| | Clearing member exposures to clients
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| 8.12 | The clearing member will always capitalize its exposure (including potential credit valuation adjustment, or CVA, risk exposure) to clients as bilateral trades, irrespective of whether the clearing member guarantees the trade or acts as an intermediary between the client and the CCP. However, to recognize the shorter close-out period for cleared client transactions, clearing members can capitalize the exposure to their clients applying a margin period of risk of at least five days in IMM or SA-CCR. The reduced exposure at default (EAD) should also be used for the calculation of the CVA capital requirement.
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| 8.13 | If a clearing member collects collateral from a client for client cleared trades and this collateral is passed on to the CCP, the clearing member may recognize this collateral for both the CCP-clearing member leg and the clearing member-client leg of the client-cleared trade. Therefore, initial margin posted by clients to their clearing member mitigates the exposure the clearing member has against these clients. The same treatment applies, in an analogous fashion, to multi-level client structures (between a higher-level client and a lower-level client).
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| | Client exposures
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| 8.14 | Subject to the two conditions set out in 8.15 below being met, the treatment set out in 8.7 to 8.11 (i.e. the treatment of clearing member exposures to CCPs) also applies to the following:
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| | (1) | A bank's exposure to a clearing member where:
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| | | (a) | the bank is a client of the clearing member; and
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| | | (b) | the transactions arise as a result of the clearing member acting as a financial intermediary (i.e. the clearing member completes an offsetting transaction with a CCP).
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| | (2) | A bank's exposure to a CCP resulting from a transaction with the CCP where:
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| | | (a) | the bank is a client of a clearing member; and
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| | | (b) | the clearing member guarantees the performance the bank's exposure to the CCP.
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| | (3) | Exposures of lower-level clients to higher-level clients in a multi-level client structure, provided that for all client levels in-between the two conditions in 8.15 below are met.
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| 8.15 | The two conditions referenced in 8.14 above are:
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| | (1) | The offsetting transactions are identified by the CCP as client transactions and collateral to support them is held by the CCP and/or the clearing member, as applicable, under arrangements that prevent any losses to the client due to: (a) the default or insolvency of the clearing member; (b) the default or insolvency of the clearing member's other clients; and (c) the joint default or insolvency of the clearing member and any of its other clients. Regarding the condition set out in this paragraph:
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| | | (a) | Upon the insolvency of the clearing member, there must be no legal impediment (other than the need to obtain a court order to which the client is entitled) to the transfer of the collateral belonging to clients of a defaulting clearing member to the CCP, to one or more other surviving clearing members or to the client or the client's nominee. SAMA should be consulted to determine whether this is achieved based on particular facts and SAMA will consult and communicate with other supervisors.
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| | | (b) | The client must have conducted a sufficient legal review (and undertake such further review as necessary to ensure continuing enforceability) and have a well founded basis to conclude that, in the event of legal challenge, the relevant courts and administrative authorities would find that such arrangements mentioned above would be legal, valid, binding and enforceable under the relevant laws of the relevant jurisdiction(s).
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| | (2) | Relevant laws, regulation, rules, contractual, or administrative arrangements provide that the offsetting transactions with the defaulted or insolvent clearing member are highly likely to continue to be indirectly transacted through the CCP, or by the CCP, if the clearing member defaults or becomes insolvent. In such circumstances, the client positions and collateral with the CCP will be transferred at market value unless the client requests to close out the position at market value. Regarding the condition set out in this paragraph, if there is a clear precedent for transactions being ported at a CCP and industry intent for this practice to continue, then these factors must be considered when assessing if trades are highly likely to be ported. The fact that CCP documentation does not prohibit client trades from being ported is not sufficient to say they are highly likely to be ported.
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| 8.16 | Where a client is not protected from losses in the case that the clearing member and another client of the clearing member jointly default or become jointly insolvent, but all other conditions in the preceding paragraph are met, a risk weight of 4% will apply to the client's exposure to the clearing member, or to the higher-level client, respectively.
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| 8.17 | Where the bank is a client of the clearing member and the requirements in 8.14 to 8.16 above are not met, the bank will capitalize its exposure (including potential CVA risk exposure) to the clearing member as a bilateral trade.
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| | Treatment of posted collateral
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| 8.18 | In all cases, any assets or collateral posted must, from the perspective of the bank posting such collateral, receive the risk weights that otherwise applies to such assets or collateral under the capital adequacy framework, regardless of the fact that such assets have been posted as collateral. That is, collateral posted must receive the banking book or trading book treatment it would receive if it had not been posted to the CCP.
