• PRU A4.9 PRU A4.9 Exposures to central counterparties

    • PRU A4.9.1

      This Section applies to exposures arising from Derivatives, SFTs and/or long settlement transactions that are cleared by a central counterparty (CCP). Exposures arising from the settlement of cash transactions (equities, fixed income, spot FX and spot commodities) are not subject to this Section.

    • PRU A4.9.2 PRU A4.9.2

      Authorised Persons must:

      (a) monitor all their exposures to CCPs; and must have adequate procedures for the regular reporting of information on those exposures to senior management and appropriate committee or committees of the management body; and
      (b) assess, through appropriate scenario analysis and stress testing, whether the level of capital held by the Authorised Person against exposures to a CCP is adequate.

      • Guidance

        The assessment under Rule A4.9.2(b) must cover the inherent risks of exposures to the CCP, including potential future credit exposures, exposures from default fund contributions and, where the Authorised Person is acting as a clearing member of the CCP, exposures resulting from contractual arrangements providing for commitments to take over or replace offsetting transactions from clients of another clearing member, in case such other clearing member defaults or becomes insolvent.

    • Trade Exposure Of A Clearing Member To A Qualifying Central Counterparty

      • PRU A4.9.3

        Where an Authorised Person acts as a clearing member, either for its own purposes or as an intermediary between a client and a qualifying central counterparty (QCCP), it must calculate Credit RWA in respect of its Trade Exposure to the QCCP in accordance with Rule A4.6.14, except that it must apply a CRW of 2%, unless Rule A4.9.4 applies.

      • PRU A4.9.4

        Where an Authorised Person is acting as an intermediary between a client and a QCCP and the terms of the QCCP-related transaction stipulate that the Authorised Person is not obligated to reimburse the client for any losses suffered due to changes in the value of that transaction in the event that the QCCP defaults, it may apply a CRW of 0% when calculating Credit RWA in respect of its Trade Exposure to the QCCP.

    • Trade Exposure Of A Clearing Member To A Non - QCCP

      • PRU A4.9.5

        (1) The Protection Buyer relies on the Protection Seller to pay the Credit Event Payment if a Credit Event occurs, and therefore must compute Credit RWAs for the Counterparty Risk involved.
        (2) The Protection Seller is exposed to the Protection Buyer only if there are premium or interest rate-related payments outstanding.

    • Trade Exposure Of A Clearing Member To A Client

      • Credit default products

        • PRU A4.9.6

          Where an Authorised Person acts as a clearing member, and in that capacity, acts as an intermediary between a client and a CCP, it must calculate Credit RWA in respect of its Trade Exposure to the client in accordance with Rule A4.6.14, together with App5 and relevant provisions of Section 4.13 in respect of any Collateral posted by the client, if applicable.

      • Trade Exposure Of A Client To A Clearing Member

        • PRU A4.9.8

          For the purposes of Rule A4.9.7 above, the following conditions must be met:

          (a) the clearing member's offsetting transaction with a QCCP is identified by the QCCP as a client transaction and collateral to support it is held by the QCCP and/or the clearing member, as applicable, under arrangements that would prevent any losses to the Authorised Person due to: (i) the default or insolvency of the clearing member, (ii) the default or insolvency of the clearing member's other clients; and (iii) the joint default or insolvency of the clearing member and any of its other clients;

           

          (b) the Authorised Person has conducted sufficient legal review (and undertaken such further review as necessary to ensure continuing enforceability) that concludes that, in the event of legal challenge, the relevant courts and administrative authorities would find that the Authorised Person would bear no losses on account of the insolvency of its clearing member or of any of its clearing member's clients under the relevant laws of the relevant jurisdiction(s); and

           

          (c) laws, regulations, rules, contractual or administrative arrangements applicable to or binding the Authorised Person or the QCCP facilitate the transfer of the Authorised Person's position relating to that contract and transaction and of the corresponding collateral to another clearing member within the applicable margin period of risk in the event of default or insolvency of the original clearing member. In such a circumstance, the Authorised Person's position and the collateral must be transferred at market value unless the client requests to close out the position at market value.

           

        • A4.9.9 PRU A4.9.9

          Where an Authorised Person is a client of the clearing member and the conditions set out in Rule A4.9.8 are not satisfied, the Authorised Person must capitalise its exposure to the clearing member as a bilateral OTC transaction in accordance with A4.6.14.

