BIPRU 13.3 Calculation of exposure values for financial derivatives and long settlement transactions: General provisions

A firm must determine the exposure value of a financial derivative instrument in accordance with BIPRU 13, with the effects of contracts of novation and other netting agreements taken into account for the purposes of those methods in accordance with BIPRU 13.

[Note: BCD Article 78(2) first sentence]

Subject to BIPRU 13.3, a firm must determine the exposure value for financial derivative instruments with the CCR mark to market method, the CCR standardised method or the CCR internal model method.

[Note: BCD Annex III, Part 2 point 1]

Each of the following is a financial derivative instrument:

1. (1)

   an interest-rate contract, being:

   1. (a)

      a single-currency interest rate swap;

   2. (b)

      a basis-swap;

   3. (c)

      a forward rate agreement;

   4. (d)

      an interest-rate future;

   5. (e)

      a purchased interest-rate option; and

   6. (f)

      other contracts of similar nature.

2. (2)

   a foreign currency contract or contract concerning gold, being:

   1. (a)

      a cross-currency interest-rate swap;

   2. (b)

      a forward foreign currency contract;

   3. (c)

      a currency future;

   4. (d)

      a currency option purchased;

   5. (e)

      other contracts of a similar nature; and

   6. (f)

      a contract concerning gold of a nature similar to (2)(a) to (e).

3. (3)

   a contract of a nature similar to those in 1(a) to (e) and 2(a) to (d) concerning other reference items or indices, including as a minimum all instruments specified in points 4 to 7, 9 and 10 of Section C of Annex I to the MIFID not otherwise included in (1) or (2).

   [Note: BCD Annex IV]

Long settlement transaction means a transaction where a counterparty undertakes to deliver a security, a commodity, or a foreign currency amount against cash, other financial instruments, or commodities, or vice versa, at a settlement or delivery date that is contractually specified as more than the lower of the market standard for this particular transaction and five business days after the date on which the firm enters into the transaction.

[Note: BCD Annex III Part 1 point 3]

A firm must calculate the exposure value of a long settlement transaction in accordance with either:

1. (1)

   BIPRU 13; or

2. (2)

   the master netting agreement internal models approach, if it has a master netting agreement internal models approach waiver which permits it to apply that approach.

   [Note: BCD Article 78(2) second sentence, in respect of long settlement transaction]

A firm may determine exposures arising from long settlement transactions using any of the CCR mark to market method, the CCR standardised method and the CCR internal model method, regardless of the methods chosen for treating financial derivatives instruments and repurchase transactions, securities or commodities lending or borrowing transactions, and margin lending transactions. In calculating capital requirements for long settlement transactions, a firm that uses the IRB approach may apply the risk weights under the standardised approach on a permanent basis and irrespective of the materiality of such positions.

[Note: BCD Annex III Part 2 point 7]

Under the CCR mark to market method, the CCR standardised method and the CCR internal model method, a firm must determine the exposure value for a given counterparty as equal to the sum of the exposure values calculated for each netting set with that counterparty.

[Note: BCD Annex III Part 2 point 5]

A firm may only recognise netting for the purposes of BIPRU 13.4, BIPRU 13.5 and BIPRU 13.6 if the requirements in BIPRU 13.7 are met.

The combined use of the CCR mark to market method, the CCR standardised method and the CCR internal model method is not permitted. The combined use of the CCR mark to market method and the CCR standardised method is permitted where one of the methods is used for the cases set out in BIPRU 13.5.9 R to BIPRU 13.5.10 R.

[Note: BCD Annex III Part 2 point 1(part)]

Notwithstanding BIPRU 13.3.1 R and BIPRU 13.3.5 R, a firm may determine the exposure value of a credit risk exposure outstanding with a central counterparty in accordance with BIPRU 13.3.13 R, provided that the central counterparty's counterparty credit risk exposure with all participants in its arrangements are fully collateralised on a daily basis.

[Note: BCD Article 78(4) in respect of financial derivatives and long settlement transactions]

A firm may attribute an exposure value of zero for CCR to derivative contracts and long settlement transactions, or to other exposures arising in respect of those contracts or transactions (but excluding an exposure arising from collateral held to mitigate losses in the event of the default of other participants in the central counterparty's arrangements) where they are outstanding with a central counterparty and have not been rejected by the central counterparty.

[Note: BCD Annex III Part 2 point 6 in respect of financial derivatives and long settlement transactions]

When a firm purchases credit derivative protection against a non-trading book ,exposure or against a CCR exposure, it must compute its capital requirement for the hedged asset in accordance with:

1. (1)

   BIPRU 5.7.16 R to BIPRU 5.7.25 R and BIPRU 4.10.49 R (4) to (6) (Unfunded credit protection: Valuation and calculation of risk-weighted exposure amounts and expected loss amounts);

2. (2)

   BIPRU 4.4.79 R (Double default); or

3. (3)

   BIPRU 4.10.40 R to BIPRU 4.10.48 R (Unfunded credit protection: Minimum requirements for assessing the effect of guarantees and credit derivatives).

   [Note: BCD Annex III Part 2 point 3 (part)]

In the cases in BIPRU 13.3.14 R, a firm must set the exposure value for CCR for these credit derivatives to zero.

[Note: BCD Annex III Part 2 point 3 (part)]

A firm must set the exposure value for CCR from sold credit default swaps in the non-trading book, where they are treated as credit protection provided by the firm and subject to a capital requirement for credit risk for the full notional amount, to zero.

[Note: BCD Annex III Part 2 point 4]