Netting Agreements Credit Risk
The expected effective positive exposure (effective EPE) is the weighted temporal average of the exposure actually expected in the first year or, if all contracts in the clearing package expire one year ago, over the contract period with the longest duration in the clearing package, the weights corresponding to the proportion that a single expected exposure represents for the entire time interval. Cross-product clearing refers to the inclusion of transactions of different product categories in the same set of offsets in accordance with the product-to-product clearing rules of CRE53. The distribution of market values is the prediction of the probability distribution of the net market values of transactions in a compensation rate for a future date (the forecast horizon), taking into account the realized market value of these transactions so far. The credit rating adjustment is an adjustment of the mid-market assessment of the portfolio of transactions with a counterparty. This adjustment reflects the market value of the credit risk resulting from the non-performance of contractual arrangements with a counterparty. This adjustment may reflect the market value of the counterparty`s credit risk or the market value of the bank`s and counterparty`s credit risk. Resolution 3.263 of the National Monetary Council of 24 February 2005 sets out the conditions for the validity of the netting agreement within the national financial system, including the condition that it be registered with B3 within 15 working days of its signature. B3 also allows the submission of a digital version of the printed copy of the netting agreement signed by the parties with the application for registration. The clearing rate is a group of transactions with a single counterparty that are subject to a legally enforceable bilateral clearing agreement and for which clearing is recognised for regulatory capital purposes in accordance with the provisions of CRE52.7 and CRE52.8 that apply to the group of operations, this framework text on credit risk mitigation techniques in CRE22 or the rules for cross-product clearing under CRE53.61 to CRE53. 71. Any transaction that is not the subject of a legally enforceable bilateral netting agreement recognised for regulatory capital purposes should be interpreted as a separate set-off rate for the purposes of those rules. In addition to financial guarantees and guarantees from recognised guarantee providers, which all institutions can recognise, assignments of claims or physical guarantees are also considered risk mitigation measures if institutions use an IRBA (so-called IRBA institutions). If advanced IRBA are used, the range of eligible assets is even unlimited, provided that an institution can provide reliable estimates of the value of the asset.
However, in order for credit risk mitigation techniques to be taken into account in the calculation of minimum own funds requirements, institutions must meet certain minimum quality requirements expressly set out in the Solvency Regulation. However, when dealing with regular clients, constant review and rechecking of the loan not only takes a lot of time, but also has the potential to create missed opportunities. The conclusion of a large-scale credit clearing agreement can therefore be beneficial for all parties involved. From the lender`s perspective, credit clearing can reduce administrative costs and allow more transactions to be processed in a given period of time. From the borrower`s perspective, credit clearing can make it easier for large borrowers to get a loan on time. Clearing is often used in trading, where an investor can balance a position in one security or currency with another position in either the same security or another security. The purpose of compensation is to offset losses in one position with profits in another. For example, if an investor runs out of 40 shares of one security and 100 shares of the same security, the net-long position is 60 shares.
Initial margin means the collateral financed by a clearing member or client that is sent to the CCP to mitigate the CCP`s potential future risk (ITP) to the clearing member resulting from the possible future change in the value of its transactions. For the purpose of calculating risk capital requirements for counterparty loans, the initial margin does not include contributions to a CCP for pooled loss-sharing arrangements (i.e. where a CCP uses the initial margin to pool losses between clearing members, it is treated as a default fund risk). The initial margin shall include collateral issued by a clearing member or client in excess of the minimum amount required, provided that the CCP or clearing member can, in appropriate cases, prevent the clearing member or client from withdrawing such excess collateral. Clearing is a method of reducing risk in financial contracts by combining or aggregating multiple financial obligations to obtain a net commitment amount. Clearing is used to reduce settlement, credit and other financial risks between two or more parties. A specific false risk occurs when exposure to a particular counterparty is positively correlated with the counterparty`s probability of default due to the nature of the transactions with the counterparty. Rollover risk is the amount by which the expected positive exposure is undervalued if future transactions with a counterparty are expected to be conducted on an ongoing basis, but the additional exposure generated by those future transactions is not included in the calculation of the expected positive exposure.
The hedging ratio is a set of transactions under a single clearing rate within which full or partial clearing is accounted for for the purpose of calculating the ITP premium of the standard counterparty credit risk approach. Novation clearing removes balancing swaps and replaces them with new bonds. In other words, if two companies have obligations to which the other is entitled on the same value date (or execution date), the net amount is calculated. However, instead of simply sending the net difference to the party due, novation netting cancels the contracts and reserves a new one for the net or total amount. The new aggregated contract under Novation Netting clearly distinguishes it from Payment Netting, where no new contracts are reserved; Instead, the total net amount is exchanged. Credit clearing is a system in which the number of credit checks on financial transactions is reduced by entering into agreements that simply less all transactions. These agreements are made between large banks and other financial institutions and combine all current and future transactions into a single agreement, eliminating the need for credit checks for each transaction. Current exposure is the greater value of zero or the current market value of a transaction or portfolio of transactions under a clearing rate with a counterparty that would be lost in the event of immediate default of the counterparty, provided that the value of such bankrupt transactions is not recovered. The current exposure is often referred to as replacement cost. Counterparty credit risk (CCR) is the risk that the counterparty to a transaction defaults before the final settlement of the transaction`s cash flows. An economic loss would occur if the transactions or the portfolio of transactions with the counterparty have a positive economic value at the time of default. Unlike a company`s credit risk linked to a loan, where the credit risk is unilateral and only the lending bank is exposed to the risk of loss, the JRC creates a bilateral risk of loss: the market value of the transaction can be positive or negative for both counterparties to the transaction.
Market value is uncertain and may vary over time depending on the evolution of underlying market factors. In this context, Article 119, paragraph VIII, of Law 11.101 of 9. February 2005, better known as the new bankruptcy law, that “if there is an agreement on the settlement and performance of obligations under the national financial system, the non-bankrupt party may, in accordance with the applicable law, assume that the agreement expires prematurely, in which case it will be regulated as set out in the regulations, accepting the offsetting of each loan, which is calculated in favour of the insolvent party with loans from the contracting party. “The maximum risk is a high percentile (typically 95% or 99%) of the distribution of exposures at a given future time before the maturity date of the longest transaction of the clearing rate. A maximum exposure value is typically generated for a large amount of future data up to the longest maturity date of the transactions in the clearing set. The need for credit clearing stems from the fact that financial institutions are often required to conduct credit checks on their customers before approving certain transactions. Reviewing the borrowing party`s loan reduces the counterparty risk or the risk that the counterparty or borrowing party defaults on the loan. Provided that a creditable netting agreement has been concluded bilaterally with the respective contractual partner, derivatives and non-derivatives transactions with reintroduction (mainly reverse repurchase and lending transactions) may be set off against each other in accordance with the provisions of the Solvency Ordinance. The offsetting of the balance sheet of mutual pecuniary claims and liabilities is also permitted.
In addition, where an inter-product clearing agreement is in force, institutions may take into account offsetting effects for exposures of different product categories. It is therefore permissible to recognise derivative counterparty credit risks arising from non-derivative transactions involving repurchase agreements or other repurchase agreements, loan agreements or similar arrangements in securities or commodities. However, for such inter-product clearing agreements, the application of the internal model method as the most risk-sensitive of all methods is mandatory. Businesses can also use compensation to simplify third-party invoices and ultimately reduce multiple invoices to one. .