Finalized Guidance Document Concerning the Implementation of Basel III

Requirements on the Controls Around the Reuse of Collateral by IMM Banks As a summary, please note the following: • Applicable to IMM banks • Relates to variation margin, initial or independent margin and calls resulting from potential downgrade. • Cash management policies for IMM banks to account liquidity risks of potential incoming margin calls To further elaborate on the aforementioned, 107. To implement the requirements on controls regarding the reuse of collateral, a new paragraph 51(iii) will be included in Annex 4 1 as follows: 51(iii). A bank employing the internal models method must ensure that its cash management policies account simultaneously for the liquidity risks of potential incoming margin calls in the context of exchanges of variation margin or other margin types, such as initial or independent margin, under adverse market shocks, potential incoming calls for the return of excess collateral posted by counterparties, and calls resulting from a potential downgrade of its own public rating. The bank must ensure that the nature and horizon of collateral reuse is consistent with its liquidity needs and does not jeopardize its ability to post or return collateral in a timely manner. 1 Annex 5 of this document . 6.4.5 Require Banks to Use Supervisory Haircuts when Transforming Non-Cash OTC Collateral into Cash-Equivalent • Applicable to IMM banks • Implementation of supervisory haircuts for non-cash OTC collateral • Recognition in EAD calculation the effect of collateral other than cash • Must use either haircuts that meets the standards of the financial collateral comprehensive method or standard supervisory haircuts 108. To implement the supervisory haircuts for non-cash OTC collateral, a new paragraph 61(i) would be incorporated in Annex 4 1 as follows: 61(i). For a bank to recognize in its EAD calculations for OTC derivatives the effect of collateral other than cash of the same currency as the exposure itself, if it is not able to model collateral jointly with the exposure then it must use either haircuts that meet the standards of the financial collateral comprehensive method with own haircut estimates or the standard supervisory haircuts. 1 Annex 5 of this document . 6.4.6 Requirement for Banks to Model Non-Cash Collateral Jointly with Underlying Securities for OTC Derivatives and SFTs The following summary is appropriate. • Applicable to IMM banks • Regulation ensures robustness of non-cash collateral • Ensure the effect of collateral on changes in the market for SFTs for EAD calculation In order to further explain this component: 109. To ensure the robustness of non-cash collateral, a new paragraph 61(ii) will be inserted in Annex 4 1 as follows: 61(ii). If the internal model includes the effect of collateral on changes in the market value of the netting set, the bank must model collateral other than cash of the same currency as the exposure itself jointly with the exposure in its EAD calculations for securities-financing transactions. 1 Annex 5 of this document .