BANK 3.4.18 SFT exposures — firm acting as principal

(1) When a banking business firm is acting as a principal in a securities financing contract, its total exposure measure must include the sum of:
(a) its gross SFT assets as recognised for accounting purposes, adjusted in accordance with subrule (2); and
(b) a measure of exposure to counterparty credit risk (CCR), calculated in accordance with subrule (3).
(2) The firm's gross SFT assets as recognised for accounting purposes are adjusted as follows:
(a) by excluding the value of any securities, received under a securities financing contract, that the firm has recognised as an asset on its balance-sheet;
(b) cash payables and cash receivables in securities financing contracts with the same counterparty may be measured net if all the following criteria are met:
(i) the contracts have the same explicit final settlement date;
(ii) the right to set off the amount owed to the counterparty against the amount owed by it is legally enforceable both currently in the normal course of business and in the event of default, insolvency or bankruptcy;
(iii) either:
(A) the firm and the counterparty intend to settle net or settle simultaneously; or
(B) the contracts are subject to a settlement mechanism that results in the functional equivalent of net settlement (that is, the cash flows of the contracts are equivalent to a single net amount on the settlement date).
Guidance

To achieve that equivalence, both contracts are settled through the same settlement system and the settlement arrangements are supported by cash or intraday credit facilities intended to ensure that settlement of both contracts will occur by the end of the business day, and the linkages to collateral flows do not result in the unwinding of net cash settlement. The failure of any one contract in the settlement mechanism should delay settlement of only the matching cash leg or create an obligation to the settlement mechanism, supported by an associated credit facility.
(3) The measure of exposure to CCR is calculated as follows:
(a) for exposures covered by a qualifying master netting agreement, the current exposure is:

max {(∑Ei – ∑Ci), 0};

where:

Ei is the total fair value of securities and cash lent to the counterparty for all contracts covered by the agreement.

Ci is the total fair value of cash and securities received from the counterparty for those contracts;
(b) if there is no qualifying master netting agreement, the current exposure for contracts with a counterparty must be calculated contract by contract.
(4) A bilateral netting agreement is a qualifying master netting agreement for paragraph (3) (a) only if:
(a) it is legally enforceable in each relevant jurisdiction on an event of default, regardless of whether the counterparty is insolvent or bankrupt;
(b) it provides the non-defaulting party with the right to terminate and close out, in a timely way, all contracts under the agreement on an event of default, including the insolvency or bankruptcy of the counterparty;
(c) it provides for the netting of gains and losses on contracts (including the value of any collateral) terminated and closed out under it so that a single net amount is owed by one party to the other; and
(d) it allows for the prompt monetisation or setoff of collateral on an event of default.
(5) Positions held in the firm's banking book may be netted against positions held in its trading book only if both of the following conditions are satisfied:
(a) all the contracts are marked to market daily;
(b) any collateral is recognised as eligible financial collateral in the banking book.

Note For the meaning of eligible financial collateral, see the Glossary and rule 4.5.7.
(6) For a securities financing contract that is treated, under the relevant accounting standard, as a sale, the firm must reverse all the sales-related accounting entries, and then calculate its exposure as if the contract had been treated as a financing contract under subrules (1) to (3) for the purposes of determining its SFT exposures.
Inserted by QFCRA RM/2019-6 (as from 1st January 2020).