BANK 4.4.11 How to convert notional amounts — market-related items

(1) A banking business firm must calculate the credit equivalent amount of each of its market-related items. Unless the item is covered by an eligible netting agreement, the credit equivalent amount of a market-related off-balance-sheet item is the sum of the current credit exposure and the potential future credit exposure from the item.
(2) Current credit exposure is the absolute mark-to-market value (or replacement cost) of the item.
(3) Potential future credit exposure (also known as ‘the add-on’) is the amount calculated by multiplying the notional principal amount of the item by the relevant credit conversion factor in table 4.4.11. The notional principal amount of an item is the reference amount used to calculate payment streams between counterparties to the item.

Table 4.4.11 Credit conversion factors for market-related off-balance-sheet items

column 1 item column 2 description of claim or asset column 3 credit conversion factor %
1 interest rate contracts  
  (a) residual maturity 1 year or less 0
  (b) residual maturity > 1 year to 5 years 0.5
  (c) residual maturity > 5 years 1.5
2 foreign exchange and gold contracts  
  (a) residual maturity 1 year or less 1
  (b) residual maturity > 1 year to 5 years 5
  (c) residual maturity > 5 years 7.5
3 equity contracts  
  (a) residual maturity 1 year or less 6
  (b) residual maturity > 1 year to 5 years 8
  (c) residual maturity > 5 years 10
4 precious metal contracts (other than gold)  
  (a) residual maturity 1 year or less 7
  (b) residual maturity > 1 year to 5 years 7
  (c) residual maturity > 5 years 8
5 other commodity contracts (other than precious metals)  
  (a) residual maturity 1 year or less 10
  (b) residual maturity > 1 year to 5 years 12
  (c) residual maturity > 5 years 15
6 other market-related contracts  
  (a) residual maturity 1 year or less 10
  (b) residual maturity > 1 year to 5 years 12
  (c) residual maturity > 5 years 15
(4) A potential future credit exposure must be based on an effective, rather than an apparent, notional principal amount. If the stated notional principal amount of an item is leveraged or enhanced by the structure of the item, the firm must use the effective notional principal amount in calculating the potential future credit exposure.
(5) No potential future credit exposure is calculated for a single-currency floating/floating interest rate swap. The credit exposure from such an interest rate swap must be based on mark-to-market values.
Derived from QFCRA RM/2014-2 (as from 1st January 2015).