CC&G Page 1 London Stock Exchange Group Basel III Reporting for “own funds requirements for exposures to a CCP” CC&G – Risk Policy Team September 2020
CC&G
Page 1London Stock Exchange Group
Basel III
Reporting for “own funds
requirements for exposures to a CCP”
CC&G – Risk Policy TeamSeptember 2020
Banks Exposures to CCPs
• The Basel Committee has identified two macro-types of banks’ exposures to CCPs:
Trade
Exposure
Potential Future
Exposure
Mark-to-Market Current
Exposure
Non-bankruptcy
Remote Initial Margin
CCP Default Risk
Default Fund
Exposure
Banks’ Contributions to QCCP’s
Default Fund
CCP Default
Risk
CMs Default
Risk
Page 2London Stock Exchange Group
+
The Interim Rules: a General Overview
Page 3London Stock Exchange Group
Method 1:2% RW against ‘Trade Exposure’+
Pre-funded Default Fund multiplied by ‘C-Factor’ (provided byCCP)
Method 2:Minimum of:
a) 2% RW against ‘Trade Exposure’ +1,250% RW against pre-funded Default Fund
b) 20% RW against ‘Trade Exposure’
Banks can choose between two methods to calculate their capital requirement:
• CCPs are required to calculate and publish “on a monthly basis at a minimum” a C-Factor so
that Members can calculate their capital requirement under Method 1
• Under “Interim Rules” currently in place, C-Factor is generated by measuring total default
provisions of the CCP against “Hypothetical Capital” (KCCP) calculated from trade data using
the Current Exposure Method (CEM)
• “Final standards” will become effective as of 28th June 2021
Capital Treatment of IM Exposures to QCCPs
Page 4London Stock Exchange Group
• A CCP is assumed to be “Qualified” (QCCP) under the CPSS-IOSCO Principles
• The Capital Charge on Trade Exposures reflects the risk of default of the Qualified
CCP (QCCP), which is assumed to be very low. As such, this exposure receives a risk-
weight of 2%
• If the collateral is posted in a way that is “bankruptcy remote” from the CCP (i.e. if the
CCP defaults, the Clearing Member does not lose the collateral), the risk weight
applied to the collateral is 0%
• A 0% risk weight is applied to margins collected by CC&G, both under “Interim
Rules“ and “Final Standards“
Capital Treatment of DF Contributions
Page 5London Stock Exchange Group
• Under “Interim Rules”, Capital Requirements for the Default Fund Exposures are
calculated in three steps:
o Calculation of the “Hypothetical Capital”, (KCCP), that a QCCP would have to
hold if it had bilateral trades to all its Clearing Members
o Calculation of the “Aggregate Capital Requirements” (K*CM) for all the Clearing
Members of a QCCP, comparing the “Hypothetical Capital” to the CCP’s own loss-
bearing capital contributed to the default fund (DFCCP ) and the default fund
contributions of the Clearing Members (DFCM)
o Allocation of the “Aggregate Capital Requirements”, (KCMi), to individual
Clearing Members, based on each Clearing Members’ default fund contribution
multiplied by a risk weight (“C Factor”) that takes into account the granularity and
concentration of the CCP
• Under “Final Standards”, a different approach will be adopted to calculate Capital
Requirements for the Default Fund Exposures for Repos and Reverse Repos
transactions
Results for Fixed Income and Equity
Derivatives asset classes
Page 6London Stock Exchange Group
Reference Date
C-factor under Interim Rules(official data)
Fixed Income Eq. Derivatives
30/09/2016 0,22% 0,24%
30/12/2016 0,24% 0,23%
31/03/2017 0,23% 0,21%
30/06/2017 0,23% 0,21%
29/09/2017 0,23% 0,21%
29/12/2017 0,23% 0,22%
• C-factor results highlight very low risk weights to calculate each CM Capital Requirement
(namely, C-factors below 0.3%)
• The prudential amount of CC&G Default Funds contributes to have very low levels of C-
factors
• Central Clearing through CC&G allows significant savings in Capital Requirements
CC&G monthly reporting
• CC&G calculates, on a monthly basis, the figures required to calculate Basel III capital
requirements for default fund exposures to CCPs.
