You are viewing CRYPTOPRU 4.10 K-factor requirement for cryptoasset counterparty default (K-CCD) as it appeared on 25/10/2027. The current version of CRYPTOPRU 4.10 K-factor requirement for cryptoasset counterparty default (K-CCD) was last updated on 25/10/2027.

CRYPTOPRU 4.10 K-factor requirement for cryptoasset counterparty default (K-CCD)

Scope

25/10/2027R

The K-CCD requirement applies to a firm that enters into a trading book transaction involving a qualifying cryptoasset which exposes it to a risk of counterparty default that persists for longer than the standard spot settlement period.

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  1. (1) The FCA does not expect a firm that simply trades in spot qualifying cryptoassets to calculate the K-CCD requirement.
  2. (2) However, where a firm enters into any qualifying cryptoasset transaction in the trading book that takes longer to complete – for example, by lending qualifying cryptoassets to a counterparty – it must calculate the K-CCD requirement.
  3. (3) PERG 18.6.6 sets out the FCA’s general expectations regarding settlement of a spot qualifying cryptoasset transaction.
  4. (4) A firm must calculate the K-CCD requirement even if it receives collateral to help mitigate against the risk of counterparty default. The K-CCD requirement recognises collateral as part of the calculation.

Purpose

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  1. (1) This section contains the minimum own funds requirement for counterparty risk in transactions involving a qualifying cryptoasset. It prescribes standardised risk factors for different types of counterparty, and standardised volatility adjustments for different types of asset.
  2. (2) As part of the overall risk assessment, a firm should consider whether it needs to hold any additional own funds for its transactions involving a qualifying cryptoasset, having regard to the characteristics of each of its counterparties and the assets it trades.

General rule

25/10/2027R

A firm must calculate its K-CCD requirement by:

  1. (1) identifying transactions in qualifying cryptoassets which are in scope in accordance with CRYPTOPRU 4.10.5R;
  2. (2) calculating the exposure value for each transaction in its functional currency in accordance with CRYPTOPRU 4.10.6R;
  3. (3) using each exposure value to calculate a requirement for each transaction in accordance with CRYPTOPRU 4.10.11R; and
  4. (4) summing the resulting requirements for each transaction.

Transactions in scope of K-CCD

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  1. (1) A firm must calculate its K-CCD requirement by identifying every transaction and contract involving any trading book qualifying cryptoasset which exposes it to a risk of counterparty default that persists for longer than the standard spot settlement period, except where (2) applies.
  2. (2) A firm is not required to calculate the K-CCD requirement for a transaction or contract involving a qualifying cryptoasset where the value of the transaction or contract has been deducted in full under COREPRU 3.
  3. (3) Where the K-CCD requirement applies to a transaction or contract, and the firm receives collateral which would be deductible in full under COREPRU 3, the firm must apply a volatility adjustment of 100% to the collateral under CRYPTOPRU 4.10.8R.

Calculating the exposure value

25/10/2027R

The exposure value must be calculated using the following formula:

Exposure value = Max (0; RC– C)

where:

  1. (1) RC = the replacement cost calculated in accordance with CRYPTOPRU 4.10.7R; and
  2. (2) C = collateral as calculated in accordance with CRYPTOPRU 4.10.8R.

Replacement cost

25/10/2027R

The replacement cost is the current market value of the asset that the firm is due to receive from the counterparty to the transaction, increased by the volatility adjustment in CRYPTOPRU 4.10.9R.

Collateral

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The value of C is the current market value of any collateral received by the firm, decreased in accordance with the relevant volatility adjustment specified in CRYPTOPRU 4.10.9R.

Volatility adjustment

25/10/2027R

The volatility adjustment for each asset class is specified in the table below.

Asset classVolatility adjustment
CASS 16 stablecoin0%
Any asset class referred to in MIFIDPRU 4.14.25R The applicable volatility adjustment listed in Column (B) of MIFIDPRU 4.14.25R
Any other qualifying cryptoasset40%
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  1. (1) The following is an example of how the volatility adjustment to collateral under CRYPTOPRU 4.10.8R and CRYPTOPRU 4.10.9R applies.
  2. (2) A firm receives collateral in the form of a qualifying cryptoasset. The notional value of the collateral is 100.
  3. (3) CRYPTOPRU 4.10.8R requires the notional value of the collateral to be decreased by the applicable volatility adjustment.
  4. (4) The relevant volatility adjustment in CRYPTOPRU 4.10.9R is 40%.
  5. (5) The resulting value of the collateral after the volatility adjustment has been applied is therefore 60.

Calculating the K-CCD requirement

25/10/2027R

The K-CCD requirement for each transaction must be calculated using the following formula:

α * EV * RF

where:

  1. (1) α = 1.2;
  2. (2) EV = the exposure value calculated in accordance with CRYPTOPRU 4.10.6R; and
  3. (3) RF = the risk factor applicable to the counterparty type as set out in CRYPTOPRU 4.10.12R.

Risk factor

25/10/2027R

The risk factor for a counterparty is set out in the following table:

Counterparty typeRisk factor
Central governments, central banks and public sector entities1.6%
Credit institutions, investment firms and CRYPTOPRU firms1.6%
retail client with negative balance protection under CRYPTO 9.783.33%
Other counterparties8%
25/10/2027G
  1. (1) The following example illustrates how to calculate the K-CCD requirement.
  2. (2) In this example, there are two qualifying cryptoassets, neither of which are CASS 16 stablecoins. Cryptoasset A is traded on a UK QCATP, whereas Cryptoasset B is not.
  3. (3) A firm lends out Cryptoasset A valued at £100 to another CRYPTOPRU firm. The firm receives Cryptoasset B valued at £100 as collateral.
  4. (4) The transaction is in scope of the K-CCD requirement.
  5. (5) The K-CCD requirement is α * EV * RF.
  6. (6) α is 1.2, and the RF for another CRYPTOPRU firm is 1.6%.
  7. (7) The EV (Exposure Value) is the RC (Replacement Cost) – C (Collateral).
  8. (8) The RC (Replacement Cost) is the current market value of Cryptoasset A, £100, increased by a volatility adjustment of 40%, to a total of £140.
  9. (9) As Cryptoasset B is not traded on a UK QCATP, the value of C (Collateral) is reduced by a volatility adjustment of 100%, to zero.
  10. (10) The EV is therefore £140 – £0 = £140.
  11. (11) The K-CCD requirement for this transaction is 1.2*£140*1.6% = £2.688.
Point In Time
25/10/2027