Prudential Regulation Authority Rulebook

1.

A firm must treat exposures to the Scottish Government, the Welsh Government and the Northern Ireland Executive as exposures to the central government of the UK for the calculation of the counterparty default risk module of the standard formula.

1.

A firm must calculate the capital requirement for counterparty default risk on the basis of single name exposures. For that purpose exposures to undertakings which belong to the same corporate group must be treated as a single name exposure.

2.

A firm may treat exposures which belong to different members of the same legal or contractual pooling arrangement as different single name exposures where the probability of default of the single name exposure is calculated in accordance with 3E12 and the loss-given-default is calculated as follows:

1. (1) in accordance with 3E6, if it is a pool exposure of type A,
2. (2) in accordance with 3E7, if it is a pool exposure of type B; or
3. (3) in accordance with 3E8, if it is a pool exposure of type C. 

Alternatively exposures to the undertakings which belong to the same pooling arrangement must be treated as a single name exposure.

1.

A firm must treat retail loans secured by mortgages on residential property (mortgage loans) as type 2 exposures under the counterparty default risk provided the requirements in 3E3.2 to 3E3.13 are met.

2.

The exposure must be either to a natural person or persons or to a small or medium-sized enterprise.

3.

The exposure must be one of a significant number of exposures with similar characteristics such that the risks associated with such lending are substantially reduced.

4.

The total amount owed to the firm and, where relevant, to all related undertakings, including any exposure in default, by the counterparty or other connected third party, must not, to the knowledge of the firm, exceed GBP 880,000 and the firm must take reasonable steps to acquire this knowledge.

5.

The residential property is or will be occupied or let by the owner.

6.

The value of the property does not materially depend upon the credit quality of the borrower.

7.

The risk of the borrower does not materially depend upon the performance of the underlying property, but on the underlying capacity of the borrower to repay the debt from other sources, and as a consequence, the repayment of the facility does not materially depend on any cash-flow generated by the underlying property serving as collateral provided by way of a collateral arrangement. For those other sources, the firm must determine maximum loan-to-income ratio as part of its lending policy and obtain suitable evidence of the relevant income when granting the loan.

8.

All of the following requirements on legal certainty must be met:

1. (1) a mortgage or charge is enforceable in all jurisdictions which are relevant at the time of the conclusion of the credit agreement and must be properly filed on a timely basis;
2. (2) all legal requirements for establishing the pledge have been fulfilled; and
3. (3) the protection agreement and the legal process underpinning it enable the firm to realise the value of the protection within a reasonable timeframe.

9.

All of the following requirements on the monitoring of property values and on property valuation must be met:

1. (1) the firm must monitor the value of the property on a frequent basis and at a minimum once every three years, provided that the firm must carry out more frequent monitoring where the market is subject to significant changes in conditions; and
2. (2) the firm must review the property valuation when information available to the firm indicates that the value of the property may have declined materially relative to general market prices and that review must be external and independent and carried out by a valuer who possesses the necessary qualifications, ability and experience to execute a valuation and who is independent from the credit decision process.

10.

For the purposes of 3E3.9, a firm may use statistical methods to monitor the value of the property and to identify property that needs revaluation.

11.

A firm must clearly document the types of residential property it accepts as collateral and its lending policies in this regard and must require the independent valuer of the market value of the property, as referred to in 3E11.2, to document that market value in a transparent and clear manner.

12.

A firm must have in place procedures to monitor that the property taken as credit protection is adequately insured against the risk of damage.

13.

A firm must report all of the following data on losses stemming from mortgage loans to the PRA:

1. (1) losses stemming from loans that have been classified as type 2 exposures in accordance with 3.15 in any given year; and
2. (2) overall losses in any given year.

1.

A firm must calculate the loss-given-default on a single name exposure as equal to the sum of the loss-given-default on each of the exposures to counterparties belonging to the single name exposure on the following basis:

1. (1) the loss-given-default must be net of the liabilities towards counterparties belonging to the single name exposure provided that:
   1. (a) those liabilities and exposures are set off in the case of default of the counterparties; and
   2. (b) 3G2 and 3G3 are complied with in relation to that right of set-off; and
2. (2) no offsetting shall be allowed for if the liabilities are expected to be met before the credit exposure is cleared.

2.

