Comprehensive Approach for Financial Collaterals
For a collateralised transaction, the exposure amount after risk mitigation is calculated using the formula that follows, where:
Where:
E* = the exposure value after risk mitigation
E = current value of the exposure
He = haircut appropriate to the exposure
C = the current value of the collateral received
Hc = haircut appropriate to the collateral
Hfx = haircut appropriate for currency mismatch between the collateral and exposure
The comprehensive approach: standard supervisory haircuts
The standard supervisory haircuts (HC) assume daily mark-to-market, daily remargining/revaluation and a 10-business day holding period:
1. Debt
2. Equities
If listed in the Main index equities then the haircut is 15% and if listed only on a recognized exchange then the haircut is 25%.
3. Undertakings for Collective Investments in Transferable Securities (UCITS)/Mutual Funds
It applied the highest haircut applicable to any security in fund.
4. Cash in the same currency
Cash, certificates of deposit or comparable instruments issued by the lending bank gets a haircut of 0%.The standard supervisory haircut for currency risk where exposure and collateral are denominated in different currencies (Hfx) is 8% (also based on a 10-business day holding period and daily mark-to-market):
For transactions in which the bank lends non-eligible instruments (eg non-investment grade corporate debt securities), the haircut to be applied on the exposure should:
Adjustment for different holding periods and non-daily mark-to-market or remargining
For some transactions, depending on the nature and frequency of the revaluation and remargining provisions, different holding periods are appropriate.
Changes in minimum holding period and/or remargining period
All the standard supervisory haircuts presented above (HC) assume a 10-business day holding period and a daily remargining. When the frequency of remargining is higher than a day or the holding period is different than 10 days, then a scaling should be applied to the haircut:
Where:
H = scaled haircut
HM = haircut under the minimum holding period
TM = minimum holding period for the type of transaction
NR = actual number of business days between remargining for capital market transactions or revaluation for secured transactions
Example A
A haircut for equity in a main index used as mitigation for in a secured lending transaction with daily revaluation and where exposure and collateral are denominated in different currencies will have a haircut of:
Example B
A haircut for equity if listed on a recognized exchange as mitigation for in a secured lending transaction with 5 days revaluation and where exposure and collateral are denominated in same currencies will have a haircut of:
Source:
https://www.bis.org/basel_framework/chapter/CRE/22.htm?inforce=20191215&published=20191215