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«Good, Bad or Inevitable? The Introduction of CCPs in Securities Lending A White Paper on the issues, opportunities and implications for the ...»

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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

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