Where a firm has concluded contractual netting agreements covering several derivatives that represent credit exposure to the same counterparty, it may calculate the loss-given-default on those derivatives, as set out in 3E4.5 to 3E4.8, on the basis of the combined economic effect of  all of those derivatives that are covered by the same contractual netting agreement, provided that 3G2 and 3G3 are complied with in relation to the netting.

3.

A firm must calculate the loss-given-default on a reinsurance arrangement or insurance securitisation in accordance with the following formula:

$$LGD=max[50\mathrm{\%}\cdot (Recoverables+50\mathrm{\%}\cdot {RM}_{re})-F\cdot Collateral;0]$$

where:

1. (a) Recoverables denotes the best estimate of amounts recoverable from the reinsurance arrangement or insurance securitisation and the corresponding debtors;
2. (b) RM_re denotes the risk mitigating effect on underwriting risk of the reinsurance arrangement or securitisation;
3. (c) Collateral denotes the risk-adjusted value of collateral provided by way of a collateral arrangement in relation to the reinsurance arrangement or securitisation; and
4. (d) F denotes a factor to take into account the economic effect of the collateral arrangement in relation to the reinsurance arrangement or securitisation in case of any credit event related to the counterparty, determined in accordance with 3E10.7.

4.

Where the reinsurance arrangement is with a UK Solvency II undertaking, a third country insurance undertaking or a third country reinsurance undertaking and 60% or more of that counterparty’s assets are subject to collateral arrangements, a firm must calculate the loss-given-default in accordance with the following formula:

$$LGD=max(90\mathrm{\%}\cdot (Recoverables+50\mathrm{\%}\cdot {RM}_{re})-F^{\mathrm{\prime }}\cdot Collateral;0)$$

where:

F’ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the reinsurance arrangement or securitisation in the case of a credit event related to the counterparty, determined in accordance with 3E10.7.

5.

A firm must calculate the loss-given-default on a derivative falling within 3E5.1 in accordance with the following formula:

$$LGD=max(18\mathrm{\%}\cdot (Derivative+50\mathrm{\%}\cdot {RM}_{fin})-50\mathrm{\%}\cdot F^{\mathrm{\prime }}\cdot Value;0)$$

where:

1. (a) Derivative denotes the value of the derivative determined in accordance with Valuation 2.1 to 2.2;
2. (b) RM _fin denotes the risk-mitigating effect on market risk of the derivative;
3. (c) Value denotes the value of the assets held as collateral, provided by way of a collateral arrangement, determined in accordance with Valuation 2.1 to 2.2; and
4. (d) F′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty, determined in accordance with 3E10.7.

6.

Notwithstanding 3E4.5, a firm must calculate the loss-given-default on a derivative falling within 3E5.2 in accordance with the following formula:

$$LGD=max(16\mathrm{\%}\cdot (Derivative+50\mathrm{\%}\cdot {RM}_{fin})-50\mathrm{\%}\cdot F"\cdot Value;0)$$

where:

1. (a) Derivative denotes the value of the derivative in accordance with Valuation 2.1 to 2.2;
2. (b) RM _fin denotes the risk-mitigating effect on market risk of the derivative;
3. (c) Value denotes the value of the assets held as collateral, provided by way of a collateral arrangement, in accordance with Valuation 2.1 to 2.2; and
4. (d) F′′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty, determined in accordance with 3E10.7.

7.

A firm must calculate the loss-given-default on derivatives other than those referred to in 3E4.5 and 3E4.6 in accordance with the following formula, provided that the derivative contract meets the requirements of Article 11 of Regulation (EU) 648/2012:

$$LGD=max(90\mathrm{\%}\cdot (Derivative+{50\mathrm{\%}\cdot RM}_{fin})-50\mathrm{\%}\cdot F^{\mathrm{\prime }\mathrm{\prime }\mathrm{\prime }}\cdot Value;0)$$

where:

1. (a) Derivative denotes the value of the derivative determined in accordance with Valuation 2.1 to 2.2;
2. (b) RM _fin denotes the risk-mitigating effect on market risk of the derivative;
3. (c) Value denotes the value of the assets held as collateral, provided by way of a collateral arrangement, determined in accordance with Valuation 2.1 to 2.2; and
4. (d) F′′′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty, determined in accordance with 3E10.7.

8.

