A. Illustration 1
C 52/2017 STA Effective from 1/4/2021Consider a netting set with three interest rates derivatives: two fixed versus floating interest rate swaps and one purchased physically settled European swaption. The table below summarizes the relevant contractual terms of the three derivatives. All notional amounts and market values in the table are given in USD. We also know that this netting set is not subject to a margin agreement and there is no exchange of collateral (independent amount/initial margin) at inception.
| Trade # | Nature | Residual maturity | Base currency | Notional (thousands) | Pay Leg (*) | Receive Leg (*) | Market value (thousands) |
| 1 | Interest rate swap | 10 years | USD | 10,000 | Fixed | Floating | 30 |
| 2 | Interest rate swap | 4 years | USD | 10,000 | Floating | Fixed | -20 |
| 3 | European swaption | 1 into 10 years | EUR | 5,000 | Floating | Fixed | 50 |
(*) For the swaption, the legs are those of the underlying swap.
The EAD for un-margined netting sets is given by:
EAD = 1.4 * (RC + PFE)