          • PRU A4.9.7

            Where an Authorised Person is a client of a clearing member, and enters into a transaction with the clearing member acting as an intermediary between the Authorised Person and a CCP, it must calculate Credit RWA in respect of its Trade Exposure to the clearing member as if it were a Trade Exposure to a QCCP provided all the conditions in Rule A4.9.8 are satisfied.

          • PRU A4.9.10

            Without prejudice to Rule A4.9.9, where an Authorised Person that is a client is not protected from losses where the clearing member and another client of the clearing member jointly default, but all the other conditions set out in Rule A4.9.8 are met, it must calculate Credit RWA in respect of its exposure to the clearing member in accordance with Rule A4.6.14, except that it must apply a CRW of 4%.

      • Trade Exposures In An Indirect Clearing Arrangement

        • PRU A4.9.11

          Where an Authorised Person that is a client accesses the services of a CCP through indirect clearing arrangements (where, for example it is a client of a clearing member's client), it may calculate Credit RWA in respect of its exposure to its intermediary in accordance with Rules A4.9.7 and A4.9.8, provided that the conditions set out in Rule A4.9.8 are satisfied at every level of the chain of intermediaries.

      • Treatment Of Posted Collateral

        • PRU A4.9.12

          Any collateral posted pursuant to transactions covered by Rules A4.9.3 to A4.9.11 must, from the perspective of the Authorised Person posting such collateral, receive the CRWs that otherwise apply to such assets or collateral, regardless of the fact that such collateral has been posted as collateral as part of a clearing arrangement.

        • A4.9.13 PRU A4.9.13

          Where collateral of a clearing member or client is posted with a QCCP or a clearing member, the Authorised Person posting such collateral must also recognise credit risk arising as a result of the collateral being exposed to risk of loss based on the creditworthiness of the entity holding such collateral according to the following Rules:

          (a) Where the entity holding such collateral is the QCCP, a CRW of 2% applies to collateral posted in relation to Trade Exposures. The relevant CRW of the QCCP will apply to collateral posted for other purposes. Where the Authorised Person uses the SA-CCR to calculate exposures, collateral posted which is not held in a bankruptcy remote manner must be accounted for in the NICA term in accordance with Rule A4.6.14. Where the Authorised Person uses an IMM Model in accordance with Rule A4.6.14, the alpha multiplier must be applied to the exposure on posted collateral.
          (b) All collateral posted by the clearing member (including cash, securities, other pledged assets and excess initial or variation margin) that is held by a custodian and is bankruptcy remote from the QCCP, is not subject to a capital requirement for Counterparty Credit Risk exposure to such bankruptcy remote custodian (i.e. the related CRW is 0%).
          (c) Collateral posted by a client, that is held by a custodian, and is bankruptcy remote from the QCCP, the clearing member and other clients, is not subject to a capital requirement for Counterparty Credit Risk. If the collateral is held at the QCCP on a client's behalf and is not held on a bankruptcy remote basis, a 2% risk-weight must apply to the collateral if the conditions in Rule A4.9.9 are met; or 4% if the conditions in Rule A4.9.10 are met.

          • Guidance

            The treatments set out in Rule A4.9.13 are summarised in the table below.

            Collateral Bankruptcy
            remote
            Conditions Risk weight
            posted by held by
            Clearing member QCCP No   2%
            Client Clearing member No   CRW of QCCP
            Clearing member Custodian Yes   0%
            Client Custodian Yes   0%
            QCCP Yes Rule A4.9.8 2%
            QCCP No Rule A4.9.10 4%

             

      • Calculation Of Credit RWA In Relation To Prefunded Contributions To The Default Fund Of A QCCP

        • PRU A4.9.14

          An Authorised Person acting as a clearing member must apply the following treatment to its exposures arising from its contributions to a default fund maintained by a QCCP:

          (a) it must calculate the Credit RWA for its prefunded contributions to the default fund of a QCCP in accordance with the approach set out in Rules A4.9.15 to A4.9.17; or
          (b) it must calculate the Credit RWA for its contributions to the default fund of a Non-QCCP in accordance with the approach set out in Rule A4.9.18.

      • Prefunded Contributions To The Default Fund Of A QCCP

        • PRU A4.9.15

          An Authorised Person acting as a clearing member must calculate its Credit RWA for its prefunded contributions to the default fund of a QCCP in accordance with the steps set out in Rules A4.9.16 and A4.9.17 below.