A firm must calculate the loss-given-default on derivatives not covered by 3E4.5, 3E4.6 and 3E4.7 in accordance with the following formula:

$$LGD=max(90\mathrm{\%}\cdot (Derivative+{RM}_{fin})-F^{\mathrm{\prime }\mathrm{\prime }\mathrm{\prime }}\cdot Collateral;0)$$

where:

1. (a) Derivative denotes the value of the derivative determined in accordance with Valuation 2.1 to 2.2;
2. (b) RM _fin denotes risk-mitigating effect on market risk of the derivative;
3. (c) Collateral denotes the risk-adjusted value of collateral provided by way of a collateral arrangement in relation to the derivative; and
4. (d) F′′′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty, determined in accordance with 3E10.7.

9.

Where the loss-given-default on derivatives is to be calculated on the basis referred to in 3E4.2, the following rules apply for the purposes of 3E4.5 to 3E4.8:

1. (1) the value of the derivative must be the sum of the values of the derivatives covered by the contractual netting arrangement;
2. (2) the risk-mitigating effect must be determined at the level of the combination of derivatives covered by the contractual netting arrangement; and
3. (3) the risk-adjusted value of collateral provided by way of a collateral arrangement must be determined at the level of the combination of derivatives covered by the contractual netting arrangement.

10.

A firm must calculate the loss-given-default on a mortgage loan in accordance with the following formula:

$$LGD=max(Loan-(80\mathrm{\%}\cdot Mortgage+Guarantee);0)$$

where:

1. (a) Loan denotes the value of the mortgage loan determined in accordance with Valuation 2.1 to 2.2;
2. (b) Mortgage denotes the risk-adjusted value of the mortgage; and
3. (c) Guarantee denotes the amount that the guarantor would be required to pay to the firm if the obligor of the mortgage loan were to default at a time when the value of the property held as mortgage were equal to 80% of the risk-adjusted value of the mortgage.

11.

For the purposes of 3E4.10(c), a guarantee must only be recognised if it is provided by a counterparty mentioned in 3D24.2(1) to (3) and it complies with the requirements set out in 3G2, 3G3 and 3G9.1(1) to (5).

12.

A firm must calculate the loss-given-default on a legally binding commitment as referred to in 3.14(5) as the difference between its nominal value and its value in accordance with Valuation 2.1 to 2.2.

13.

The loss-given-default on cash at bank as referred to in Schedule 3 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008/410 as amended from time to time, of a deposit with a ceding undertaking, of an item listed in 3.14(4) or 3.15(5), or of a receivable from an intermediary or policyholder debtor, as well as any other exposure not listed elsewhere in this Chapter must be equal to its value in accordance with Valuation 2.1 to 2.2.

1.

For the purposes of 3E4.5, a derivative falls within this rule if the following requirements are met:

1. (1) the derivative is a CCP-related transaction in which the firm is the client;
2. (2) the positions and assets of the firm related to that transaction are distinguished and segregated, at the level of both the clearing member and the CCP, from the positions and assets of both the clearing member and the other clients of that clearing member and as a result of that distinction and segregation those positions and assets are bankruptcy remote in the event of the default or insolvency of the clearing member or one or more of its other clients;
3. (3) the laws, regulations, rules and contractual arrangements applicable to or binding the firm or the CCP facilitate the transfer of the client’s positions relating to that transaction and of the corresponding collateral provided by way of a collateral arrangement to another clearing member within the applicable margin period of risk in the event of default or insolvency of the original clearing member and in such circumstances, the client’s positions and the collateral must be transferred at market value, unless the client requests to close out the position at market value;
4. (4) the firm has available an independent, written and reasoned legal opinion that concludes that, in the event of legal challenge, the relevant courts and administrative authorities would find that the client would bear no losses on account of the insolvency of the clearing member or of any the clients of that clearing member under any of the following laws:
   1. (a) the laws of the jurisdiction of the firm, its clearing member or the CCP;
   2. (b) the law governing the transaction;
   3. (c) the law governing the collateral; and
   4. (d) the law governing any contract or agreement necessary to meet the requirement set out in (2); and
5. (5) the CCP is a qualifying central counterparty as defined in Article 4(1)(88) of the CRR.

2.

For the purposes of 3E4.6, a derivative falls within this rule if the requirements set out in 3E5.1 are met, with the exception that the firm is not required to be protected from losses in the event that the clearing member and another client of the clearing member jointly default.

1.

For pool exposures of type A which a firm is permitted to treat as separate single name exposures in accordance with 3E2.2, where members are each only liable up to their respective portion of the obligation covered by the pooling arrangement, the firm must calculate the loss-given-default in accordance with 3E4.

