Book traversal links for V. Appendix: Computation of Exposures with Credit Risk Mitigation Effects
V. Appendix: Computation of Exposures with Credit Risk Mitigation Effects
C 52/2017 STA Effective from 1/4/2021Bank A repos out cash of AED 1000 to a corporate with an external rating of AA. The corporate provides collateral in the form of debt securities issued by a bank with an external rating of AA. The debt securities have a remaining maturity of 7 years and a market value of AED 990.
Minimum holding period for various products | ||
Transaction type | Minimum holding period | Condition |
Repo-style transaction | 5 Business days | Daily remargining |
Other capital market transactions | 10 Business days | Daily remargining |
Secured lending | 20 Business days | Daily revaluation |
The haircut for the transaction with other than 10 business days minimum holding period, as indicated above, will have to be adjusted by scaling up or down the haircut for 10 business days as per the formula given below:
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Variables | Details of the Variables | Supervisory haircuts | Scaling factor | Adjusted haircuts |
He | Haircut appropriate to the underlying exposure | Exposure in the form of cash, supervisory haircut 0% | 0 | Not applicable |
Hc | Haircut appropriate to the Collateral | Debt securities issued by a bank supervisory haircut 8% | 0.71 | Supervisory haircut (8%)* Scaling factor (0.71 )= 6% |
Hfx | Haircut appropriate for Currency Mismatch | No Currency Mismatch | 0 | Not applicable |
The exposure amount after risk mitigation is calculated as follows:
Variables | E*= max {0, [E x (1 + He) – C x (1 – Hc – Hfx)]} | Value |
E* | Net credit exposure (i.e. exposure value after CRM) | 69.4 |
E | Principal Amount, which is net of specific provisions, if any For off-balance sheet, it is the credit equivalent amount | 1000 |
He | Haircut appropriate to the underlying exposure (cash) | 0 |
C | Value of the collateral before CRM | 990 |
Hc | Haircut appropriate to the Collateral | 6% |
Hfx | Haircut appropriate for Currency Mismatch | 0 |
Risk weighted asset for the exposure = (69.40 * 50% (AA)) = 34.70
(Exposure * Risk weight)