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| 8.19 | In addition to the requirements of 8.18 above, the posted assets or collateral are subject to the counterparty credit risk requirements, regardless of whether they are in the banking or trading book. This includes the increase in the counterparty credit risk exposure due to the application of haircuts. The counterparty credit risk requirements arise where assets or collateral of a clearing member or client are posted with a CCP or a clearing member and are not held in a bankruptcy remote manner. In such cases, the bank posting such assets or collateral must recognize credit risk based upon the assets or collateral being exposed to risk of loss based on the creditworthiness of the entity holding such assets or collateral, as described further below.
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| 8.20 | Where such collateral is included in the definition of trade exposures (see Chapter 3of this framework) and the entity holding the collateral is the CCP, the following risk weights apply where the assets or collateral is not held on a bankruptcy- remote basis:
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| | (1) | For banks that are clearing members a risk weight of 2% applies.
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| | (2) | For banks that are clients of clearing members:
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| | | (a) | a 2% risk weight applies if the conditions established in 8.14 and 8.15 are met; or
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| | | (b) | a 4% risk weight applies if the conditions in 8.16 are met.
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| 8.21 | Where such collateral is included in the definition of trade exposures (see Chapter 3 of this framework), there is no capital requirement for counterparty credit risk exposure (i.e. the related risk weight or EAD is equal to zero) if the collateral is: (a) held by a custodian; and (b) bankruptcy remote from the CCP. Regarding this paragraph:
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| | (1) | All forms of collateral are included, such as: cash, securities, other pledged assets, and excess initial or variation margin, also called overcollateralization.
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| | (2) | The word “custodian” may include a trustee, agent, pledgee, secured creditor or any other person that holds property in a way that does not give such person a beneficial interest in such property and will not result in such property being subject to legally-enforceable claims by such persons creditors, or to a court- ordered stay of the return of such property, if such person becomes insolvent or bankrupt.
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| 8.22 | The relevant risk weight of the CCP will apply to assets or collateral posted by a bank that do not meet the definition of trade exposures (for example treating the exposure as a financial institution under standardized approach or internal ratings-based approach to credit risk).
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| 8.23 | Regarding the calculation of the exposure, or EAD, where banks use the SA-CCR to calculate exposures, collateral posted which is not held in a bankruptcy remote manner must be accounted for in the net independent collateral amount term in accordance with 6.17 to 6.21. For banks using IMM models, the alpha multiplier must be applied to the exposure on posted collateral.
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| | Default fund exposures
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| 8.24 | Where a default fund is shared between products or types of business with settlement risk only (e.g. equities and bonds) and products or types of business which give rise to counterparty credit risk i.e. OTC derivatives, exchange-traded derivatives, SFTs or long settlement transactions, all of the default fund contributions will receive the risk weight determined according to the formula and methodology set forth below, without apportioning to different classes or types of business or products. However, where the default fund contributions from clearing members are segregated by product types and only accessible for specific product types, the capital requirements for those default fund exposures determined according to the formulae and methodology set forth below must be calculated for each specific product giving rise to counterparty credit risk. In case the CCP's prefunded own resources are shared among product types, the CCP will have to allocate those funds to each of the calculations, in proportion to the respective product specific EAD.
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| 8.25 | Whenever a bank is required to capitalize for exposures arising from default fund contributions to a QCCP, clearing member banks will apply the following approach.
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| 8.26 | Clearing member banks will apply a risk weight to their default fund contributions determined according to a risk sensitive formula that considers
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| | (i) | the size and quality of a qualifying CCP's financial resources,
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| | (ii) | the counterparty credit risk exposures of such CCP, and
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| | (iii) | the application of such financial resources via the CCP's loss-bearing waterfall, in the case of one or more clearing member defaults. The clearing member bank's risk sensitive capital requirement for its default fund contribution (KCMi) must be calculated using the formulae and methodology set forth below.
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| 8.27 | The clearing member bank's risk-sensitive capital requirement for its default fund contribution (KCMi) is calculated in two steps:
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| | (1) | Calculate the hypothetical capital requirement of the CCP due to its counterparty credit risk exposures to all of its clearing members and their clients.
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| | (2) | Calculate the capital requirement for the clearing member bank.
