Directive 2006/48/EC of the European Parliament and of the council (repealed)Show full title

Exposure value

5. The exposure value shall be measured at the level of the netting set. The model shall specify the forecasting distribution for changes in the market value of the netting set attributable to changes in market variables, such as interest rates, foreign exchange rates. The model shall then compute the exposure value for the netting set at each future date given the changes in the market variables. For margined counterparties, the model may also capture future collateral movements.

6. Credit institutions may include eligible financial collateral as defined in point 11 of Part 1 of Annex VIII to this Directive and point 9 of Annex II to Directive 2006/49/EC in their forecasting distributions for changes in the market value of the netting set, if the quantitative, qualitative and data requirements for the IMM are met for the collateral.

7. The exposure value shall be calculated as the product of α times Effective EPE, as follows:

Exposure value = α × Effective EPE

where:

alpha (α) shall be 1.4, but competent authorities may require a higher α, and Effective EPE shall be computed by estimating expected exposure (EEt) as the average exposure at future date t, where the average is taken across possible future values of relevant market risk factors. The model estimates EE at a series of future dates t1, t2, t3, etc.

8. Effective EE shall be computed recursively as:

Effective EEtk = max(Effective EEtk‐1; EEtk)

where:

the current date is denoted as t0 and Effective EEt0 equals current exposure.

9. In this regard, Effective EPE is the average Effective EE during the first year of future exposure. If all contracts in the netting set mature within less than one year, EPE is the average of EE until all contracts in the netting set mature. Effective EPE is computed as a weighted average of Effective EE:

where:

the weights Δtk = tk — tk‐1 allow for the case when future exposure is calculated at dates that are not equally spaced over time.

10. EE or peak exposure measures shall be calculated based on a distribution of exposures that accounts for the possible non‐normality of the distribution of exposures.

11. Credit institutions may use a measure that is more conservative than α multiplied by Effective EPE as calculated according to the equation above for every counterparty.

12. Notwithstanding point 7, competent authorities may permit credit institutions to use their own estimates of α, subject to a floor of 1,2, where α shall equal the ratio of internal capital from a full simulation of CCR exposure across counterparties (numerator) and internal capital based on EPE (denominator). In the denominator, EPE shall be used as if it were a fixed outstanding amount. Credit institutions shall demonstrate that their internal estimates of α capture in the numerator material sources of stochastic dependency of distribution of market values of transactions or of portfolios of transactions across counterparties. Internal estimates of α shall take account of the granularity of portfolios.

13. A credit institution shall ensure that the numerator and denominator of α are computed in a consistent fashion with respect to the modelling methodology, parameter specifications and portfolio composition. The approach used shall be based on the credit institution's internal capital approach, be well documented and be subject to independent validation. In addition, credit institutions shall review their estimates on at least a quarterly basis, and more frequently when the composition of the portfolio varies over time. Credit institutions shall also assess the model risk.

14. Where appropriate, volatilities and correlations of market risk factors used in the joint simulation of market and credit risk should be conditioned on the credit risk factor to reflect potential increases in volatility or correlation in an economic downturn.

15. If the netting set is subject to a margin agreement, credit institutions shall use one of the following EPE measures:

(a)

Effective EPE without taking into account the margin agreement;

(b)

the threshold, if positive, under the margin agreement plus an add‐on that reflects the potential increase in exposure over the margin period of risk. The add‐on is computed as the expected increase in the netting set's exposure beginning from a current exposure of zero over the margin period of risk. A floor of five business days for netting sets consisting only of repo‐style transactions subject to daily remargining and daily mark‐to‐market, and ten business days for all other netting sets is imposed on the margin period of risk used for this purpose; or

(c)

if the model captures the effects of margining when estimating EE, the model's EE measure may be used directly in the equation in point 8 subject to the approval of the competent authorities.

Minimum requirements for EPE models

16. A credit institution's EPE model shall meet the operational requirements set out in points 17 to 41.