• Basel III parameters are available to CC&G’s direct Clearing Members through the ICWS
platform.
• CC&G Client Services
department
will help on any issues with
credentials and retrieving
reports.
Report example
Page 7London Stock Exchange Group
mailto:[email protected]
AppendixCoefficient Calculation Technical Details
Page 8London Stock Exchange Group
Under Interim Rules, the “Hypothetical Capital Requirement” of the CCP due to its counterparty credit
risk exposures to all of its clearing members and their clients, is equal to:
Page 9London Stock Exchange Group
• RW is a risk weight of 20%
• CR is the capital ratio of 8%
• EBRMi is the exposure value to CMi before risk mitigation,
• IMi is the initial margin posted by CMi
• DFi is the prefunded default fund contribution by CMi
• For derivatives, σmax(𝐸𝐵𝑅𝑀𝑖 − 𝐼𝑀𝑖 − 𝐷𝐹𝑖 ; 0) is calculated as the bilateral trade exposure the CCP
has against the CMi , using the Current Exposure Method (CEM)
• For SFTs (repos), σmax(𝐸𝐵𝑅𝑀𝑖 − 𝐼𝑀𝑖 − 𝐷𝐹𝑖; 0) is calculated according to Financial Collateral
Comprehensive Method.
Default Fund Exposures: KCCP
The same methodology is
applied by “Interim Rules”
and “Final Standards” for
repos and reverse repos
𝐾𝐶𝐶𝑃 =
𝐶𝑀𝑖
max(𝐸𝐵𝑅𝑀𝑖 − 𝐼𝑀𝑖 − 𝐷𝐹𝑖; 0) ∗ 𝑅𝑊 ∗ 𝐶𝑅
• Calculation of the “Capital Requirement for each Clearing Member”
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is the Skin in The Game of the CCP
CMDF pref is the total prefunded default fund contribution from clearingmembers
Default Fund Exposures: KCMi
pref
i
CMCCP
iCCPCMi +DF prefDF
DF pref;8% 2% DFK = maxK
DFCCP
i
Default Fund Exposures
under “Final Standards”
DF pref the prefunded default fund contributions provided by Clearing Member i
• Calculation of the “Aggregate Capital Requirement for all Clearing Members”
is the Skin in The Game of the CCPDFCCP
CMDefault Fund Exposures:K *
'
1
' '
(iii)c DF
) if DF K DF ' (ii)= c (K − DF )+ c (DF ' −K
(i)if DF ' K
K*
if KCCP DFCCP 1 CM
CCPCCPCCPCCP2 CCP
CCP2 CCP 2 CM
CM
c (K − DF )+c DF
DF ' = DF − 2 DFCM CM i
CMCCP+ DF 'DF ' =DF
)
Page 11London Stock Exchange Group
1.6%0.3'1
;0.16% ;
=1.2c2 =100%;
(DF /Kc = max
CCP
Default Fund Exposures
under “Interim Rules”
• Calculation of the “Capital Requirement for each Clearing Member”
N is the number of Clearing Members
Default Fund Exposures: KCMi
CMCMiK*
N DFi N − 2 DFCM
K =1+
Gross
Page 12London Stock Exchange Group
GrossNet
i
A+ 0.85 NGR AA = 0.15A
Net,i
=ANet ,1 + ANet ,2 ;
Default Fund Exposures
under “Interim Rules”
Contact Details
Page 13London Stock Exchange Group
Risk Policy – CC&G
London Stock Exchange Group
Telephone: +39 06 32395 202
Via Tomacelli 146, 00186 Rome, Italy
mailto:[email protected]
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