44.Off-balance sheet items must be converted into credit exposure equivalents through the use of CCF.

Credit Conversion Factor of 100%

45.The following items must be converted into credit exposure equivalents through the use of CCF of 100%:

1. (i)All direct credit substitutes, including general guarantees of indebtedness (such as standby letters of credit serving as financial guarantees for loans and securities) and acceptances (such as endorsements with the character of acceptances);
2. (ii)Sale and repurchase agreements and asset sales with recourse, where the credit risk remains with the bank;
3. (iii)Forward asset purchases, forward deposits and commitments for the unpaid portion of partly-paid shares and securities which represent commitments with certain draw-downs, and which shall be risk-weighted according to the type of asset and not according to the type of counterparty with whom the transaction has been entered into;
4. (iv)The lending of banks’ securities or the posting of securities as collateral by banks, including instances where these arise out of repo-style transactions (i.e., repurchase/reverse repurchase and securities lending/securities borrowing transactions). Section IV on credit risk mitigation sets out the requirements for the calculation of risk-weighted assets where the credit converted exposure is secured by eligible collateral;
5. (v)Off-balance sheet items that are credit substitutes not explicitly included in any other category (including credit derivatives such as credit default swaps).

Credit Conversion Factor of 50%

46.The following items must be converted into credit exposure equivalents through the use of CCF of 50%:

1. (i)Transaction-related contingent items (e.g., performance bonds, bid bonds warranties, and standby letters of credit related to particular transactions);
2. (ii)Underwriting commitments under note issuance and revolving underwriting facilities regardless of maturity of the underlying facility;
3. (iii)Other commitments that are not unconditionally cancellable with an original maturity exceeding one year.

Credit Conversion Factor of 20%

47.The following items must be converted into credit exposure equivalents through the use of CCF of 20%:

1. (i)Other commitments not unconditionally cancellable with an original maturity of one year or less; and
2. (ii)Short-term self-liquidating trade letters of credit arising from the movement of goods (e.g., documentary credits collateralised by the underlying shipment), for both issuing and confirming banks.

Credit Conversion Factor of 0%

48.Any commitments that are unconditionally cancellable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness must be converted into credit exposure equivalents using CCF of 0%.

Other Principles

49.Where there is an undertaking to provide a commitment on an off-balance sheet item (i.e., commitment for a commitment), banks shall apply the lower of the two applicable CCFs.

50.The credit equivalent amount of OTC derivatives that expose a bank to counterparty credit risk shall be calculated under the rules set forth below in the Counterparty Credit Risk Standard below.

Failed Trades and Non-DvP Transactions

51.Banks shall closely monitor securities, commodities, and foreign exchange transactions that have failed or not been timely settled.

Principles for Failed Trades and Non-DvP Transactions

52.DvP also refers to PvP transactions for the purpose of this Standard. Transactions settled through a DvP system, providing simultaneous exchanges of securities for cash, expose firms to a risk of loss on the difference between the transaction valued at the agreed settlement price and the transaction valued at current market price (i.e., positive current exposure). Transactions where cash is paid without receipt of the corresponding receivable (securities, foreign currencies, gold, or commodities) or, conversely, deliverables were delivered without receipt of the corresponding cash payment (i.e., non-DvP, or free-delivery transactions) expose firms to a risk of loss on the full amount of cash paid or deliverables delivered. Specific capital charges address these two kinds of exposures.

53.The following capital treatment is applicable to all transactions on securities, foreign exchange instruments, and commodities that give rise to a risk of delayed settlement or delivery. This includes transactions through recognised clearing houses that are subject to daily mark-to-market and payment of daily variation margins and that involve a mismatched trade. Repurchase and reverse-repurchase agreements as well as securities lending and borrowing that have failed to settle are excluded from this capital treatment. (All repurchase and reverse-repurchase agreements as well as securities lending and borrowing, including those that have failed to settle, shall be treated in accordance with the sections on CRM below).

54.In cases of a system wide failure of a settlement or clearing system, the Central Bank may use its discretion to waive capital charges until the situation is rectified.

55.Failure of a counterparty to settle a trade in itself shall not be deemed a default for purposes of credit risk.

Capital Requirements for Failed Trades and Non-DvP Transactions

56.The capital requirement for failed trades and Non-DvP transactions shall be calculated as follows:

1. (i)For DvP transactions, if the payments have not yet taken place five business days after the settlement date, firms must calculate a capital charge by multiplying the positive current exposure of the transaction by the appropriate factor, according to the table below.
    

   Number of working days after the agreed settlement date	Corresponding risk multiplier
   From 5 to 15	8%
   From 16 to 30	50%
   From 31 to 45	75%
   46 or more	100%

2.  
3. (ii)For Non-DvP transactions (i.e., free deliveries), after the first contractual payment/delivery leg, the bank that has made the payment shall treat its exposure as a loan if the second leg has not been received by the end of the business day. This means that a bank shall use the risk weights set forth in the exposure classes set out in this Standard. However, when exposures are not material, banks may choose to apply a uniform 100% risk-weight to these exposures, in order to avoid the burden of a full credit assessment.
4. (iii)If five business days after the second contractual payment/delivery date the second leg has not yet effectively taken place, the bank that has made the first payment leg shall deduct from capital the full amount of the value transferred plus replacement cost, if any. This treatment shall apply until the second payment/delivery leg is effectively made.