2.

For pool exposures of type A which a firm is permitted to treat as separate single name exposures in accordance with 3E2.2, where members are each liable up to the full amount of the obligation covered by the pooling arrangement, a firm must multiply the loss-given-default calculated in accordance with 3E4 by the risk-share factor, calculated in accordance with the following formula:

$$risk-share\mathrm{\_}factor=e^{-0.15(min(SR,196\mathrm{\%})-1)}$$

3.

Where a firm is ceding risk to a pooling arrangement by the intermediary of a central undertaking, the firm must treat the central undertaking as part of the pooling arrangement and calculate its share of the risk accordingly.

1.

For pool exposures of type B which a firm is permitted to treat as separate single name exposures in accordance with 3E2.2, where members are each liable up to the full amount of the obligation covered by the pooling arrangement, the firm must calculate the loss-given-default in accordance with the following formula:

$$LGD=max(((1-R{R}_c)\cdot (\frac{P_u}{(1-P_c)}B{E}_c+\mathrm{\Delta }R{M}_c)-F\cdot Collateral);0)$$

2.

For pool exposures of type B which a firm is permitted to treat as separate single name exposures in accordance with 3E2.2, where members are each only liable up to their respective portion of the obligation covered by the pooling arrangement, the firm must calculate the loss-given-default in accordance with the following formula:

$$LGD=max(((1-R{R}_{CE})\cdot (P_c\cdot B{E}_{CE}+\mathrm{\Delta }R{M}_{CE})-F\cdot Collateral);0)$$

1.

For pool exposures of type C which a firm is permitted to treat as separate single name exposures in accordance with 3E2.2, the firm must calculate the loss-given-default in accordance with the following formula:

$$LGD=max(((1-R{R}_{CE})\cdot (P_U\cdot B{E}_{CE}+\mathrm{\Delta }R{M}_{CE})-F\cdot Collateral);0)$$

1.

A firm must calculate the risk-mitigating effect on underwriting risk or market risk of a reinsurance arrangement, securitisation or derivative as the greater of zero and the difference between the following capital requirements:

1. (1) the hypothetical capital requirement for underwriting risk or market risk of the firm, calculated in accordance with Chapter 3 and Sections 3A to 3D, that would apply if the reinsurance arrangement, securitisation or derivative did not exist; and
2. (2) the capital requirement for underwriting risk or market risk of the firm.

1.

Where the criteria set out in 3G8 are met, a firm must calculate the risk-adjusted value of collateral provided by way of security, as referred to in paragraph (2) of the definition collateral arrangement, as the difference between the value of the assets held as collateral, valued in accordance with Valuation 2.1 to 2.2, and the adjustment for market risk, as referred to in 3E10.5, provided that both of the following requirements are fulfilled:

1. (1) the firm has (or is a beneficiary under a trust where the trustee has) the right to liquidate or retain, in a timely manner, the collateral in the event of a default, insolvency or bankruptcy or other credit event relating to the counterparty (‘the counterparty requirement’); and
2. (2) the firm has (or is a beneficiary under a trust where the trustee has) the right to liquidate or retain, in a timely manner, the collateral in the event of a default, insolvency or bankruptcy or other credit event relating to the custodian or other third party holding the collateral on behalf of the counterparty (‘the third party requirement’).

2.

Where the counterparty requirement is met and the criteria set out in 3G8 are met and the third party requirement is not met, a firm must calculate the risk-adjusted value of a collateral provided by way of security, as referred to in paragraph (2) of the definition collateral arrangement, as equal to 90% of the difference between the value of the assets held as collateral in accordance with Valuation 2.1 to 2.2 and the adjustment for market risk, as referred to in 3E10.5.

3.

Where either the counterparty requirement is not met or the requirements in 3G8 are not met, a firm must assign a value to the risk-adjusted value of collateral provided by way of security, as referred to in paragraph (2) of the definition collateral arrangements, of zero.

4.

A firm must calculate the risk-adjusted value of a collateral of which full ownership is transferred, as referred to in paragraph (1) of the definition collateral arrangement, as the difference between the value of the assets held as collateral, valued in accordance with Valuation 2.1 to 2.2, and the adjustment for market risk, as referred to in 3E10.5, provided the requirements in 3G8 are fulfilled.

5.

