Prudential Regulation Authority Rulebook

1.

Institutions shall calculate a single exposure value at netting set level in accordance with Section 3, subject to paragraph 2 of this Article.

2.

The exposure value of a netting set shall be calculated in accordance with the following requirements:

1. (a) institutions shall not apply the treatment referred to in Article 274(6);
2. (b) by way of derogation from Article 275(1), for netting sets that are not referred to in Article 275(2), institutions shall calculate the replacement cost in accordance with the following formula:
3. RC = max{CMV, 0}
4. where:
5. RC = the replacement cost; and
6. CMV = the current market value.
7. (c) by way of derogation from Article 275(2), for netting sets of transactions: that are traded on a recognised exchange; that are centrally cleared by a central counterparty authorised in accordance with Article 14 of Regulation (EU) No 648/2012 or recognised in accordance with Article 25 of that Regulation; or for which collateral is exchanged bilaterally with the counterparty in accordance with Article 11 of Regulation (EU) No 648/2012, institutions shall calculate the replacement cost in accordance with the following formula:
8. RC = TH + MTA
9. where:
10. RC = the replacement cost;
11. TH = the margin threshold applicable to the netting set under the margin agreement below which the institution cannot call for collateral; and
12. MTA = the minimum transfer amount applicable to the netting set under the margin agreement;
13. (d) by way of derogation from Article 275(3), for multiple netting sets that are subject to a margin agreement, institutions shall calculate the replacement cost as the sum of the replacement cost of each individual netting set, calculated in accordance with paragraph 1 as if they were not margined;
14. (e) all hedging sets shall be established in accordance with Article 277a(1);
15. (f) institutions shall set to 1 the multiplier in the formula that is used to calculate the potential future exposure in Article 278(1), as follows:
16. 
17. where:
18. PFE = the potential future exposure; and
19. AddOn^(a) = the add-on for risk category a;
20. (g) by way of derogation from Article 279a(1), for all transactions, institutions shall calculate the supervisory delta as follows:
21. δ =
22. where:
23. δ = the supervisory delta;
24. (h) the formula referred to in point (a) of Article 279b(1) that is used to compute the supervisory duration factor shall read as follows:
25. supervisory duration factor = E – S
26. where:
27. E = the period between the end date of a transaction and the calculation date; and
28. S = the period between the start date of a transaction and the calculation date;
29. (i) the maturity factor referred to in Article 279c(1) shall be calculated as follows:
1. (i) for transactions included in netting sets referred to in Article 275(1), MF = 1;
2. (ii) for transactions included in netting sets referred to in Article 275(2) and (3), MF = 0.42;
30. (j) the formula referred to in Article 280a(3) that is used to calculate the effective notional amount of hedging set j shall read as follows:
31. 
32. where:
33. = the effective notional amount of hedging set j; and
34. D_j,k = the effective notional amount of bucket k of hedging set j;
35. (k) the formula referred to in Article 280c(3) that is used to calculate the credit risk category add-on for hedging set j shall read as follows:
36. 
37. where:
38. = the credit risk category add-on for hedging set j; and
39. AddOn(Entity_k) = the add-on for the credit reference entity k;
40. (l) the formula referred to in Article 280d(3) that is used to calculate the equity risk category add-on for hedging set j shall read as follows:
41. 
42. where:
43. = the equity risk category add-on for hedging set j; and
44. AddOn(Entity_k) = the add-on for the credit reference entity k;
45. (m) the formula referred to in Article 280e(4) that is used to calculate the commodity risk category add-on for hedging set j of the commodity risk category in Article 280e(3) shall read as follows:
46. 
47. where:
48. = the commodity risk category add-on for hedging set j; and
49. = the add-on for the commodity reference type k.