Prudential Regulation Authority Rulebook

1.

Institutions may calculate a single exposure value for all the transactions within a contractual netting agreement where all the conditions set out in Article 274(1) are met. Otherwise, institutions shall calculate an exposure value separately for each transaction, which shall be treated as its own netting set.

2.

The exposure value of a netting set or a transaction shall be the product of 1.4 times the sum of the current replacement cost and the potential future exposure.

3.

The current replacement cost referred to in paragraph 2 shall be calculated as follows:

1. (a) for netting sets of transactions: that are traded on a recognised exchange; 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 use the following formula:
2. RC = TH + MTA
3. where:
4. RC = the replacement cost;
5. TH = the margin threshold applicable to the netting set under the margin agreement below which the institution cannot call for collateral; and
6. MTA = the minimum transfer amount applicable to the netting set under the margin agreement;
7. (b) for all other netting sets or individual transactions, institutions shall use the following formula:
8. RC = max{CMV, 0}
9. where:
10. RC = the replacement cost; and
11. CMV = the current market value.

In order to calculate the current replacement cost, institutions shall update current market values at least monthly.

4.

Institutions shall calculate the potential future exposure referred to in paragraph 2 as follows:

1. (a) the potential future exposure of a netting set is the sum of the potential future exposure of all the transactions included in the netting set, calculated in accordance with point (b);
2. (b) the potential future exposure of a single transaction is its notional amount multiplied by:
1. (i) the product of 0.5% and the residual maturity of the transaction expressed in years for interest-rate derivative contracts;
2. (ii) the product of 6% and the residual maturity of the transaction expressed in years for credit derivative contracts;
3. (iii) 4% for foreign-exchange derivatives;
4. (iv) 18% for gold and commodity derivatives other than electricity derivatives;
5. (v) 40% for electricity derivatives;
6. (vi) 32% for equity derivatives;
3. (c) the notional amount referred to in point (b) of this paragraph shall be determined in accordance with Article 279b(2) and (3) for all derivatives listed in that point; in addition, the notional amount of the derivatives referred to in points (b)(iii) to (b)(vi) of this paragraph shall be determined in accordance with points (b) and (c) of Article 279b(1);
4. (d) the potential future exposure of netting sets referred to in point (a) of paragraph 3 shall be multiplied by 0.42.

For calculating the potential exposure of interest-rate derivatives and credit derivatives in accordance with points b(i) and (b)(ii), an institution may choose to use the original maturity instead of the residual maturity of the contracts.

[Note: Articles 283 to 299 remain in the CRR]