Minimum Capital Requirements for Credit Risk

For a collateralized transaction, the exposure amount after risk mitigation is calculated using the formula that follows, where: (1) E* = the exposure value after risk mitigation (2) E = current value of the exposure (3) H e = haircut appropriate to the exposure (4) C = the current value of the collateral received (5) H c = haircut appropriate to the collateral (6) H fx = haircut appropriate for currency mismatch between the collateral and exposure 9.47 In the case of maturity mismatches, the value of the collateral received (collateral amount) must be adjusted in accordance with paragraphs 9.10 to 0. 9.48 The exposure amount after risk mitigation (E*) must be multiplied by the risk weight of the counterparty to obtain the risk-weighted asset amount for the collateralized transaction. 9.49 The following supervisory haircuts in table 14 below (assuming daily mark-to- market, daily remargining and a 10 business day holding period), expressed as percentages, must be used to determine the haircuts appropriate to the collateral (H c ) and to the exposure (H e ): Supervisory haircuts for comprehensive approach Table 14 Issue rating for debt securities Residual maturity Sovereigns Other issuers Securitization exposures AAA to AA–/A-1 < 1 year 0.5 1 2 >1 year, < 3 years 2 3 8 >3 years, < 5 years 4 >5 years, < 10 years 4 6 16 > 10 years 12 A+ to BBB–/A-2/A-3/P-3 and unrated bank securities 9.34(3)(b) < 1 year 1 2 4 >1 year, < 3 years 3 4 12 >3 years, < 5 years 6 >5 years, < 10 years 6 12 24 > 10 years 20 BB+ to BB– All 15 Not eligible Not eligible Main index equities (including convertible bonds) and gold 20 Other equities and convertible bonds listed on a recognized exchange 30 UCITS/mutual funds Highest haircut applicable to any security in which the fund can invest, unless the bank can apply the look-through approach (LTA) for equity investments in funds, in which case the bank may use a weighted average of haircuts applicable to instruments held by the fund. Cash in the same currency 0 9.50 In paragraph 9.49 : (1) “Sovereigns” includes: PSEs that are treated as sovereigns by SAMA, as well as multilateral development banks receiving a 0% risk weight. (2) “Other issuers” includes: PSEs that are not treated as sovereigns by SAMA. (3) “Securitization exposures” refers to exposures that meet the definition set forth in the securitization framework. (4) “Cash in the same currency” refers to eligible cash collateral specified in paragraph 9.34(1). 9.51 The haircut for currency risk (H fx ) where exposure and collateral are denominated in different currencies is 8% (also based on a 10-business day holding period and daily mark-to-market). 9.52 For SFTs and secured lending transactions, a haircut adjustment may need to be applied in accordance with paragraphs 9.55 to 9.58. 9.53 For SFTs in which the bank lends, or posts as collateral, non-eligible instruments, the haircut to be applied on the exposure must be 30%. For transactions in which the bank borrows non-eligible instruments, credit risk mitigation may not be applied. 9.54 Where the collateral is a basket of assets, the haircut (H) on the basket must be calculated using the formula that follows, where: (1) a i is the weight of the asset (as measured by units of currency) in the basket (2) H i the haircut applicable to that asset The comprehensive approach: adjustment for different holding periods and non-daily mark-to-market or remargining