11.Banks must calculate replacement cost at the netting set level. Calculations for margined and un-margined transactions differ.

12.Banks first must calculate the total current market value of the derivative contracts in the netting set. Banks may net transactions within a netting set that are subject to any legally valid form of bilateral netting, including netting by novation. Banks must then subtract from that total current market value the net value of collateral (after application of collateral haircuts) held by the bank for the netting set. The result is the Net Current Value (NCV) of the transactions in the netting set.

13.For un-margined transactions, RC for a netting set is equal to the NCV, provided the NCV is greater than zero. If that value is not greater than zero, RC equals zero.

14.For margined transactions, RC depends on the greatest exposure that would not trigger a call for variation margin, taking into account the mechanics of collateral exchanges in the margining agreements. That critical exposure level is equal to the threshold level of variation that would require a transfer of collateral, plus the minimum transfer amount of the collateral. The bank should subtract from that exposure amount the NICA, if any, to calculate the RC for margined transactions. However, the resulting RC may be no less than the RC if the netting set were un-margined. That is, for a margined netting set the RC is equal to the larger of the amount calculated according to this paragraph, or the RC for the same netting set if un-margined.

15.Bilateral transactions with a one-way margining agreement in favor of the bank’s counterparty (that is, where the bank posts margin but the counterparty does not) must be treated as un-margined transactions.

16.If multiple margin agreements apply to a single netting set, the bank must divide the netting set into sub-netting sets that align with each respective margin agreement, and calculate RC for each sub-netting set separately.