        • A4.9.16 PRU A4.9.16

          An Authorised Person must first calculate the hypothetical capital requirement of the QCCP (KCCP) due to its counterparty credit risk exposures to all of its clearing members and their clients in accordance with the following formula:

          where:

          RW = a risk weight of 20%;

          Capital ratio= 10%;

          EADi = the exposure amount of the QCCP to clearing member i, including both the clearing member's own transactions and client transactions guaranteed by the clearing member, and all values of collateral held by the QCCP held over all clearing member accounts (including the clearing member's prefunded default fund contribution) against these transactions, relating to the valuation at the end of the regulatory reporting date before the margin called on the final margin call of that day is exchanged.

          • Guidance

            1. Where clearing members provide client clearing services, and client transactions and collateral are held in separate sub-accounts to the clearing member's proprietary business, each such client sub-account should enter the sum separately, i.e. the member EAD in the formula above is then the sum of the client sub-account EADs and any house sub-account EAD. This will ensure that client collateral cannot be used to offset the exposures of the QCCP to clearing members' proprietary activity in the calculation of KCCP. If any of these sub-accounts contains both derivatives and SFTs, the EAD of that sub-account is the sum of the derivative EAD and the SFT EAD. If the default fund contributions of the member (DFi) are not split with regard to client and house sub-accounts, they must be allocated per subaccount according to the respective fraction the initial margin of that subaccount has in relation to the total initial margin posted by or for the account of the clearing member.
            (2) For derivatives, EADi is calculated as the bilateral trade exposure the QCCP has against clearing member i using the approach in Rule A4.6.14. All collateral held by a QCCP to which that QCCP has a legal claim in the event of default of a member or client, including default fund contributions of that member (DFi), is used to offset the exposure of the QCCP to that member or client, through inclusion in the potential future exposure multiplier in accordance with Rule A4.6.14.
            (3) For SFTs, EAD is equal to max(EBRMi – IMi – DFi; 0), where: a. EBRMi denotes the exposure value to clearing member i before risk mitigation. For the purposes of this calculation, variation margin that has been exchanged (before the margin called on the final margin call of that day) enters into the mark-to-market value of the transactions;
            b. IMi is the initial margin collateral posted by clearing member i with the QCCP;
            c. DFi is the prefunded default fund contribution by clearing member i that will be applied upon such clearing member's default, either along with or immediately following such member's initial margin, to reduce the QCCP loss.

        • A4.9.17 PRU A4.9.17

          An Authorised Person must next calculate the capital requirement for each clearing member in accordance with the following formula:

          where:

          KCMi = the capital requirement on the default fund contribution of clearing member i;

          DFprefCM = the total prefunded default fund contributions from clearing members;

          DFCCP = the prefunded own resources of the CCP (e.g. contributed capital, retained earnings, etc.), which are contributed to the default waterfall, where these are junior or pari passu to prefunded member contributions; and

          DFprefi = the prefunded default fund contributions provided by clearing member i.

          • Guidance

            1. If the Regulator is not provided with a calculation of KCCP, DFprefCM and DFCCP or if the Regulator is not able to confirm those calculations, the treatment set out in Rule A4.9.18 shall apply to the calculation made by the relevant Authorised Person to the default fund of a QCCP.
            2. KCCP should be calculated on a quarterly basis at a minimum, although the Regulator may require more frequent calculations in case of material changes (such as the QCCP clearing a new product). If the Authorised Person or Regulator performed the calculations, it should make available to any other Authorised Person which acts as a clearing member sufficient aggregate information about the composition of the exposures of the QCCP to clearing members and information provided to the Authorised Person for the purposes of the calculation of KCCP, DFprefCM and DFCCP.
            3. Such information should be provided a least on a quarterly basis. KCCP and KCMi should be recalculated at least quarterly, and should also be recalculated when there are material changes to the number or exposure of cleared transactions or material changes to the financial resources of the QCCP.

      • Prefunded And Unfunded Contributions To The Default Fund Of A Non - QCCP

        • PRU A4.9.18

          An Authorised Person must calculate Credit RWA for the exposures arising from its contributions to the default fund of a Non-QCCP in accordance with the following formula:

          Credit RWA = (DF + UC) × 10

          where:

          DF = the total prefunded default fund contributions provided by the Authorised Person; and

          UC = the total unfunded default fund contributions which the Non-QCCP may require the Authorised Person to provide.

          The Regulator may determine whether an Authorised Person's unfunded contribution to the default fund should be factored into the imposition of an Individual Capital Requirement under Rule 10.6.

      • Cap On Total Credit RWA With Regard To QCCPs

        • PRU A4.9.19

          An Authorised Person's total Credit RWA for Trade Exposures to a QCCP and default fund exposures to a QCCP must be limited to the total Credit RWA that would apply if the exposures were to a Non-QCCP.