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Financial Markets Act, 2012 (Act No. 19 of 2012)

Regulations

Financial Markets Act Regulations

Chapter VI : Central Counterparties

29. Calculation of a central counterparty's credit exposure in terms of the current exposure method

29.1 Matters relating to the exposure amount or EAD

 

A central counterparty that adopts the current exposure method for the measurement of its exposure to counterparty credit risk—

(a) must, in respect of each relevant transaction, contract or netting set, calculate the relevant replacement cost or net replacement cost of the transaction, contract or netting set;
(b) must, in respect of each relevant netting set, multiply the relevant notional principle amount with the relevant credit conversion factors specified in Table 27(B) in Schedule A in order to calculate the relevant required add-on amount, which must be calculated independent from and irrespective of the relevant replacement cost or value calculated in terms of paragraph (a);
(c) may recognise eligible collateral obtained in respect of its exposure to counterparty credit risk in accordance with the relevant requirements in Regulation 26;
(d) must, in the case of any single name credit derivative instrument held in its book, calculate the its exposure amount or exposure-at-default through the application of the relevant potential future exposure add-on factors specified in Table 27(C) in Schedule A;
(e) must, in the case of any qualifying credit derivative instrument held in respect of an exposure, calculate the central counterparty’s required amount of capital in accordance with the relevant requirements in Regulation 26;
(f) may, in respect of any OTC derivative transaction subject to novation or a legally enforceable bilateral netting agreement, recognise the effect of the novation or netting agreement, provided that the central counterparty at all times complies with the relevant requirements specified in Regulation 29.2;
(g) must calculate its adjusted exposure amount or exposure-at-default through the application of the formula specified below which formula is designed to recognise the effect of collateral and any volatility in the amount relating to the collateral, and, when relevant, the effect of any legally enforceable bilateral netting agreement. The formula is expressed as:

 

 

where:

 

RC = the relevant current replacement cost, or

when the central counterparty has in place a legally enforceable netting agreement that complies with Regulation 29.2 below, the current net replacement cost of the relevant netting set, that is, when the central counterparty has in place a legally enforceable netting agreement the central counterparty may net off positive market values against negative market values in order to calculate a single net current exposure for all transactions covered by the netting agreement, subject to a minimum value of zero

 

Add-on

     =        the estimated amount relating to the potential future exposure, or

when the central counterparty has in place a legally enforceable netting agreement that complies with Regulation 29.2 below, the adjusted add-on amount, that is, the add-on amount may be reduced through the application of the formula specified below, which formula is designed to recognise reductions in the volatility of current exposures resulting from netting agreements

 

Anet = 0.4 (Agross) + 0.6(NGR x Agross)

 

where:

 

Anet   = the adjusted add-on for all contracts subject to the bilateral netting contract

 

Agross

= the sum of the gross add-ons for the contracts covered by the netting agreement. Agross is equal to the sum of individual add-on amounts, calculated by multiplying the relevant notional principal amount with the relevant specified add-on factor, of all transactions subject to the bilateral netting contract

 

NGR = the ratio of the net current exposure of the contracts included in the bilateral netting agreement to the gross current exposure of the said contracts

 

CA   = the volatility adjusted collateral amount calculated in accordance with the relevant requirements of the comprehensive approach in Regulation 26 or zero in the absence of eligible collateral, provided that the central counterparty must apply the relevant haircut for currency risk, that is, Hfx, when a mismatch exists between the collateral currency and the settlement currency. Even when more than two currencies are involved in the exposure, collateral and settlement currency, the central counterparty must, based on the frequency of mark-to-market, apply a single haircut assuming a 10-business day holding period, scaled up as necessary.