Minimum Capital Requirements for Counterparty Credit Risk (CCR) and Credit Valuation Adjustment (CVA)

(for example, all equity volatility transactions form a single hedging set). Examples of volatility transactions include variance and volatility swaps, options on realized or implied volatility. For hedging sets consisting of volatility transactions, the supervisory factor applicable to a given asset class must be multiplied by a factor of five. 21 Maturity factors 6.51. The minimum time risk horizon for an unmargined transaction is the lesser of one year and the remaining maturity of the derivative contract, floored at ten business days. 22 Therefore, the calculation of the effective notional for an unmargined transaction includes the following maturity factor, where M i is the remaining maturity of transaction i, floored at 10 business days: 6.52. The maturity parameter ( M i ) is expressed in years but is subject to a floor of 10 business days. Banks should use standard market convention to convert business days into years, and vice versa. For example, 250 business days in a year, which results in a floor of 10/250 years for M i . 6.53. For margined transactions, the maturity factor is calculated using the margin period of risk (MPOR), subject to specified floors. That is, banks must first estimate the margin period of risk (as defined in 4.17) for each of their netting sets. They must then use the higher of their estimated margin period of risk and the relevant floor in the calculation of the maturity factor (6.55). The floors for the margin period of risk are as follows: (1) Ten business days for non-centrally-cleared transactions subject to daily margin agreements. (2) The sum of nine business days plus the re-margining period for non-centrally cleared transactions that are not subject daily margin agreements. (3) The relevant floors for centrally cleared transactions are prescribed in the capital requirements for bank exposures to central counterparties (see in Chapter 8 of this framework). 6.54. The following are exceptions to the floors on the minimum margin period of risk set out in 6.53 above: (1) For netting sets consisting of more than 5000 transactions that are not with a central counterparty the floor on the margin period of risk is 20 business days. (2) For netting sets containing one or more trades involving either illiquid collateral, or an OTC derivative that cannot be easily replaced, the floor on the margin period of risk is 20 business days. For these purposes, "Illiquid collateral" and "OTC derivatives that cannot be easily replaced" 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 (in the case of collateral) or premium (in the case of an OTC derivative). 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. OTC derivatives 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 applicable margin period of risk (before consideration of this provision), then the bank must reflect this history appropriately by doubling the applicable supervisory floor on the margin period of risk for that netting set for the subsequent two quarters. (4) In the case of non-centrally cleared derivatives that are subject to the requirements under Margin requirements, 6.55(3) applies only to variation margin call disputes. 6.55. The calculation of the effective notional for a margined transaction includes the following maturity factor, where MPOR i is the margin period of risk appr