73.A bank must calculate RWA for exposures to QCCPs to reflect credit risk due to trade exposures (either as a clearing member of the QCCP or as a client of a clearing member), posted collateral, and default fund contributions. If a bank’s combined RWA for trade exposures to a QCCP and default fund contribution for that QCCP is higher than would apply for those same exposures if the QCCP were a non-qualifying CCP, the bank may treat the exposures as if the QCCP was non-qualifying.

Trade exposures to the QCCP

74.A risk weight of 2% applies to a bank’s trade exposure to the QCCP where the bank as a clearing member of the QCCP trades for its own account. The risk weight of 2% also applies to trade exposures to the QCCP arising from clearing services the bank provides to clients where the bank is obligated to reimburse those clients for losses in the event that the QCCP defaults.

75.In general, a bank must calculate exposure amounts for trade exposures to QCCPs as for other derivatives exposure under this Standard. Banks must use a minimum MPOR of 10 days for the calculation of trade exposures to QCCPs on over-the-counter derivatives. Where QCCPs retain variation margin against certain trades and the member collateral is not protected against the insolvency of the QCCP, the minimum horizon applied to the bank’s QCCP trade exposures must be the lesser of one year and the remaining maturity of the transaction, with a floor of 10 business days.

Treatment of posted collateral

76.Any assets or collateral posted to the QCCP by the bank must receive the banking book or trading book treatment it would receive under the capital adequacy framework, regardless of the fact that such assets have been posted as collateral. Where the entity holding such assets or collateral is the QCCP, a risk-weight of 2% applies to collateral included in the definition of trade exposures. The relevant risk-weight of the QCCP will apply to assets or collateral posted for other purposes.

77.A risk weight of zero applies to all collateral (including cash, securities, other pledged assets, and excess initial or variation margin) posted by the clearing member that is held by a custodian and is bankruptcy remote from the QCCP. Collateral posted by a client that is held by a custodian and is bankruptcy remote from the QCCP, the bank, and other clients of the bank is not subject to a CCR capital requirement.

78.Where a bank posts assets or collateral (either as a clearing member or on behalf of a client) with a QCCP or a clearing member, and the assets or collateral is not held in a bankruptcy remote manner, the bank must recognize credit risk based upon the creditworthiness of the entity holding such assets or collateral. Posted collateral not held in a bankruptcy remote manner must be accounted for in the NICA term for CCR calculations.

Default fund exposures

79.A bank’s default fund contributions as a clearing member of a QCCP must be included in the bank’s calculation of risk-weighted assets. Certain inputs required for the RWA calculation must be provided to the bank by the QCCP, its supervisor, or some other body with access to the required data, as described below. Provision of the necessary inputs is a condition for CCP qualification.

80.Risk-weighted assets for the bank’s default fund contributions should be calculated as:

where

• •RW is a risk weight of 20% unless the Central Bank determines that banks must apply a higher risk weight, for example to reflect a QCCP membership composed of relatively high-risk members;
• •DF_M is the bank’s total pre-funded contributions to the QCCP’s default fund;
• •DF is the total value of the QCCP’s default fund, including its own funds and the prefunded contributions from members; and
• •EAD is the sum of the QCCP’s exposure to all clearing members accounts, including clearing members’ own transactions, client transactions guaranteed by clearing members, and the value of all collateral held by the QCCP against those transactions (including clearing members’ prefunded default fund contributions) prior to exchange of margin in the final margin call on the date of the calculation. This exposure should include the exposure arising from client sub-accounts to the clearing member’s proprietary business where clearing members provide client-clearing services and the client transactions and collateral are held in separate (individual or omnibus) subaccounts.

81.However, if the RWA from the calculation above is less than 2% of the amount of the bank’s pre-funded contributions to the default fund, then the bank must set RWA equal to 2% of its pre-funded contributions to the default fund, which is 2%×DFM.

82.Exposure to each clearing member for the QCCP’s EAD calculation is the bilateral CCR trade exposure the QCCP has to the clearing member as calculated under this Standard, using MPOR of 10 days. All collateral held by a QCCP to which that QCCP has a legal claim in the event of the default of the member or client, including default fund contributions of that member, is used to offset the QCCP’s exposure to that member or client for the PFE multiplier. If the default fund contributions of the member are not split with regard to client and sub-accounts, they must be allocated to sub-accounts according to the initial margin of that sub-account as a fraction of the total initial margin posted by or for the account of the clearing member.

83.If clearing member default fund contributions are segregated by product types and only accessible for specific product types, the RWA calculation must be performed for each specific product giving rise to counterparty credit risk. Any contributions by the bank to prepaid default funds covering settlement-risk-only products should be risk-weighted at 0%. If the QCCP’s own prefunded resources cover multiple product types, the QCCP must allocate those funds to each of the calculations, in proportion to the respective product-specific EAD.

