| 13.1. | In this section (13.1 to 13.18), five examples are used to illustrate the operation of the SA-CCR in the context of standard margin agreements. In particular, they relate to the formulation of replacement cost for margined trades, as set out in 6.20:
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RC = max{V — C; TH + MTA — NICA; 0}
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| | Example 1
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| 13.2. | The bank currently has met all past VM calls so that the value of trades with its counterparty (€80 million) is offset by cumulative VM in the form of cash collateral received. There is a small “Minimum Transfer Amount” (MTA) of €1 million and a €0 ”Threshold” (TH). Furthermore, an “Independent Amount” (IA) of €10 million is agreed in favor of the bank and none in favor of its counterparty (i.e. the NICA is €10 million. This leads to a credit support amount of €90 million, which is assumed to have been fully received as of the reporting date.
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| 13.3. | In this example, the three terms in the replacement cost formula are:
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| | (1) | V - C =€80 million - €90 million = negative €10 million.
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| | (2) | TH + MTA - NICA = €0 + €1 million - €10 million = negative €9 million.
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| | (3) | The third term in the RC formula is always zero, which ensures that replacement cost is not negative.
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| 13.4. | The highest of the three terms (-€10 million, -€9 million, 0) is zero, so the replacement cost is zero. This is due to the large amount of collateral posted by the bank's counterparty.
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| | Example 2
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| 13.5. | The counterparty has met all VM calls but the bank has some residual exposure due to the MTA of €1 million in its master agreement, and has a €0 TH. The value of the bank's trades with the counterparty is €80 million and the bank holds €79.5 million in VM in the form of cash collateral. In addition, the bank holds €10 million in independent collateral (here being an initial margin independent of VM, the latter of which is driven by mark-to-market (MTM) changes) from the counterparty. The counterparty holds €10 million in independent collateral from the bank, which is held by the counterparty in a non-segregated manner. The NICA is therefore €0 (= €10 million independent collateral held less €10 million independent collateral posted).
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| 13.6. | In this example, the three terms in the replacement formula are:
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| | (1) | V - C = €80 million - (€79.5 million + €10 million - €10 million)= €0.5 million.
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| | (2) | TH + MTA - NICA = €0 + €1 million - €0 = €1 million.
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| | (3) | The third term is zero.
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| 13.7. | The replacement cost is the highest of the three terms (€0.5 million, €1 million, 0) which is €1 million. This represents the largest exposure before collateral must be exchanged.
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| | Bank as a clearing member
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| 13.8. | The case of central clearing can be viewed from a number of perspectives. One example in which the replacement cost formula for margined trades can be applied is when the bank is a clearing member and is calculating replacement cost for its own trades with a central counterparty (CCP). In this case, the MTA and TH are generally zero. VM is usually exchanged at least daily and the independent collateral amount (ICA) in the form of a performance bond or IM is held by the CCP.
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| | Example 3
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| 13.9. | The bank, in its capacity as clearing member of a CCP, has posted VM to the CCP in an amount equal to the value of the trades it has with the CCP. The bank has posted cash as initial margin and the CCP holds the IM in a bankruptcy- remote fashion. Assume that the value of trades with the CCP are negative €50 million, the bank has posted €50 million in VM and €10 million in IM to the CCP.
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| 13.10. | Given that the IM is held by the CCP in a bankruptcy remote fashion, 6.19 permits this amount to be excluded in the calculation NICA. Therefore, the NICA is €0 because the bankruptcy-remote IM posted to the CCP can be exclude and the bank has not received any IM from the CCP. The value of C is calculated as the value of NICA plus any VM received less any VM posted. The value of C is thus negative €50 million (= €0 million + €0 million - €50 million).
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| 13.11. | In this example, the three terms in the replacement formula are:
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| | (1) | V - C = (-€50 million) - (-€50 million) = €0. That is, the negative value of the trades has been fully offset by the VM posted by the bank.
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| | (2) | TH + MTA - NICA = €0 + €0 - €0 = €0.
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| | (3) | The third term is zero.
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| 13.12. | The replacement cost is therefore €0.
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| | Example 4
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| 13.13. | Example 4 is the same as Example 3, except that the IM posted to the CCP is not bankruptcy-remote. As a consequence, the €10 million of IM must be included in the calculation of NICA. Thus, NICA is negative €10 million (= ICA received of €0 minus unsegregated ICA posted of €10 million). Also, the value of C is negative €60 million (=NICA + VM received - VM posted = -€10 million + €0 - €50 million).
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| 13.14. | In this example, the three terms in the replacement formula are:
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| | (1) | V - C = (-€50 million) - (-€60 million) = €10 million. That is, the negative value of the trades is more than fully offset by collateral posted by the bank.
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| | (2) | TH + MTA - NICA = €0 + €0 - (-€10 million) = €10 million.
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| | (3) | The third term is zero.
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| 13.15. | The replacement cost is therefore €10 million. This represents the IM posted to the CCP which risks being lost upon default and bankruptcy of the CCP.
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| | Example 5: Maintenance Margin Agreement
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| 13.16. | Some margin agreements specify that a counterparty (in this case, a bank) must maintain a level of collateral that is a fixed percentage of the MTM of the transactions in a netting set. For this type of margining agreement, ICA is the amount of collateral that the counterparty must maintain above the net MTM of the transactions.
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| 13.17. | For example, suppose the agreement states that a counterparty must maintain a collateral balance of at least 140% of the MTM of its transactions and that the MtM of the derivatives transactions is €50 in the bank's favor. ICA in this case is €20 (= 140% * €50 - €50). Further, suppose there is no TH, no MTA, the bank has posted no collateral and the counterparty has posted €80 in cash collateral. In this example, the three terms of the replacement cost formula are:
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| | (1) | V - C = €50 - €80 = -€30.
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| | (2) | MTA + TH - NICA = €0 + €0 - €20 = -€20.
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| | (3) | The third term is zero.
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| 13.18. | Thus, the replacement cost is zero in this example.
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