CA-4.3.3

For a collateralised transaction, the exposure amount after risk mitigation is calculated as follows:

E* = Max {0, [E × (1 + He) - C × (1 - Hc - Hfx)]}

where:

E* = The exposure value after risk mitigation

E = Current value of the exposure

He = Haircut appropriate to the exposure

C = The current value of the collateral received

Hc = Haircut appropriate to the collateral

Hfx = Haircut appropriate for currency mismatch between the collateral and exposure

CA-4.3.4

The exposure amount after risk mitigation will be multiplied by the risk weight of the counterparty to obtain the risk-weighted asset amount for the collateralised transaction.

CA-4.3.5

The treatment for transactions where there is a mismatch between the maturity of the counterparty exposure and the collateral is given in paragraphs CA-4.6.1 to CA-4.6.4.

CA-4.3.6

Where the collateral is a basket of assets, the haircut on the basket will be

H = Σ_i a_i H_i , where a_i is the weight of the asset (as measured by units of currency) in the i basket and H_i the haircut applicable to that asset.

CA-4.3.7

These are the standard haircuts (assuming daily mark-to-market, daily re-margining and a 10-business day holding period), expressed as percentages:

¹⁹ Includes PSEs which are treated as sovereigns by the CBB.

²⁰ Multilateral development banks receiving a 0% risk weight will be treated as sovereigns.

²¹ Includes PSEs which are not treated as sovereigns by CBB.

²² Eligible cash collateral specified in paragraph CA-4.3.1 (a).

CA-4.3.8

The standard haircut for currency risk 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).

CA-4.3.9

For transactions in which the bank lends non-eligible instruments (e.g. non-investment grade corporate debt securities), the haircut to be applied on the exposure should be the same as the one for equity traded on a recognised exchange that is not part of a main index.

CA-4.3.10

For some transactions, depending on the nature and frequency of the revaluation and re-margining provisions, different holding periods are appropriate. The framework for collateral haircuts distinguishes between repo-style transactions (i.e. repo/reverse repos and securities lending/borrowing), "other capital-market-driven transactions" (i.e. OTC derivatives transactions and margin lending) and secured lending. In capital-market-driven transactions and repo-style transactions, the documentation contains remargining clauses; in secured lending transactions, it generally does not.

CA-4.3.11

The minimum holding period for various products is summarised in the following table.

CA-4.3.12

When the frequency of remargining or revaluation is longer than the minimum, the minimum haircut numbers will be scaled up depending on the actual number of business days between remargining or revaluation using the square root of time formula below:

where:

H = Haircut

H_M = Haircut under the minimum holding period

T_M = Minimum holding period for the type of transaction

N_R = Actual number of business days between remargining for capital market transactions or revaluation for secured transactions.

When a bank calculates the volatility on a T_N day holding period which is different from the specified minimum holding period T_M, the H_M will be calculated using the square root of time formula:

T_N = Holding period used by the bank for deriving H_N

H_N = Haircut based on the holding period T_N

CA-4.3.13

For example, for banks using the standard CBB haircuts, the 10-business day haircuts provided in paragraph CA-4.3.7 will be the basis and this haircut will be scaled up or down depending on the type of transaction and the frequency of re-margining or revaluation using the formula below:

where:

H = Haircut

H₁₀ = 10-business day standard CBB haircut for instrument

N_R = Actual number of business days between re-margining for capital

      = Market transactions or revaluation for secured transactions.

T_M = Minimum holding period for the type of transaction

CA-4.3.14

For repo-style transactions where the following conditions are satisfied, and the counterparty is a core market participant, banks are not required to apply the haircuts specified in the comprehensive approach and may instead apply a haircut of zero. This carve-out will not be available for banks using the modelling approaches as described in paragraphs CA-4.3.22 to CA-4.3.25:

²³ This does not require the bank to always liquidate the collateral but rather to have the capability to do so within the given time frame.

CA-4.3.15

Core market participants include the following entities:

CA-4.3.16

Where a supervisor has applied a specific carve-out to repo-style transactions in securities issued by its domestic government, then banks incorporated in Bahrain are allowed to adopt the same approach to the same transactions.

CA-4.3.17

The effects of bilateral netting agreements covering repo-style transactions will be recognised on a counterparty-by-counterparty basis if the agreements are legally enforceable in each relevant jurisdiction upon the occurrence of an event of default and regardless of whether the counterparty is insolvent or bankrupt. In addition, netting agreements must:

CA-4.3.18

Netting across positions in the banking and trading book will only be recognised when the netted transactions fulfill the following conditions:

²⁴The holding period for the haircuts will depend as in other repo-style transactions on the frequency of margining.

CA-4.3.19

The formula in paragraph CA-4.3.3 will be adapted to calculate the capital requirements for transactions with netting agreements.

