derivatives, including those that are off-balance sheet, in accordance with the method set out in Article 274. Institutions shall apply Article 299(2)(a) for the determination of the potential future credit exposure for credit derivatives.

When determining the potential future credit exposure of credit derivatives, institutions shall apply the principles laid down in Article 299(2)(a) to all their credit derivatives, not only those assigned to the trading book.

In determining the exposure value, institutions may take into account the effects of contracts for novation and other netting agreements in accordance with Article 295. Cross-product netting shall not apply. However, institutions may net within the product category referred to in point (25)(c) of Article 272 and credit derivatives when they are subject to a contractual cross-product netting agreement referred to in Article 295(c).

2. Where the provision of collateral related to derivatives contracts reduces the amount of assets under the applicable accounting framework, institutions shall reverse that reduction.

3. For the purposes of paragraph 1, institutions may deduct variation margin received in cash from the counterparty from the current replacement cost portion of the exposure value in so far as under the applicable accounting framework the variation margin has not already been recognised as a reduction of the exposure value and when all the following conditions are met:

(a) for trades not cleared through a QCCP, the cash received by the recipient counterparty is not segregated;

(b) the variation margin is calculated and exchanged on a daily basis based on mark-to-market valuation of derivatives positions;

(c) the variation margin received in cash is in the same currency as the currency of settlement of the derivative contract;

(d) the variation margin exchanged is the full amount that would be necessary to fully extinguish the mark-to-market exposure of the derivative subject to the threshold and minimum transfer amounts applicable to the counterparty;

(e) the derivative contract and the variation margin between the institution and the counterparty to that contract are covered by a single netting agreement that the institution may treat as risk-reducing in accordance with Article 295.

For the purposes of point (c) of the first subparagraph, where the derivative contract is subject to a qualifying master netting agreement, the currency of settlement means any currency of settlement specified in the derivative contract, the governing qualifying master netting agreement or the credit support annex to the qualifying master netting agreement.

Where under the applicable accounting framework an institution recognises the variation margin paid in cash to the counterparty as a receivable asset, it may exclude that asset from the exposure measure provided that the conditions in points (a) to (e) are met.

4. For the purposes of paragraph 3 the following shall apply:

(a) the deduction of variation margin received shall be limited to the positive current replacement cost portion of the exposure value;

(b) an institution shall not use variation margin received in cash to reduce the potential future credit exposure amount, including for the purposes of Article 298(1)(c)(ii);

 

5. In addition to the treatment laid down in paragraph 1, for written credit derivatives institutions shall include in the exposure value the effective notional amounts referenced by the written credit derivatives reduced by any negative fair value changes that have been incorporated in Tier 1 capital with respect to the written credit derivative. The resulting exposure value may be further reduced by the effective notional amount of a purchased credit derivative on the same reference name provided that all the following conditions are met:

(a) for single name credit derivatives, the credit derivatives purchased must be on a reference name which ranks pari passu with or is junior to the underlying reference obligation of the written credit derivative and a credit event on the senior reference asset would result in a credit event on the subordinated asset;

(b) where an institution purchases protection on a pool of reference names, the purchased protection may offset sold protection on a pool of reference names only if the pool of reference entities and the level of subordination in both transactions are identical;

(c) the remaining maturity of the credit derivative purchased is equal to or greater than the remaining maturity of the written credit derivative;

(d) in determining the additional exposure value for written credit derivatives, the notional amount of the purchased credit derivative is reduced by any positive fair value change that has been incorporated in Tier 1 capital with respect to the credit derivative purchased;

(e) for tranched products, the credit derivative purchased as protection is on a reference obligation which ranks equal to the underlying reference obligation of the written credit derivative.

Where the notional amount of a written credit derivative is not reduced by the notional amount of a purchased credit derivative, institutions may deduct the individual potential future exposure of that written credit derivative from the total potential future exposure determined according to paragraph 1 of this Article in conjunction with Article 274(2) or Article 299(2)(a) as applicable. In case that the potential future credit exposure shall be determined in conjunction with Article 298(1)(c)(ii), PCEgross may be reduced by the individual potential future exposure of written credit derivatives with no adjustment made to the NGR.

6. Institutions shall not reduce the written credit derivative effective notional amount where they buy credit protection through a total return swap and record the net payments received as net income, but do not record any offsetting deterioration in the value of the written credit derivative reflected in Tier 1 capital.

7. In case of purchased credit derivatives on a pool of reference entities, institutions may recognise a reduction according to paragraph 5 on written credit derivatives on individual reference names only if the protection purchased is economically equivalent to buying protection separately on each of the individual names in the pool. If an institution purchases a credit derivative on a pool of reference names, it may only recognise a reduction on a pool of written credit derivatives when the pool of reference entities and the level of subordination in both transactions are identical.

8. By way of derogation from paragraph 1 of this Article, institutions may use the method set out in Article 275 to determine the exposure value of contracts listed in points 1 and 2 of Annex II only where they also use that method for determining the exposure value of those contracts for the purposes of meeting the own funds requirements set out in Article 92.

When institutions apply the method set out in Article 275, they shall not reduce the exposure measure by the amount of variation margin received in cash.