Calculating derivative assets

166. When determining its RSF, a Bank must calculate the value of a derivative asset first based on the replacement cost for the contract (obtained by marking to market) if the contract has a positive value. If there is a netting agreement with the counterparty that satisfies all the conditions in paragraphs 8 & 9 above, the replacement cost for the set of exposures covered by the agreement is taken to be the net replacement cost.

167. Collateral received in connection with a derivative contract does not offset the positive replacement cost amount, regardless of whether or not netting is permitted under the bank’s accounting or risk- based framework, unless the collateral is received in the form of cash variation margin, and all of the following conditions are met:

(a) either:

(i) the trades are cleared through a qualifying central counterparty; or

(ii) the cash received by the counterparty is not segregated;

(b) the variation margin is calculated and exchanged every day, based on mark-to-market valuation of the relevant positions;

(c) the variation margin is received in the same currency as the currency of settlement of the contract;

(d) the variation margin exchanged is the full amount that would be necessary to fully extinguish the mark-to-market exposure of the contract subject to the threshold and minimum transfer amounts applicable to the counterparty;

(e) derivative transactions and variation margins are covered by a single master netting agreement (MNA) between the counterparties;

(f) the MNA explicitly stipulates that the counterparties agree to settle net any payment obligations covered by the agreement, taking into account any variation margin received or provided if a credit event occurs involving either counterparty;

(g) the MNA is legally enforceable and effective in all the relevant jurisdictions, including in the event of default, bankruptcy or insolvency.

168. Any remaining balance-sheet liability associated with initial margin received or variation margin received that does not meet all of the conditions in the (a) to (g) of the previous paragraph, does not offset derivative assets and receives a 0% ASF factor.

169. For the purposes of this section, a qualifying central counterparty is an entity that is licensed to operate as a central counterparty in relation to the instruments concerned and the financial regulator that is responsible for its prudential supervision:

(a) has established Rules and regulations for central counterparties that are consistent with Principles for Financial Market Infrastructures, published by the International Organization of Securities Commissions in July 2011; and

(b) has publicly indicated that it applies those Rules and regulations to the entity on an ongoing basis.