84.However, where a default fund is shared between products or types of business with settlement risk only (such as equities and bonds) and products or types of business which give rise to counterparty credit risk, all of the default fund contributions receive the risk weight determined above, without apportioning to different classes or types of business or products.

85.Banks must apply a risk weight of 1250% to default fund contributions to a non-qualifying CCP. For the purposes of this paragraph, the default fund contributions of such banks will include both the funded contributions and any unfunded contributions for which the bank could be liable upon demand by the CCP.

86.As a requirement for QCCP qualification, the CCP, its supervisor, or another body with access to the required data must calculate and provide values for EAD, D_FM, and DF in such a way to permit the supervisor of the CCP to oversee those calculations, and must share sufficient information about the calculation results to permit banks to calculate capital requirements for their exposures to the default fund, as well as to permit the Central Bank to review and confirm such calculations. The information must be provided at least quarterly, although the Central Bank may require more frequent calculations in the event of material changes, such as material changes to the number or size of cleared transactions, material changes to the financial resources of the QCCP, or initiation by the QCCP of clearing of a new product.

Clearing member exposures to clients

87.A bank as a clearing member of a QCCP must treat its exposure to clients as bilateral trades, irrespective of whether the bank as clearing member guarantees the trade or acts as an intermediary between the client and the QCCP.

88.If a bank as a clearing member of a QCCP collects collateral from a client and passes this collateral on to the QCCP, the bank may recognize this collateral for both the exposure to the QCCP and the exposure to the client.

89.If a bank as a clearing member conducts an exchange-traded derivatives transaction on a bilateral basis with a client, it is treated as a bilateral counterparty credit risk exposure rather than a QCCP exposure. In this case, the bank can compute the exposure to the client using a margin period of risk, subject to a minimum MPOR of at least five days.

90.These requirements also apply to transactions between lower-level clients and higher-level clients in a multi-level client structure. (A multi-level client structure is one in which banks can centrally clear as an indirect client of a clearing member; that is, when clearing services are provided to the bank by an institution that is not a direct clearing member, but is itself a client of a clearing member or another clearing client.)

Bank exposures as a client of clearing members

91.Where a bank is a client of a clearing member, and enters into a transaction with a clearing member who completes an offsetting transaction with the QCCP, of if a clearing member guarantees QCCP performance to the bank as a client, the bank’s exposures to the clearing member may be treated as trade exposures to the QCCP with a risk weight of 2% if the conditions below are met. (This also applies to exposures of lower-level clients to higher- level clients in a multi-level client structure, provided that for all intermediate client levels the two conditions below are met.)

• •Condition 1: Relevant laws, regulation, rules, contractual, or administrative arrangements make it highly likely that, in the event that the clearing member defaults or becomes insolvent, the offsetting transactions with the defaulted or insolvent clearing member would continue to be indirectly transacted through or by the QCCP, and that client positions and collateral with the QCCP would be transferred or closed out at market value.
• •Condition 2: Offsetting transactions are identified by the QCCP as client transactions, and collateral to support them is held by the QCCP and/or the clearing member under arrangements that prevent any losses to the client due to the default or insolvency of either the clearing member or other clients of the clearing member, or of a joint default or insolvency of the clearing member and any of its other clients.

92.Where a bank is a client of the clearing member and the two conditions above are not met, the bank must treat its exposures to the clearing member as an ordinary bilateral exposure under this Standard, not a QCCP exposure. If the two conditions above are met with the exception of the requirement regarding joint default or insolvency of the clearing member and any of its other clients, a 4% risk weight must be applied instead of 2%.

93.A bank must have conducted sufficient legal review (and undertake such further review as necessary to ensure continuing enforceability) and have a well-founded basis to conclude that, in the event of legal challenge, the relevant courts and administrative authorities would find that such arrangements mentioned above would be legal, valid, binding and enforceable under the relevant laws of the relevant jurisdictions. Upon the insolvency of the clearing member, there should be no legal impediment (other than the need to obtain an appropriate court order) to the transfer of the bank’s collateral to one or more surviving clearing members or to the bank or the bank’s nominee.

94.The treatment described here also applies to exposures resulting from posting of collateral by the bank as a client of a clearing member that is held by the QCCP on the bank’s behalf but not on a bankruptcy remote basis.

95.If a bank conducts an exchange-traded derivatives transaction on a bilateral basis with a clearing member as a client of that clearing member, the transaction is treated as a bilateral counterparty credit risk exposure, not a QCCP exposure. The same applies to transactions between lower-level clients and higher-level clients in a multi-level client structure.