Capital requirements for bank exposures to central counterparties: Difference between revisions
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The [[Bank | {{anat|crr}} | ||
The [[Bank for International Settlements]] [https://www.bis.org/publ/bcbs282.htm capital requirements for [[bank]] exposures to central counterparties] paper came into force on 1 January 2017. Read the full text of the paper [https://www.bis.org/publ/bcbs282.pdf here]. | |||
The final standard differs from the interim requirements by: | The final standard differs from the interim requirements by: | ||
*including a single approach for calculating capital requirements for a bank's exposure that arises from its contributions to the mutualised default fund of a qualifying CCP ( | *including a single approach for calculating capital requirements for a [[bank]]'s exposure that arises from its contributions to the mutualised [[default]] fund of a qualifying [[CCP]] (Q[[CCP]]); | ||
*employing the standardised approach for counterparty credit risk (as opposed to the Current Exposure Method) to measure the hypothetical capital requirement of a CCP; | *employing the standardised approach for counterparty credit risk (as opposed to the Current Exposure Method) to measure the hypothetical capital requirement of a [[CCP]]; | ||
including an explicit cap on the capital charges applicable to a bank's exposures to a | *including an explicit cap on the capital charges applicable to a [[bank]]'s exposures to a Q[[CCP]]; | ||
*specifying how to treat multi-level client structures whereby an institution clears its trades through intermediaries linked to a CCP; and | *specifying how to treat multi-level client structures whereby an institution clears its trades through intermediaries linked to a [[CCP]]; and | ||
*incorporating responses to frequently asked questions posed to the Basel Committee in the course of its work on the final standard. | *incorporating responses to frequently asked questions posed to the Basel Committee in the course of its work on the final standard. | ||
=== Important provisions === | |||
:192. Where a [[bank]] acts as a [[clearing member]] of a [[CCP]] for its own purposes, a [[risk weighting|risk weight]] of 2% must be applied to the [[bank]]’s trade exposure to the [[CCP]] in respect of OTC derivatives, [[exchange-traded derivatives|exchange-traded derivative]] transactions, [[Securities finance transaction|SFT]]s and long-settlement transactions. Where the [[clearing member]] offers clearing services to clients, the 2% [[risk weighting|risk weight]] also applies to the [[clearing member]]’s trade exposure to the [[CCP]] that arises when the [[clearing member]] is obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that the [[CCP]] [[default]]s. The [[risk weighting|risk weight]] applied to collateral posted to the [[CCP]] by the [[bank]] must be determined in accordance with paragraphs 200-202. | |||
:[...] | |||
:197. Where a [[bank]] is a client of a [[clearing member]], and enters into a transaction with the [[clearing member]] acting as a financial intermediary (ie the [[clearing member]] completes an offsetting transaction with a [[CCP]]), the client’s exposures to the [[clearing member]] may receive the treatment in paragraphs 192 to 194 of this Annex if the two conditions below are met. Likewise, where a client enters into a transaction with the [[CCP]], with a [[clearing member]] guaranteeing its performance, the client’s exposures to the [[CCP]] may receive the treatment in paragraph 192 to 194 if the conditions in (a) and (b) below are met. | |||
:The treatment in paragraph 192 to 194 may also apply to exposures of lower level clients to higher level clients in a multi-level client structure, provided that for all client levels in-between the conditions in (a) and (b) below are met. <br> | |||
:(a) 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: (i) the [[default]] or [[insolvency]] of the [[clearing member]], (ii) the [[default]] or [[insolvency]] of the [[clearing member]]’s other clients, and (iii) the joint [[default]] or [[insolvency]] of the [[clearing member]] and any of its other clients.<ref>That is, upon the [[insolvency]] of the [[clearing member]], there is 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 [[default]]ing [[clearing member]] to the [[CCP]], to one or more other surviving [[clearing member]]s or to the client or the client’s nominee. National supervisors should be consulted to determine whether this is achieved based on particular facts and such supervisors should consult and communicate with other supervisors via the “frequently asked questions” process to ensure consistency. </ref><br> | |||
: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). <br> | |||
:(b) Relevant laws, regulation, rules, contractual, or administrative arrangements provide that the offsetting transactions with the [[default]]ed or insolvent [[clearing member]] are highly likely to continue to be indirectly transacted through the [[CCP]], or by the [[CCP]], if the [[clearing member]] [[default]]s or becomes insolvent.<ref>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.</ref> 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. | |||
{{sa}} | |||
[[306(1) - CRR Provision]] | |||
{{ref}} | |||
Latest revision as of 11:36, 18 January 2020
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Regulatory Capital Anatomy™
The JC’s untutored thoughts on how bank capital works. {{{2}}}
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The Bank for International Settlements capital requirements for bank exposures to central counterparties paper came into force on 1 January 2017. Read the full text of the paper here.
The final standard differs from the interim requirements by:
- including a single approach for calculating capital requirements for a bank's exposure that arises from its contributions to the mutualised default fund of a qualifying CCP (QCCP);
- employing the standardised approach for counterparty credit risk (as opposed to the Current Exposure Method) to measure the hypothetical capital requirement of a CCP;
- including an explicit cap on the capital charges applicable to a bank's exposures to a QCCP;
- specifying how to treat multi-level client structures whereby an institution clears its trades through intermediaries linked to a CCP; and
- incorporating responses to frequently asked questions posed to the Basel Committee in the course of its work on the final standard.
Important provisions
- 192. Where a bank acts as a clearing member of a CCP for its own purposes, a risk weight of 2% must be applied to the bank’s trade exposure to the CCP in respect of OTC derivatives, exchange-traded derivative transactions, SFTs and long-settlement transactions. Where the clearing member offers clearing services to clients, the 2% risk weight also applies to the clearing member’s trade exposure to the CCP that arises when the clearing member is obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that the CCP defaults. The risk weight applied to collateral posted to the CCP by the bank must be determined in accordance with paragraphs 200-202.
- [...]
- 197. Where a bank is a client of a clearing member, and enters into a transaction with the clearing member acting as a financial intermediary (ie the clearing member completes an offsetting transaction with a CCP), the client’s exposures to the clearing member may receive the treatment in paragraphs 192 to 194 of this Annex if the two conditions below are met. Likewise, where a client enters into a transaction with the CCP, with a clearing member guaranteeing its performance, the client’s exposures to the CCP may receive the treatment in paragraph 192 to 194 if the conditions in (a) and (b) below are met.
- The treatment in paragraph 192 to 194 may also apply to exposures of lower level clients to higher level clients in a multi-level client structure, provided that for all client levels in-between the conditions in (a) and (b) below are met.
- (a) 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: (i) the default or insolvency of the clearing member, (ii) the default or insolvency of the clearing member’s other clients, and (iii) the joint default or insolvency of the clearing member and any of its other clients.[1]
- 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).
- (b) 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.[2] 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.
See also
References
- ↑ That is, upon the insolvency of the clearing member, there is 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. National supervisors should be consulted to determine whether this is achieved based on particular facts and such supervisors should consult and communicate with other supervisors via the “frequently asked questions” process to ensure consistency.
- ↑ 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.