Collateralized Transactions

For some transactions, depending on the nature and frequency of the revaluation and remargining provisions, different holding periods and thus different haircuts must be applied. The framework for collateral haircuts distinguishes between repo-style transactions (i.e. repo/reverse repos and securities lending/borrowing),” other capital markets-driven transactions” (i.e. OTC derivatives transactions and margin lending) and secured lending. In capital-market-driven transactions and repo-style transactions, the documentation contains remargining clauses; in secured lending transactions, it generally does not. 9.56 The minimum holding period for various products is summarized in table 15 below: Minimum holding periods Table 15 Summary of minimum holding periods and remargining/revaluation periods Transaction type Minimum holding period Minimum remargining/revaluation period Repo-style transaction five business days daily remargining Other capital market transactions 10 business days daily remargining Secured lending 20 business days daily revaluation 9.57 Regarding the minimum holding periods set out in paragraph 9.56, if a netting set includes both repo-style and other capital market transactions, the minimum holding period of ten business days must be used. Furthermore, a higher minimum holding period must be used in the following cases: (1) For all netting sets where the number of trades exceeds 5,000 at any point during a quarter, a 20-business day minimum holding period for the following quarter must be used. (2) For netting sets containing one or more trades involving illiquid collateral, a minimum holding period of 20 business days must be used. "Illiquid collateral" must be determined in the context of stressed market conditions and will be characterized by the absence of continuously active markets where a counterparty would, within two or fewer days, obtain multiple price quotations that would not move the market or represent a price reflecting a market discount. Examples of situations where trades are deemed illiquid for this purpose include, but are not limited to, trades that are not marked daily and trades that are subject to specific accounting treatment for valuation purposes (e.g. repo-style transactions referencing securities whose fair value is determined by models with inputs that are not observed in the market). (3) If a bank has experienced more than two margin call disputes on a particular netting set over the previous two quarters that have lasted longer than the bank's estimate of the margin period of risk (as defined in The Counterparty Credit Risk (CCR) Framework ), then for the subsequent two quarters the bank must use a minimum holding period that is twice the level that would apply excluding the application of this sub-paragraph. 9.58 When the frequency of remargining or revaluation is longer than the minimum, the minimum haircut numbers must be scaled up depending on the actual number of business days between remargining or revaluation. The 10-business day haircuts provided in paragraphs 9.49 to 9.50 are the default haircuts and these haircuts must be scaled up or down using the formula below, where: (1) H = haircut (2) H 10 = 10-business day haircut for instrument (3) T M = minimum holding period for the type of transaction. (4) N R = actual number of business days between remargining for capital market transactions or revaluation for secured transactions The comprehensive approach: exemptions under the comprehensive approach for qualifying repo-style transactions involving core market participants 9.59 For repo-style transactions with core market participants as defined in paragraph 9.37 and that satisfy the conditions in paragraph 9.36, a haircut of zero can be applied.