A firm must calculate the adjustment for market risk as the difference between the following capital requirements:

1. (1) the hypothetical capital requirement for market risk of the firm that would apply if the assets held as collateral provided by way of a collateral arrangement were not included in the calculation; and
2. (2) the hypothetical capital requirement for market risk of the firm that would apply if the assets held as collateral provided by way of a collateral arrangement were included in the calculation.

6.

For the purposes of 3E10.5, a firm must calculate the currency risk of the assets held as collateral by comparing the currency of the assets held as collateral against the currency of the corresponding exposure.

7.

Where, in case of insolvency of the counterparty, the determination of the firm’s proportional share of the counterparty’s insolvency estate in excess of the collateral does not take into account that the firm receives the collateral, the factors F, F’, F’’ and F’’’ referred to in 3E4.3 to 3E4.8 and 7.35 must all be 100% and in all other cases these factors must be 50%, 18%, 16% and 90% respectively.

1.

A firm must calculate the risk-adjusted value of mortgage as the difference between the value of the residential property held as mortgage, valued in accordance with 3E11.2, and the adjustment for market risk, as referred to in 3E11.3.

2.

A firm must calculate the value of the residential property held as mortgage as the market value, reduced as appropriate to reflect the results of the monitoring required under 3E3.9 and 3E3.10 and to take account of any prior claims on the property and the external, independent valuation of the property must be the same or less than the market value calculated in accordance with Valuation 2.1 to 2.2.

3.

A firm must calculate the adjustment for market risk referred to in 3E11.1 as the difference between the following capital requirements:

1. (1) the hypothetical capital requirement for market risk of the firm that would apply if the residential property held as mortgage were not included in the calculation; and
2. (2) the hypothetical capital requirement for market risk of the firm that would apply if the residential property held as mortgage were included in the calculation.

4.

For the purposes of 3E11.2, a firm must calculate the currency risk of the residential property held as mortgage by comparing the currency of the residential property against the currency of the corresponding loan.

1.

A firm must calculate the probability of default on a single name exposure as equal to the average of the probabilities of default on each of the exposures to counterparties that belong to the single name exposure, weighted by the loss-given-default in respect of those exposures.

2.

A firm must assign to a single name exposure i for which a credit assessment by a nominated external credit assessment institution is available, a probability of default PD_i in accordance with the following table:

3.

In respect of single name exposures i to a UK Solvency II undertaking for which a credit assessment by a nominated external credit assessment institution is not available and where this UK Solvency II undertaking meets its MCR, a firm must assign a probability of default PD_i depending on the UK Solvency II undertaking’s solvency ratio, in accordance with the following table:

Where the solvency ratio falls in between the solvency ratios specified in the table above, the value of the probability of default must be linearly interpolated from the closest values of probabilities of default corresponding to the closest solvency ratios specified in the table above, provided that:

(1) where the solvency ratio is lower than 75%, the probability of default must be 4.2%; and

(2) where the solvency ratio is higher than 196%, the probability of default must be 0.01%.

For the purposes of this rule, ‘solvency ratio’ denotes the ratio of the eligible own funds to cover the SCR and the SCR, using the latest available values.

4.

A firm must assign a probability of default equal to 4.2% to exposures to a UK Solvency II undertaking that does not meet its MCR.

5.

3E12.3 and 3E12.4 only apply as of the first date of public disclosure, by the UK Solvency II undertaking corresponding to the exposure, of the SFCR and before that date, the following applies:

1. (1) if a credit assessment by a nominated external credit assessment institution is available for the exposures, 3E12.2 applies; 
2. (2) in all other cases, a firm must assign to the exposures the same risk factor as the ones that would result from the application of 3E3.3 to exposures to a UK Solvency II undertaking whose solvency ratio is 100%.

6.

In respect of exposures to a third country insurance undertaking or a third country reinsurance undertaking for which a credit assessment by a nominated external credit assessment institution is not available, situated in a third country which is an overseas jurisdiction designated under regulation 11 in relation to regulation 13 of the IRPR regulations in respect of the insurance group capital requirements calculation, and which complies with the solvency requirements of that third country, a firm must assign a probability of default equal to 0.5%.

7.

In respect of exposures to credit institutions and financial institutions which comply with the solvency requirements set out in the PRA Rulebook, the CRR or technical standards as amended from time to time, for which a credit assessment by a nominated external credit assessment institution is not available, a firm must assign a probability of default equal to 0.5%.

8.

