+Section 1 Trading counterparty default
---+Article 25 Scope
------+Article 25 1.
------+Article 25 2.
------+Article 25 3.
------+Article 25 4.
------+Article 25 5.
---+Article 26 Calculating K‐TCD
---+Article 27 Calculation of exposure value
---+Article 28 Replacement cost (RC)
---+Article 29 Potential future exposure
------+Article 29 1.
------+Article 29 2.
------+Article 29 3.
------+Article 29 4.
------+Article 29 5.
------+Article 29 6.
------+Article 29 7.
------+Article 29 8.
---+Article 30 Collateral
------+Article 30 1.
------+Article 30 2.
------+Article 30 3.
---+Article 31 Netting
---+Article 32 Credit valuation adjustment

Section 1 Trading counterparty default

Section 1 Trading counterparty default

1. Overview

,
Article 25 Scope
Article 26 Calculating K‐TCD

Article 26

Calculating K‐TCD

For the purpose of calculating K‐TCD, the own funds requirement shall be determined by the following formula:

Own funds requirement = α • EV • RF • CVA

where:

α = 1,2;

EV = the exposure value calculated in accordance with Article 27;

RF = the risk factor defined per counterparty type as set out in Table 2; and

CVA = the credit valuation adjustment calculated in accordance with Article 32.



Table 2

Counterparty type

Risk factor

Central governments, central banks and public sector entities

1,6 %

Credit institutions and investment firms

1,6 %

Other counterparties

8 %
Article 27 Calculation of exposure value

Article 27

Calculation of exposure value

The calculation of the exposure value shall be determined in accordance with the following formula:

Exposure value = Max(0; RC + PFE – C)

where:

RC = replacement cost as determined in Article 28;

PFE = potential future exposure as determined in Article 29; and

C = collateral as determined in Article 30.

The replacement cost (RC) and collateral (C) shall apply to all transactions referred to in Article 25.

The potential future exposure (PFE) applies only to derivative contracts.

An investment firm may calculate a single exposure value at netting level for all the transactions covered by a contractual netting agreement, subject to the conditions laid down in Article 31. Where any of those conditions is not met, the investment firm shall treat each transaction as if it was its own netting set.
Article 28 Replacement cost (RC)

Article 28

Replacement cost (RC)

The replacement cost referred to in Article 27 shall be determined as follows:

(a) 

for derivative contracts, RC is determined as the CMV;

(b) 

for long settlement transactions, RC is determined as the settlement amount of cash to be paid or to be received by the investment firm upon settlement; a receivable is to be treated as a positive amount and a payable is to be treated as a negative amount;

(c) 

for repurchase transactions and securities or commodities lending or borrowing transactions, RC is determined as the amount of cash lent or borrowed; cash lent by the investment firm is to be treated as a positive amount and cash borrowed by the investment firm is to be treated as a negative amount;

(d) 

for securities financing transactions, where both legs of the transaction are securities, RC is determined by the CMV of the security lent by the investment firm; the CMV shall be increased using the corresponding volatility adjustment in Table 4 of Article 30;

(e) 

for margin lending transactions and credits and loans referred to in point (g) of Article 25(1), RC is determined by the book value of the asset in accordance with the applicable accounting framework.
Article 29 Potential future exposure
Article 30 Collateral
Article 31 Netting

Article 31

Netting

For the purposes of this Section, an investment firm may, first, treat perfectly matching contracts included in a netting agreement as if they were a single contract with a notional principal equivalent to the net receipts, second, net other transactions subject to novation under which all obligations between the investment firm and its counterparty are automatically amalgamated in such a way that the novation legally substitutes one single net amount for the previous gross obligations, and third, net other transactions where the investment firm ensures that the following conditions have been met:

(a) 

a netting contract with the counterparty or other agreement which creates a single legal obligation covers all included transactions, such that the investment firm would have either a claim to receive or obligation to pay only the net sum of the positive and negative mark‐to‐market values of included individual transactions in the event a counterparty fails to perform due to any of the following:

(i) 

default;

(ii) 

bankruptcy;

(iii) 

liquidation; or

(iv) 

similar circumstances;

(b) 

the netting contract does not contain any clause which, in the event of default of a counterparty, permits a non‐defaulting counterparty to make limited payments only, or no payments at all, to the estate of the defaulting party, even if the defaulting party is a net creditor;

(c) 

the investment firm has obtained an independent, written and reasoned legal opinion that, in the event of a legal challenge of the netting agreement, the investment firm’s claims and obligations would be equivalent to those referred to in point (a) under the following legal regime:

(i) 

the law of the jurisdiction in which the counterparty is incorporated;

(ii) 

if a foreign branch of a counterparty is involved, the law of jurisdiction in which the branch is located;

(iii) 

the law that governs the individual transactions included in the netting agreement; or

(iv) 

the law that governs any contract or agreement necessary to effect the netting.
Article 32 Credit valuation adjustment

Article 32

Credit valuation adjustment

For the purposes of this Section, CVA means an adjustment to the mid‐market valuation of the portfolio of transactions with a counterparty which reflects the CMV of the credit risk of the counterparty to the investment firm, but does not reflect the CMV of the credit risk of the investment firm to the counterparty.

CVA shall be 1,5 for all transactions other than the following transactions, for which CVA shall be 1:

(a) 

transactions with non‐financial counterparties as defined in point (9) of Article 2 of Regulation (EU) No 648/2012, or with non‐financial counterparties established in a third country, where those transactions do not exceed the clearing threshold as specified in Article 10(3) and (4) of that Regulation;

(b) 

intragroup transactions as provided for in Article 3 of Regulation (EU) No 648/2012;

(c) 

long settlement transactions;

(d) 

SFTs, including margin lending transactions, unless the competent authority determines that the investment firm’s CVA risk exposures arising from those transactions are material; and

(e) 

credits and loans referred to in point (g) of Article 25(1).

1.1 References

1.2 Identified Requirements

1.3 Related Standards

2. Identified Requirements

Requirements

3. Related Standards

Standards