Exposures to Qualifying CCPs: Trade Exposures

Whenever a bank is required to capitalize for exposures arising from default fund contributions to a QCCP, clearing member banks will apply the following approach. 8.26 Clearing member banks will apply a risk weight to their default fund contributions determined according to a risk sensitive formula that considers (i) the size and quality of a qualifying CCP's financial resources, (ii) the counterparty credit risk exposures of such CCP, and (iii) the application of such financial resources via the CCP's loss-bearing waterfall, in the case of one or more clearing member defaults. The clearing member bank's risk sensitive capital requirement for its default fund contribution ( K CMi ) must be calculated using the formulae and methodology set forth below. 8.27 The clearing member bank's risk-sensitive capital requirement for its default fund contribution ( K CMi ) is calculated in two steps: (1) Calculate the hypothetical capital requirement of the CCP due to its counterparty credit risk exposures to all of its clearing members and their clients. (2) Calculate the capital requirement for the clearing member bank. Hypothetical capital requirement of the CCP 8.28 The first step in calculating the clearing member bank's capital requirement for its default fund contribution ( K CMi ) is to calculate the hypothetical capital requirement of the CCP ( K CMi ) due to its counterparty credit risk exposures to all of its clearing members and their clients. K CCP is a hypothetical capital requirement for a CCP, calculated on a consistent basis for the sole purpose of determining the capitalization of clearing member default fund contributions; it does not represent the actual capital requirements for a CCP which may be determined by a CCP and its supervisor. 8.29 K is calculated using the following formula, where: CCP (1) RW is a risk weight of 20% 33 (2) capital ratio is 8% (3) CM is the clearing member (4) EAD is the exposure amount of the CCP to clearing member ‘i', relating to I the valuation at the end of the regulatory reporting date before the margin called on the final margin call of that day is exchanged. The exposure includes both: (a) the clearing member's own transactions and client transactions guaranteed by the clearing member; and (b) all values of collateral held by the CCP (including the clearing member's prefunded default fund contribution) against the transactions in (a). (5) The sum is over all clearing member accounts. 8.30 Where clearing members provide client clearing services, and client transactions and collateral are held in separate (individual or omnibus) sub-accounts to the clearing member's proprietary business, each such client sub-account should enter the sum in 8.29 above separately, i.e. the member EAD in the formula above is then the sum of the client sub-account EADs and any house sub-account EAD. This will ensure that client collateral cannot be used to offset the CCP's exposures to clearing members' proprietary activity in the calculation of K CCP . If any of these sub-accounts contains both derivatives and SFTs, the EAD of that sub-account is the sum of the derivative EAD and the SFT EAD. 8.31 In the case that collateral is held against an account containing both SFTs and derivatives, the prefunded initial margin provided by the member or client must be allocated to the SFT and derivatives exposures in proportion to the respective product-specific EADs, calculated according to: (1) Chapter 9.67 to 9.71 of the Minimum Capital Requirements for Credit Risk ; and (2) SA-CCR (see Chapter 6 of this framework) for derivatives, without including the effects of collateral. 8.32 If the default fund contributions of the member (DFi) are not split with regard to i client and house sub-accounts, they must be allocated per sub-account according to the respective fraction the initial margin of that sub-account has in relation to the total initial margin posted by or for the account of the clearing member.