BIPRU 13.4 CCR mark to market method

The rules in BIPRU 13.4 set out the CCR mark to market method.

A firm must obtain the current replacement cost of all contracts with positive values by attaching current market values1 to contracts (marking to market).

[Note: BCD Annex III Part 3, Step (a)]

A firm must obtain a figure for potential future credit exposure by multiplying the notional principal amounts or underlying values by the percentages in the table in BIPRU 13.4.5 R.

[Note: BCD Annex III Part 3, Step (b) (part)]

BIPRU 13.4.3 R does not apply in the case of single-currency "floating/floating" interest rate swaps.

[Note: BCD Annex III Part 3, Step (b) (part)]

A firm must treat a contract which does not fall within one of the five categories indicated in the table in BIPRU 13.4.5 R as a contract concerning commodities other than precious metals.

[Note: BCD Annex III Part 3, Table 1 footnote 25]

For contracts with multiple exchanges of principal, a firm must multiply the percentages in the table in BIPRU 13.4.5 R by the number of remaining payments still to be made according to the contract.

[Note: BCD Annex III Part 3, Table 1 footnote 26]

For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, a firm must treat the residual maturity as equal to the time until the next reset date.

[Note: BCD Annex III Part 3, Table 1 footnote 27 (part)]

In the case of interest-rate contracts that meet the criteria in BIPRU 13.4.8 R and have a remaining maturity of over one year, a firm must apply a percentage no lower than 0.5%.

[Note: BCD Annex III Part 3, Table 1 footnote 27 (part)]

For the purpose of calculating the potential future credit exposure in accordance with BIPRU 13.4.3 R a firm may apply the percentages in the table in BIPRU 13.4.11 R instead of those prescribed in the table in BIPRU 13.4.5 R provided that it makes use of the commodity extended maturity ladder approach for contracts relating to commodities other than gold.

A firm must calculate the exposure value as the sum of:

1. (1)

   the current replacement cost calculated under BIPRU 13.4.2 R; and

2. (2)

   the potential future credit exposure calculated under BIPRU 13.4.3 R.

   [Note: BCD Annex III Part 3, Step (c)]

A firm must ensure that the notional amount to be taken into account is an appropriate yardstick for the risk inherent in the contract. Where, for instance, the contract provides for a multiplication of cash flows, a firm must adjust the notional amount in order to take into account the effects of the multiplication on the risk structure of that contract.

[Note: BCD Annex III Part 2 point 8]

The single net amounts fixed by contracts for novation, rather than the gross amounts involved, may be weighted. For the purposes of the CCR mark to market method, a firm may obtain:

1. (1)

   in BIPRU 13.4.2 R, the current replacement cost; and

2. (2)

   in BIPRU 13.4.3 R, the notional principal amounts or underlying values;

by taking account of the contract for novation.

[Note: BCD Annex III Part 7 point c(i)]

In application of the CCR mark to market method:

1. (1)

   in BIPRU 13.4.2 R a firm may obtain the current replacement cost for the contracts included in a netting agreement by taking account of the actual hypothetical net replacement cost which results from the agreement; in the case where netting leads to a net obligation for the firm calculating the net replacement cost, the current replacement cost is calculated as "0"; and

2. (2)

   in BIPRU 13.4.3 R a firm may reduce the figure for potential future credit exposure for all contracts included in a netting agreement according to the following formula:

   PCE_red = 0.4 * PCE_gross + 0.6 * NGR * PCE_gross,

   where:

   1. (a)

      PCE_red = the reduced figure for potential future credit exposure for all contracts with a given counterparty included in a legally valid bilateral netting agreement;

   2. (b)

      PCE_gross =the sum of the figures for potential future credit exposure for all contracts with a given counterparty which are included in a legally valid bilateral netting agreement and are calculated by multiplying their notional principal amounts by the percentages set out in the table in BIPRU 13.4.5 R; and

   3. (c)

      NGR = "net-to-gross ratio": the quotient of the net replacement cost for all contracts included in a legally valid bilateral netting agreement with a given counterparty (numerator) and the gross replacement cost for all contracts included in a legally valid bilateral netting agreement with that counterparty (denominator).

      [Note: BCD Annex III Part 7 point c(ii) (part)]

For the calculation of the potential future credit exposure according to the formula in BIPRU 13.4.17 R perfectly matching contracts included in the netting agreement may be taken into account as a single contract with a notional principal equivalent to the net receipts.

[Note: BCD Annex III Part 7 point c(ii) (part)]

For the purposes of BIPRU 13.4.18 R a perfectly matching contract is a forward foreign currency contract or similar contract in which a notional principal is equivalent to cash flows if the cash flows fall due on the same value date and fully or partly in the same currency.

[Note: BCD Annex III Part 7 point c(ii) (part)]