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.