Prudential Regulation Authority Rulebook

1.

In addition to the calculation of the exposure value of securities financing transactions, including those that are off-balance-sheet in accordance with Article 429b(1) of this Chapter, institutions shall include in the total exposure measure an add-on for counterparty credit risk calculated in accordance with paragraph 2 or 3 of this Article, as applicable.

2.

Institutions shall calculate the add-on for transactions with a counterparty that are not subject to a master netting agreement that meets the conditions set out in Article 206 of the CRR on a transaction-by-transaction basis in accordance with the following formula:

where:

= the add-on;

i = the index that denotes the transaction;

Ei = the fair value of securities or cash lent to the counterparty under transaction i; and

Ci = the fair value of securities or cash received from the counterparty under transaction i.

Institutions may set equal to zero where Ei is the cash lent to a counterparty and the associated cash receivable is not eligible for the netting treatment set out in Article 429b(4) of this Chapter.

3.

Institutions shall calculate the add-on for transactions with a counterparty that are subject to a master netting agreement that meets the conditions set out in Article 206 of the CRR on an agreement-by-agreement basis in accordance with the following formula:

where:

= the add-on;

i = the index that denotes the netting agreement;

Ei = the fair value of securities or cash lent to the counterparty for the transactions that are subject to master netting agreement i; and

Ci = the fair value of securities or cash received from the counterparty that is subject to master netting agreement i.

4.

For the purposes of paragraphs 2 and 3, the term counterparty includes also tri-party agents that receive collateral in deposit and manage the collateral in the case of tri-party transactions.

5.

By way of derogation from paragraph 1 of this Article, institutions may use the method set out in Article 222 of the CRR, subject to a 20% floor for the applicable risk weight, to determine the add-on for securities financing transactions including those that are off-balance-sheet. Institutions may use that method only where they also use it for calculating the exposure value of those transactions for the purpose of meeting the own funds requirements as set out in points (a), (b) and (c) of Article 92(1) of the CRR.

6.

Where sale accounting is achieved for a repurchase transaction under the applicable accounting framework, the institution shall reverse all sales-related accounting entries.

7.

Where an institution acts as an agent between two parties in a securities financing transaction, including an off-balance-sheet transaction, the following provisions shall apply to the calculation of the institution's total exposure measure:

1. (a) where the institution provides an indemnity or guarantee to one of the parties in the securities financing transaction and the indemnity or guarantee is limited to any difference between the value of the security or cash the party has lent and the value of collateral the borrower has provided, the institution shall only include the add-on calculated in accordance with paragraph 2 or 3, as applicable, in the total exposure measure;
2. (b) where the institution does not provide an indemnity or guarantee to any of the involved parties, the transaction shall not be included in the total exposure measure;
3. (c) where the institution is economically exposed to the underlying security or the cash in the transaction to an amount greater than the exposure covered by the add-on, it shall include in the total exposure measure also the full amount of the security or the cash to which it is exposed;
4. (d) where the institution acting as agent provides an indemnity or guarantee to both parties involved in a securities financing transaction, the institution shall calculate its total exposure measure in accordance with points (a), (b) and (c) separately for each party involved in the transaction.

[Note: This rule corresponds to Article 429b of the CRR as it applied immediately before revocation by the Treasury.]