Capital Requirements Regulation: Difference between revisions
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The amount of regulatory capital that has to be held is expressed as a percentage of the “'''total risk exposure amount'''” (Art. {{crrprov|92(2)}} of {{tag|CRR}}). | The amount of regulatory capital that has to be held is expressed as a percentage of the “'''total risk exposure amount'''” (Art. {{crrprov|92(2)}} of {{tag|CRR}}). | ||
{{crrsnap|92(2)}} | {{crrsnap|92(2)}} | ||
The '''total risk exposure amount''' includes the counterparty risk associated with {{tag|securities lending}} transactions in the trading book (Art. 92(3)(f) of {{tag|CRR}}). | The '''total risk exposure amount''' includes the counterparty risk associated with {{tag|securities lending}} transactions in the trading book (Art. {{crrprov|92(3)(f)}} of {{tag|CRR}}). | ||
{{crrsnap|92(3)(f)}} | |||
Under the standardised approach, the regulatory capital charge is determined by risk weighting the “'''exposure value'''” of the item in question (Art. {{crrprov|113}} of {{tag|CRR}}). | |||
{{crrsnap|113}} | |||
The '''exposure value''' of a {{tag|securities lending}} transaction is determined in accordance with '''Chapter 4''' or '''Chapter 6''' of Part 3, Title II (Art. {{crrprov|111(2)}} of {{tag|CRR}}). | |||
{{crrsnap|111(2)}} | |||
The firm can choose which Chapter to apply (Art. {{crrprov|271(2)}} of {{tag|CRR}}) | |||
{crrsnap|271(2)}} | |||
Under Chapter 4, the cash received under a {{tag|securities lending}} transaction is to be treated as collateral (Art. {{crrprov|193(4)}} of {{tag|CRR}}). | |||
{{crrsnap|193(4)}} | |||
Under Chapter 6, the exposure value can be determined by using an internal model, assuming that the firm has regulatory approval for the use of such a model (Art. {{crrprov|273(2)}} of {{tag|CRR}}) or by one of the methods set out in that Chapter. | |||
{{crrprov|273(2)}} | |||
*Although not expressly stated in relation to stock loans, these apply certain methodologies to particular “contracts” or “transactions”. | *Although not expressly stated in relation to stock loans, these apply certain methodologies to particular “contracts” or “transactions”. | ||
**A securities lending transaction is, both legally and economically a single transaction and is treated as such under {{tag|CRR}} (see, for example, Art. 92(3)(f)). | **A securities lending transaction is, both legally and economically a single transaction and is treated as such under {{tag|CRR}} (see, for example, Art. {{crrprov|92(3)(f)}}). | ||
*Where the conditions referred to in Art. 206 of {{tag|CRR}} are satisfied, [[netting]] arrangements are recognised. | *Where the conditions referred to in Art. {{crrprov|206}} of {{tag|CRR}} are satisfied, [[netting]] arrangements are recognised. | ||
{{crrsnap|206}} | |||
**However, if those conditions are not satisfied, the exposure is calculated without giving effect to any close-out netting agreement that may exists, i.e. each transaction is treated individually. | **However, if those conditions are not satisfied, the exposure is calculated without giving effect to any close-out netting agreement that may exists, i.e. each transaction is treated individually. | ||
*This is to be expected because netting arrangements are only recognised if they are legally enforceable. If they are not, the counterparties may have a gross exposure to each other due to the fact that an insolvency official may be able to “cherry pick” between individual transactions, i.e. disclaim unprofitable transactions while enforcing profitable ones. | *This is to be expected because netting arrangements are only recognised if they are legally enforceable. If they are not, the counterparties may have a gross exposure to each other due to the fact that an insolvency official may be able to “cherry pick” between individual transactions, i.e. disclaim unprofitable transactions while enforcing profitable ones. | ||