2016R2251_EN.III

ANNEX III - Own volatility estimates of the haircuts to be applied to the market value of collateral for the purposes of Article 22

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🔗 Back to Summary. 🇫🇷 French Version: 2016R2251_FR.III. Back to Summary of LVL1. Link to the PDF. Direct link to EUR-LEX.

Article II – Methodology to adjust the value of collateral for the purposes of Article 21 ⬅️ | ➡️ Article IIII – Standardised Method for the calculation of initial margin for the purposes of Articles 9 and 11

1.

The calculation of the adjusted value of the collateral shall meet all of the following conditions:

(a)

counterparties shall base the calculation on a 99th percentile, one-tailed confidence interval;

(b)

counterparties shall base the calculation on a liquidation period of at least 10 business days;

(c)

counterparties shall calculate the haircuts by scaling up the daily revaluation haircuts, using the following square-root-of time formula:

where:

H

=

the haircut to be applied;

H

M

=

the haircut where there is daily revaluation;

N

R

=

the actual number of business days between revaluations;

T

M

=

the liquidation period for the type of transaction in question;

(d)

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;

(e)

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;

(f)

the market value of the collateral shall be adjusted as follows:

C

value

= C · (1 – H)

where:

C

=

the market value of the collateral;

H

=

the haircut as calculated in point (c) above.

2.

Cash variation margin may be subject to a haircut of 0 %.

3.

For debt securities that have a credit assessment from an ECAI, counterparties may use their own volatility estimate for each category of security.

4.

In determining relevant categories of securities for the purposes of paragraph 3, counterparties shall take into account the type of issuer of the security, the external credit assessment of the securities, their residual maturity, and their modified duration. Volatility estimates shall be representative of the securities included in the category.

5.

The calculation of haircuts resulting from the application of point (c) of paragraph 1 shall meet all of the following conditions:

(a)

a counterparty shall use the volatility estimates in the day-to-day risk management process including in relation to its exposure limits;

(b)

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.# Table 1 in anx_I

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 %

Table 1 in anx_II

C	=	the market value of the collateral;

Table 2 in anx_II

HC	=	the haircut appropriate to the collateral, as calculated under paragraph 2;

Table 3 in anx_II

HFX	=	the haircut appropriate to currency mismatch, as calculated under paragraph 6.

Table 4 in anx_II

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

Table 5 in anx_II

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

Table 1 in anx_III

H	=	the haircut to be applied;

Table 2 in anx_III

HM	=	the haircut where there is daily revaluation;

Table 3 in anx_III

NR	=	the actual number of business days between revaluations;

Table 4 in anx_III

TM	=	the liquidation period for the type of transaction in question;

Table 5 in anx_III

C	=	the market value of the collateral;

Table 6 in anx_III

H	=	the haircut as calculated in point (c) above.

Table 1 in anx_IV

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 %