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| | Hypothetical capital requirement of the CCP
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| 8.28 | The first step in calculating the clearing member bank's capital requirement for its default fund contribution (KCMi) is to calculate the hypothetical capital requirement of the CCP (KCMi) due to its counterparty credit risk exposures to all of its clearing members and their clients. KCCP is a hypothetical capital requirement for a CCP, calculated on a consistent basis for the sole purpose of determining the capitalization of clearing member default fund contributions; it does not represent the actual capital requirements for a CCP which may be determined by a CCP and its supervisor.
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| 8.29 | K is calculated using the following formula, where: CCP
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| | (1) | RW is a risk weight of 20%33
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| | (2) | capital ratio is 8%
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| | (3) | CM is the clearing member
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| | (4) | EAD is the exposure amount of the CCP to clearing member ‘i', relating to I the valuation at the end of the regulatory reporting date before the margin called on the final margin call of that day is exchanged. The exposure includes both:
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| | | (a) | the clearing member's own transactions and client transactions guaranteed by the clearing member; and
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| | | (b) | all values of collateral held by the CCP (including the clearing member's prefunded default fund contribution) against the transactions in (a).
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| | (5) | The sum is over all clearing member accounts.
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| 8.30 | Where clearing members provide client clearing services, and client transactions and collateral are held in separate (individual or omnibus) sub-accounts to the clearing member's proprietary business, each such client sub-account should enter the sum in 8.29 above separately, i.e. the member EAD in the formula above is then the sum of the client sub-account EADs and any house sub-account EAD. This will ensure that client collateral cannot be used to offset the CCP's exposures to clearing members' proprietary activity in the calculation of KCCP. If any of these sub-accounts contains both derivatives and SFTs, the EAD of that sub-account is the sum of the derivative EAD and the SFT EAD.
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| 8.31 | In the case that collateral is held against an account containing both SFTs and derivatives, the prefunded initial margin provided by the member or client must be allocated to the SFT and derivatives exposures in proportion to the respective product-specific EADs, calculated according to:
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| | (1) | Chapter 9.67 to 9.71 of the Minimum Capital Requirements for Credit Risk; and
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| | (2) | SA-CCR (see Chapter 6 of this framework) for derivatives, without including the effects of collateral.
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| 8.32 | If the default fund contributions of the member (DFi) are not split with regard to i client and house sub-accounts, they must be allocated per sub-account according to the respective fraction the initial margin of that sub-account has in relation to the total initial margin posted by or for the account of the clearing member.
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| 8.33 | For derivatives, EADi is calculated as the bilateral trade exposure the CCP has i against the clearing member using the SA-CCR. In applying the SA-CCR:
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| | (1) | A MPOR of 10 business days must be used to calculate the CCP's potential future exposure to its clearing members on derivatives transactions (the 20 day floor on the MPOR for netting sets with more than 5000 trades does not apply).
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| | (2) | All collateral held by a CCP to which that CCP has a legal claim in the event of the default of the member or client, including default fund contributions of that member (DFi), is used to offset the CCP's exposure to that member or i client, through inclusion in the PFE multiplier in accordance with 6.23 to 6.25.
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| 8.34 | For SFTs, EADi is equal to max(EBRMi- IMi- DFi;0), where:
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| | (1) | EBRMi denotes the exposure value to clearing member ‘i' before risk mitigation under 9.68 to 9.72 of the Minimum Capital Requirements for Credit Risk; where, for the purposes of this calculation, variation margin that has been exchanged (before the margin called on the final margin call of that day) enters into the mark-to-market value of the transactions.
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| | (2) | IMi; is the initial margin collateral posted by the clearing member with the CCP.
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| | (3) | DFi is the prefunded default fund contribution by the clearing member that will be applied upon such clearing member's default, either along with or immediately following such member's initial margin, to reduce the CCP loss.
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| 8.35 | As regards the calculation in this first step (i.e. 8.28 to 8.34):
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| | (1) | Any haircuts to be applied for SFTs must be the standard supervisory haircuts set out in 9.44 of the Minimum Capital Requirements for Credit Risk.
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| | (2) | The holding periods for SFT calculations in 9.60 to 9.63 of the Minimum Capital Requirements for Credit Risk.
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| | (3) | The netting sets that are applicable to regulated clearing members are the same as those referred to in 8.10 and 8.11. For all other clearing members, they need to follow the netting rules as laid out by the CCP based upon notification of each of its clearing members. SAMA may demand more granular netting sets than laid out by the CCP.
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