A firm must assign a probability of default equal to 0% to exposures to counterparties referred to in 3D24.2(1) to (3)

9.

A firm must calculate the probability of default on single name exposures other than those identified in 3E12.2 to 3E12.8 as equal to 4.2%.

10.

Where a letter of credit, a guarantee or an equivalent arrangement is provided to fully secure an exposure and this arrangement complies with 3G2 to 3G9, a firm may treat the provider of that letter of credit, guarantee or equivalent arrangement as the counterparty on the secured exposure for the purposes of assessing the probability of default of a single name exposure.

11.

For the purposes of 3E12.10, a firm must treat exposures fully, unconditionally and irrevocably guaranteed by counterparties listed in 3E1 as exposures to the central government.

12.

Notwithstanding 3E12.2 to 3E12.11, a firm must assign to exposures referred to 3E4.5 a probability of default equal to 0.002%.

13.

Notwithstanding 3E12.2 to 3E12.12, a firm must assign to exposures referred to 3E4.6 a probability of default equal to 0.01%.

1.

Where the standard deviation of the loss distribution of type 1 exposures as referred to in 3.13 to 3.19 is lower than or equal to 7% of the total loss-given-default on all type 1 exposures, a firm must calculate the capital requirement for counterparty default risk on type 1 exposures in accordance with the following formula:

$${SCR}_{def,1}=3\cdot \sigma$$

where σ denotes the standard deviation of the loss distribution of type 1 exposures, as defined in 3E13.4.

2.

Where the standard deviation of the loss distribution of type 1 exposures is higher than 7% of the total loss-given-default on all type 1 exposures and lower or equal to 20% of the total loss-given-default on all type 1 exposures, a firm must calculate the capital requirement for counterparty default risk on type 1 exposures in accordance with the following formula:

$${SCR}_{def,1}=5\cdot \sigma$$

where σ denotes the standard deviation of the loss distribution of type 1 exposures.

3.

Where the standard deviation of the loss distribution of type 1 exposures is higher than 20% of the total loss-given-default on all type 1 exposures, a firm must calculate the capital requirement for counterparty default risk on type 1 exposures as equal to the total loss-given-default on all type 1 exposures.

4.

A firm must calculate the standard deviation of the loss distribution of type 1 exposures in accordance with the following formula:

$$\sigma =\sqrt{V}$$

where V denotes the variance of the loss distribution of type 1 exposures.

1.

The variance of the loss distribution of type 1 exposures as referred to in 3E13.4 must be equal to the sum of V_inter and V_intra.

2.

A firm must calculate V_inter in accordance with the following formula:

$$V_{inter}=\sum _{(j,k)}\frac{{PD}_k\cdot (1-{PD}_k)\cdot {PD}_j\cdot (1-{PD}_j)}{1.25\cdot ({PD}_k+{PD}_j)-{PD}_k\cdot {PD}_j}\cdot {TLGD}_j\cdot {TLGD}_k$$

where:

1. (a) the sum covers all possible combinations (j,k) of probabilities of default on single name exposures in accordance with 3E12; and
2. (b) TLGD_j and TLGD_k denote the sum of loss-given-default on type 1 exposures from counterparties bearing a probability of default PD_j and PD_k respectively.

3.

A firm must calculate V_intra in accordance with the following formula:

$$V_{intra}=\sum _j\frac{1.5\cdot {PD}_j\cdot (1-{PD}_j)}{2.5-{PD}_j}\cdot \sum _{{PD}_j}{LGD}_i^2$$

where:

1. (a) the first sum covers all different probabilities of default on single name exposures in accordance with 3E12;
2. (b) the second sum covers all single name exposures that have a probability of default equal to PD_j; and
3. (c) LGD_i denotes the loss-given-default on the single name exposure i.

1.

A firm must calculate the capital requirement for counterparty default risk on type 2 exposures as equal to the loss in its basic own funds that would result from an instantaneous decrease in value of type 2 exposures calculated in accordance with the following formula: 

$$90\mathrm{\%}\cdot {LGD}_{receivables>3months}+{\sum }_{i}15\mathrm{\%}\cdot {LGD}_i$$

where:

1. (a) LGD_{receivables>3months} denote the total loss-given-default on all receivables from intermediaries which have been due for more than three months;
2. (b) the sum is taken on all type 2 exposures other than receivables from intermediaries which have been due for more than three months; and
3. (c) LGDi denotes the loss-given-default on the type 2 exposure i.