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  • Treatment of Repo-Style Transactions Covered under Master Netting Agreements

    • 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:

      (a) Provide the non-defaulting party the right to terminate and close-out in a timely manner all transactions under the agreement upon an event of default, including in the event of insolvency or bankruptcy of the counterparty;
      (b) Provide for the netting of gains and losses on transactions (including the value of any collateral) terminated and closed out under it so that a single net amount is owed by one party to the other;
      (c) Allow for the prompt liquidation or setoff of collateral upon the event of default; and
      (d) Be, together with the rights arising from the provisions required in (a) to (c) above, legally enforceable in each relevant jurisdiction upon the occurrence of an event of default and regardless of the counterparty's insolvency or bankruptcy.
      January 2015

    • CA-4.3.18

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

      (a) All transactions are marked to market daily28; and
      (b) The collateral instruments used in the transactions are recognised as eligible financial collateral in the banking book.

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

      January 2015

    • 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.

      January 2015

    • CA-4.3.20

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

      E* = Max {0, [(∑(E) – ∑(C)) + ∑ (ES x HS) + ∑ (EFX x HFX)]}29

      Where:

      E* = The exposure value after risk mitigation
      E = Current value of the exposure
      C = The value of the collateral received
      ES = Absolute value of the net position in a given security
      HS = Haircut appropriate to ES
      EFX = Absolute value of the net position in a currency different from the settlement currency
      HFX = Haircut appropriate for currency mismatch

      29 The 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)]}

      January 2015

    • CA-4.3.21

      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 CA4.3.3 to CA-4.3.16 equivalently apply for conventional bank licensees using bilateral netting agreements for repo-style transactions.

      January 2015