Banks Act, 1990 (Act No. 94 of 1990)

Regulations

Regulations relating to Banks

Chapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof

23. Credit risk: monthly return

Directives and interpretations for completion of monthly return concerning credit risk (Form BA 200)

Subregulation (19) Calculation of counterparty credit exposure in terms of the internal model method

Subregulation (19)(e) Matters relating to margin agreements
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(e)Matters relating to margin agreements

 

(i)Subject to the provisions of subparagraphs (ii) and (iii) below, when a particular netting set is subject to a margin agreement and the reporting bank’s internal model is able to capture the effect of margining in its estimation of expected exposure, the bank may apply for the approval of the Authority to directly use the said estimated expected exposure amount in the formula relating to effective expected exposure, specified in paragraph (a) above;

[Regulation (23)(19)(e)(i) substituted by section 3(n) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021]

 

(A)a particular netting set is subject to a margin agreement and the reporting bank's internal model is able to capture the effect of margining in its estimation of expected exposure, the bank may apply for the approval of the Registrar to use the said estimated expected exposure amount directly in the formula relating to effective expected exposure, specified in paragraph (a) above;

 

(B)a particular counterparty exposure is subject to a margin  agreement and the reporting bank's model is able to calculate expected positive exposure without margin agreements but the model is not sufficiently sophisticated to calculate expected positive exposure with margin agreements, the effective expected positive exposure of a counterparty that is subject to a margin agreement, re-margining and daily mark-to-market as envisaged in subparagraph (ii) below, shall be deemed to be equal to the lesser of—
(i)effective expected positive exposure without any held or posted margining collateral, plus any collateral that has been posted to the counterparty independent of the daily valuation and margining process or current exposure, that is, initial margin or independent amount; or
(ii)an add-on that reflects the potential increase in exposure over the margin period of risk plus the larger of—
(aa)the current exposure net of and including all collateral currently held or posted, excluding any collateral called or in dispute; or
(bb)the largest net exposure, including all collateral held or posted under the margin agreement that would not trigger a collateral call, which amount shall reflect all relevant thresholds, minimum transfer amounts, independent amounts and initial margins under the margin agreement,

 

which add-on shall be calculated as:

 

E[max(ΔMtM, 0)]

 

where:

 

E[...] is the expectation, that is, the average over scenarios

 

ΔMtM is the possible change of the mark-to-market value of the transactions during the margin period of risk

 

Provided that—

(i)changes in the value of collateral shall be reflected using the standard haircut method or own estimates of haircut method envisaged in subregulation (9)(b) of these Regulations, but no collateral payments are assumed during the margin period of risk;
(ii)the margin period of risk shall be subject to the relevant floor specified in subparagraph (ii) below;
(iii)through backtesting, the bank shall test whether realised exposures are consistent with the shortcut method prediction over all relevant margin periods within one year envisaged in this item (B), provided that when backtesting indicates that effective EPE is underestimated, the bank shall take appropriate action to make the method more conservative, such as, for example, scaling up risk factor moves;
(iv)when some of the trades in the netting set have a maturity of less than one year, and the netting set has higher risk factor sensitivities without these trades, the bank shall take this fact into account;

 

(ii)In the case of transactions subject to daily re-margining and mark-to-market valuation, when the bank calculates its exposure or EAD amount subject to margin agreements, the bank shall apply a floor margin period of risk of five business days for netting sets consisting only of repo-style transactions, and a floor margin period of risk of 10 business days for all other netting sets, provided that—

 

(A)in respect of all netting sets where the number of trades exceeds 5,000 at any point during a quarter, the bank shall apply a floor margin period of risk of 20 business days for the following quarter;

 

(B)in respect of netting sets containing one or more trades involving either illiquid collateral, or an OTC derivative that  cannot be easily replaced, the bank shall apply a floor margin period of risk of 20 business days.

 

For purposes of this paragraph (e), "illiquid collateral" and "OTC derivatives that cannot be easily replaced" shall be determined in the context of stressed market conditions and shall be characterised by the absence of continuously active markets where a counterparty would, within two or fewer days, obtain multiple price quotations that would not move the market or represent a price reflecting a market discount in the case of collateral, or premium in the case of an OTC derivative.

 

Examples of situations where trades shall be deemed illiquid include, but are not limited to, trades that are not marked daily and trades that are subject to specific accounting treatment for valuation purposes, such as OTC derivatives or repo-style transactions referencing securities of which the fair value is determined by models with inputs that are not observed in the market.

 

(C)in all cases the bank shall duly consider whether trades or securities held as collateral are concentrated in a particular counterparty, and if that counterparty suddenly exited the market, whether the bank would be able to replace its trades;

 

(D)when the bank experienced more than two margin call disputes on a particular netting set during the preceding two quarters, and the disputes lasted longer than the applicable margin period of risk, before consideration of this provision, the bank shall in respect of the following two quarters apply a margin period of risk at least double the floor specified hereinbefore for that netting set;

 

(E)in the case of re-margining with a periodicity of N-days, the bank shall apply a margin period of risk of at least the aforesaid specified floor plus the N days minus one day, that is:

 

Margin Period of Risk = F + N - 1.

 

where:

 

F is the floor number of days specified hereinbefore

 

N is the said periodicity of N-days for re-margining

[Regulation (23)(19)(e)(ii)(E) substituted by section 3(o) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021]

 

(iii)The requirements specified in subregulation (7)(b)(iii) of these Regulations regarding legal certainty, documentation, correlation and a robust risk management process shall, insofar as the said provisions are relevant, mutatis mutandis apply in respect of all relevant margin agreements.