CA-4.3.20

For banks using the standard haircuts, the framework below will apply to take into account the impact of master netting agreements.

E* = Max {0, [(Σ(E) - Σ(C)) + Σ (E_S × H_S) +Σ (E_FX × H_FX)]}²⁵

Where:

E* = The exposure value after risk mitigation

E = Current value of the exposure

C = The value of the collateral received

E_S = Absolute value of the net position in a given security

H_S = Haircut appropriate to E_S

E_FX = Absolute value of the net position in a currency different from the settlement currency

H_FX = Haircut appropriate for currency mismatch

²⁵The starting point for this formula is the formula in paragraph CA-4.3.3 which can also be presented as the following: E* = max {0, [(E - C) + (E x He) + (C x Hc) + (C x Hfx)]}

CA-4.3.21

The intention here is to obtain a net exposure amount after netting of the exposures and collateral and have an add-on amount reflecting possible price changes for the securities involved in the transactions and for foreign exchange risk if any. The net long or short position of each security included in the netting agreement will be multiplied by the appropriate haircut. All other rules regarding the calculation of haircuts stated in paragraphs CA-4.3.3 to CA-4.3.16 equivalently apply for banks using bilateral netting agreements for repo-style transactions.

CA-4.3.22

As an alternative to the use of standard haircuts, CBB may allow banks to use a VaR models approach to reflect the price volatility of the exposure and collateral for repo-style transactions, taking into account correlation effects between security positions. This approach would apply to repo-style transactions covered by bilateral netting agreements on a counterparty-by-counterparty basis. At the discretion of CBB, firms are also eligible to use the VaR model approach for margin lending transactions, if the transactions are covered under a bilateral master netting agreement that meets the requirements of paragraphs CA-4.3.17 and CA-4.3.18. The VaR models approach is available to banks that have received CBB's recognition for an internal market risk model under the chapter CA-14. Banks which have not received CBB's recognition for use of models under the chapter CA-14 can separately apply for CBB's recognition to use their internal VaR models for calculation of potential price volatility for repo-style transactions. Internal models will only be accepted when a bank can prove the quality of its model to CBB through the backtesting of its output using one year of historical data. Banks must meet the model validation requirement of paragraph 43 of Appendix CA-2 to use VaR for repo-style and other SFTs. In addition, other transactions similar to repo-style transactions (like prime brokerage) and that meet the requirements for repo-style transactions, are also eligible to use the VaR models approach provided the model used meets the operational requirements set forth in Section I.F of Appendix CA-2.

CA-4.3.23

The quantitative and qualitative criteria for recognition of internal market risk models for repo-style transactions and other similar transactions are in principle the same as under Chapter CA-14. With regard to the holding period, the minimum will be 5- business days for repo-style transactions, rather than the 10-business days under the Market Risk Amendment. For other transactions eligible for the VaR models approach, the 10- business day holding period will be retained. The minimum holding period should be adjusted upwards for market instruments where such a holding period would be inappropriate given the liquidity of the instrument concerned.

CA-4.3.24

The calculation of the exposure E* for banks using their internal model will be the following:

E* = Max {0, [(ΣE - ΣC) + VaR output from internal model]}

In calculating capital requirements banks will use the previous business day's VaR number.

CA-4.3.25

Subject to CBB's approval, instead of using the VaR approach, banks may also calculate an expected positive exposure for repo-style and other similar SFTs, in accordance with the Internal Model Method set out in Appendix CA-2 of this Module.

CA-4.3.26

For collateral to be recognised in the simple approach, the collateral must be pledged for at least the life of the exposure and it must be marked to market and revalued with a minimum frequency of six months. Those portions of claims collateralised by the market value of recognised collateral receive the risk weight applicable to the collateral instrument. The risk weight on the collateralised portion will be subject to a floor of 20% except under the conditions specified in paragraphs CA-4.3.27 to CA-4.3.29. The remainder of the claim should be assigned to the risk weight appropriate to the counterparty. A capital requirement will be applied to banks on either side of the collateralised transaction: for example, both repos and reverse repos will be subject to capital requirements.

CA-4.3.27

Transactions which fulfil the criteria outlined in paragraph CA-4.3.14 and are with a core market participant, as defined in paragraph CA-4.3.15, receive a risk weight of 0%. If the counterparty to the transactions is not a core market participant the transaction should receive a risk weight of 10%.

CA-4.3.28

OTC derivative transactions subject to daily mark-to-market, collateralised by cash and where there is no currency mismatch receive a 0% risk weight. Such transactions collateralised by sovereign or PSE securities qualifying for a 0% risk weight in the standardised approach will receive a 10% risk weight.

CA-4.3.29

The 20% floor for the risk weight on a collateralised transaction will not be applied and a 0% risk weight can be applied where the exposure and the collateral are denominated in the same currency, and either: