Minimum Capital Requirements for Credit Risk

In cases when the IRB calculation is not feasible (24.16 (2) above), a third-party is performing the calculation of risk weights (24.16 (3) above) or when the bank is using the MBA the following methods must be used to determine the risk weights associated with the fund’s underlying exposures: (1) For securitization exposures, the Securitization External-ratings-based approach (SEC-ERBA) set out in chapter 20 ; the Standardized approach (SEC-SA) set out in chapter 19 , if the bank is not able to use the SECERBA; or a 1250% risk weight where the specified requirements for using the SEC-ERBA or SEC-SA are not met; and (2) The standardized approach ( chapter 7 ) for all other exposures. 25. Capital Treatment of Unsettled Transactions and Failed Trades No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force Overarching Principles 25.1 Banks are exposed to the risk associated with unsettled securities, commodities, and foreign exchange transactions from trade date. Irrespective of the booking or the accounting of the transaction, unsettled transactions must be taken into account for regulatory capital requirements purposes. 25.2 Banks are encouraged to develop, implement and improve systems for tracking and monitoring the credit risk exposure arising from unsettled transactions and failed trades as appropriate so that they can produce management information that facilitates timely action. Banks must closely monitor securities, commodities, and foreign exchange transactions that have failed, starting the first day they fail. Delivery-versus-payment transactions 25.3 Transactions settled through a delivery-versus-payment system (DvP), 124 providing simultaneous exchanges of securities for cash, expose firms to a risk of loss on the difference between the transaction valued at the agreed settlement price and the transaction valued at current market price (i.e. positive current exposure). Banks must calculate a capital requirement for such exposures if the payments have not yet taken place five business days after the settlement date, see paragraph 25.9 below. Non-delivery-versus-payment transactions (free deliveries) 25.4 Transactions where cash is paid without receipt of the corresponding receivable (securities, foreign currencies, gold, or commodities) or, conversely, deliverables were delivered without receipt of the corresponding cash payment (non-DvP, or free deliveries) expose firms to a risk of loss on the full amount of cash paid or deliverables delivered. Banks that have made the first contractual payment/delivery leg must calculate a capital requirement for the exposure if the second leg has not been received by the end of the business day. The requirement increases if the second leg has not been received within five business days. See paragraphs 25.10 to 25.12 124 For the purpose of this Framework, DvP transactions include payment- versus-payment transactions. Scope of Requirements 25.5 The capital treatment set out in this chapter is applicable to all transactions on securities, foreign exchange instruments, and commodities that give rise to a risk of delayed settlement or delivery. This includes transactions through recognized clearing houses and central counterparties that are subject to daily mark-to- market and payment of daily variation margins and that involve a mismatched trade. The treatment does not apply to the instruments that are subject to the counterparty credit risk requirements set out in the Minimum Capital Requirements for Counterparty Credit Risk (CCR) and Credit Valuation Adjustment (CVA) (i.e. over-the-counter derivatives, exchange- traded derivatives, long settlement transactions, securities financing transactions). 25.6 Where they do not appear on the balance sheet (i.e. settlement date accounting), the unsettled exposure amount will receive a 100% credit conversion factor to determine the credit equivalent amount.