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Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty (Text with EEA relevance)
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Commission Delegated Regulation (EU) 2016/2251 is up to date with all changes known to be in force on or before 08 June 2024. There are changes that may be brought into force at a future date. Changes that have been made appear in the content and are referenced with annotations.
EUR 2016 No. 2251 may be subject to amendment by EU Exit Instruments made by both the Prudential Regulation Authority and the Financial Conduct Authority under powers set out in The Financial Regulators' Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 (S.I. 2018/1115), regs. 2, 3, Sch. Pt. 4. These amendments are not currently available on legislation.gov.uk. Details of relevant amending instruments can be found on their website/s.
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An internal rating with a PD equal to or lower than the value in Table 1 shall be associated to the corresponding credit quality step.
Credit Quality Step | Probability of default, as defined in Article 4(54) of Regulation (EU) 575/2013 lower than or equal to: |
---|---|
1 | 0,10 % |
2 | 0,25 % |
3 | 1 % |
4 | 7,5 % |
Cvalue = C · (1 – HC – HFX)
where:
=
the market value of the collateral;
=
the haircut appropriate to the collateral, as calculated under paragraph 2;
=
the haircut appropriate to currency mismatch, as calculated under paragraph 6.
Haircuts for long term credit quality assessments
Credit quality step with which the credit assessment of the debt security is associated | Residual maturity | Haircuts for debt securities issued by entities described in Article 4 (1) (c) to (e) and (h) to (k), in (%) | Haircuts for debt securities issued by entities described in Article 4 (1) (f), (g), (l) to (n) in (%) | Haircuts for securitisation positions meeting the criteria in Article 4 (1) (o) in (%) |
---|---|---|---|---|
1 | ≤ 1 year | 0,5 | 1 | 2 |
> 1 ≤ 5 years | 2 | 4 | 8 | |
> 5 years | 4 | 8 | 16 | |
2-3 | ≤ 1 year | 1 | 2 | 4 |
> 1 ≤ 5 years | 3 | 6 | 12 | |
> 5 years | 6 | 12 | 24 | |
4 or below | ≤ 1 year | 15 | N/A | N/A |
> 1 ≤ 5 years | 15 | N/A | N/A | |
> 5 years | 15 | N/A | N/A |
Haircuts for short term credit quality assessments
Credit quality step with which the credit assessment of a short term debt security is associated | Haircuts for debt securities issued by entities described in Article 4(1) (c) and (j) in (%) | Haircuts for debt securities issued by entities described in Article 4(1) (m) in (%) | Haircuts for securitisation positions and meeting the criteria in Article 4(1) (o) in (%) |
---|---|---|---|
1 | 0,5 | 1 | 2 |
2-3 or below | 1 | 2 | 4 |
counterparties shall base the calculation on a 99th percentile, one-tailed confidence interval;
counterparties shall base the calculation on a liquidation period of at least 10 business days;
counterparties shall calculate the haircuts by scaling up the daily revaluation haircuts, using the following square-root-of time formula:
where:
=
the haircut to be applied;
=
the haircut where there is daily revaluation;
=
the actual number of business days between revaluations;
=
the liquidation period for the type of transaction in question;
counterparties shall take into account the lesser liquidity of low quality assets. They shall adjust the liquidation period upwards in cases where there are doubts concerning the liquidity of the collateral. They shall also identify where historical data may understate potential volatility. Such cases shall be dealt with by means of a stress scenario;
the length of the historical observation period institutions use for calculating haircuts shall be at least 1 year. For counterparties that use a weighting scheme or other methods for the historical observation period, the length of the effective observation period shall be at least 1 year;
the market value of the collateral shall be adjusted as follows:
Cvalue = C · (1 – H)
where:
=
the market value of the collateral;
=
the haircut as calculated in point (c) above.
a counterparty shall use the volatility estimates in the day-to-day risk management process including in relation to its exposure limits;
where the liquidation period used by a counterparty is longer than that referred to in point (b) of paragraph 1 for the type of OTC derivative contract in question, that counterparty shall increase its haircuts in accordance with the square root of time formula referred to in point (c) of that paragraph.
Category | Add-on factor |
---|---|
Credit: 0-2 year residual maturity | 2 % |
Credit: 2-5 year residual maturity | 5 % |
Credit: 5+ year residual maturity | 10 % |
Commodity | 15 % |
Equity | 15 % |
Foreign exchange | 6 % |
Interest rate and inflation: 0-2 year residual maturity | 1 % |
Interest rate and inflation: 2-5 year residual maturity | 2 % |
Interest rate and inflation: 5+ year residual maturity | 4 % |
Other | 15 % |
where a relevant risk factor for an OTC derivative contract can be clearly identified, contracts shall be assigned to the category corresponding to that risk factor;
where the condition referred to in point (a) is not met, contracts shall be assigned to the category with the highest add-on factor among the relevant categories;
the initial margin requirements for a netting set shall be calculated in accordance with the following formula:
Net initial margin = 0,4 * Gross initial margin + 0,6 * NGR * Gross initial margin.
where:
net initial margin refers to the reduced figure for initial margin requirements for all OTC derivative contracts with a given counterparty included in a netting set;
NGR refers to the net-to-gross ratio calculated as the quotient of the net replacement cost of a netting set with a given counterparty in the numerator, and the gross replacement cost of that netting set in the denominator;
for the purposes of point (c), the net replacement cost of a netting set shall be the bigger between zero and the sum of current market values of all OTC derivative contracts in the netting set;
for the purposes of point (c), the gross replacement cost of a netting set shall be the sum of the current market values of all OTC derivative contracts calculated in accordance with Article 11(2) of Regulation (EU) No 648/2012 and Articles 16 and 17 of Delegated Regulation (EU) No 149/2013 with positive values in the netting set;
the notional amount referred to in paragraph 1 may be calculated by netting the notional amounts of contracts that are of opposite direction and are otherwise identical in all contractual features except their notional amounts.
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