CA-4.2.12

In the comprehensive approach, when taking collateral, conventional bank licensees must calculate their adjusted exposure to a counterparty for capital adequacy purposes in order to take account of the effects of that collateral. Using haircuts and add-ons, conventional bank licensees are required to adjust both the amount of the exposure to the counterparty and the value of any collateral received in support of that counterparty to take account of possible future fluctuations in the value of either¹⁸, occasioned by market movements. This will produce volatility adjusted amounts for both exposure and collateral. Unless either side of the transaction is cash, the volatility adjusted amount for the exposure will be higher than the exposure due to the add-on and for the collateral it will be lower due to the haircut.

¹⁸ Exposure amounts may vary where, for example, securities are being lent.

CA-4.2.13

Additionally where the exposure and collateral are held in different currencies an additional downwards adjustment must be made to the volatility adjusted collateral amount to take account of possible future fluctuations in exchange rates.

CA-4.2.14

Where the volatility-adjusted exposure amount is greater than the volatility-adjusted collateral amount (including any further adjustment for foreign exchange risk), conventional bank licensees must calculate their risk-weighted assets as the difference between the two multiplied by the risk weight of the counterparty. The framework for performing these calculations is set out in Paragraphs CA-4.3.3 to CA-4.3.6.

CA-4.2.15

Conventional bank licensees must use standard haircuts given in Paragraph CA-4.3.7 unless allowed to use models under Paragraph CA-4.3.22.

CA-4.2.16

The size of the individual haircuts and add-ons will depend on the type of instrument, type of transaction and the frequency of marking-to-market and remargining. For example, repo-style transactions subject to daily marking-to-market and to daily re-margining will receive a haircut based on a 5-business day holding period and secured lending transactions with daily mark-to-market and no re-margining clauses will receive a haircut based on a 20-business day holding period. These haircut numbers will be scaled up using the square root of time formula depending on the frequency of re-margining or marking-to-market.

CA-4.2.17

For certain types of repo-style transactions (broadly speaking government bond repos as defined in Paragraphs CA-4.3.14 and CA-4.3.15), the CBB may allow conventional bank licensees using standard haircuts not to apply these haircuts in calculating the exposure amount after risk mitigation.

CA-4.2.18

The effect of master netting agreements covering repo-style transactions can be recognised for the calculation of capital requirements subject to the conditions in Paragraph CA-4.3.17.

CA-4.2.19

As an alternative to standard haircuts conventional bank licensees may, subject to approval from CBB, use VaR models for calculating potential price volatility for repo-style transactions and other similar SFTs, as set out in Paragraphs CA-4.3.22 to CA-4.3.25. Alternatively, subject to approval from the CBB's, they may also calculate, for these transactions, an expected positive exposure, as set forth in Appendix CA-2.