«Good, Bad or Inevitable? The Introduction of CCPs in Securities Lending A White Paper on the issues, opportunities and implications for the ...»
a. An additional VaR treatment is required based on a 12 month period of additional financial stress (e.g. 2007-8) b. Increased haircut minima for non-cash collateral c. Exposures to large financial entities will attract a multiplier of 1.25 when calculating capital requirements d. Banks’ collateral and mark to market exposures to CCPs and exchanges meeting the criteria of CPSS/IOSCO will qualify for a 0% risk weight
3. A supplementary leverage ratio to the Basel II risk based framework will be introduced
4. Measures will be introduced to promote the build up of capital buffers
5. A global minimum liquidity standard will be introduced for internationally active banks Proposed Minimum Regulatory Haircuts for Collateral
Source: BIS Consultative Document “Strengthening the resilience of the banking sector “, issued December 2009 Potential effect on securities lending
1. Current Capital Allocation calculation (without collateral):
Capital= (0.08) x (Risk Factor) x (Amount at Risk) Firm lends £ 10 million nominal value shares to firm B, which is assessed at credit quality step 3 or 50% weighting (scale of 1-15, but most SL exposures fall between steps 2 and 5).
Lender Capital Requirement: 0.08 x £ 10,000,000 x 50% = £400,000 If the loan is novated to a CCP the 50% risk weighting becomes 0% Lender Capital Requirement: 0.08 x £10,000,000 x 0% = £0
2. Current Capital Allocation calculation (with collateral):
Using Comprehensive Standardised approach:
Capital= 0.08 x New Exposure x RW (50 %) New Exposure (Enew) = [ (E+h)-(C-h-fxh)}, where E is the unweighted exposure, h is the volatility haircut and fxh is the FX haircut if any).
Assuming 105% collateralisation by a borrower and volatility/haircut of 5%:
Enew =10.5 – (10.5 – 0.525) m = £ 525,000 Capital = £525,000 x 50% x 8% Lender Capital Requirement = £21,000
From the borrower perspective:
Enew = (10.5 + 0.525) m - (10-0.5) m = £1,1525 m Capital = £1,525m x 50% x8% Borrower Capital Requirement =£61,000
3. Capital Allocation under proposed changes to Basel II:
(assuming 15% haircut/variation margin and collateral of 105%, not including proposed additional 25% large financial institution risk weighting ) Lender exposure = (10.0 + 15%) m-(10.5-15%)m = £2,575m Lender Capital Requirement = £103,000 Borrower Exposure = (10.5 + 15%) m-(10.0-15%)m + £3,575m Borrower Capital Requirement= £143,0003 Source: Examples based on information provided by SecFinex Ltd.
Good, Bad or Inevitable?
The Introduction of CCPs in Securities Lending A White Paper on the issues, opportunities and implications for the securities lending industry.
Authors: Andrew Howieson, Howieson Consulting and Roy Zimmerhansl, Zimmerhansl Consulting