Clarus Financial Technology

Mechanics and Definitions of SA-CCR (Part 2)

Please note: this is Part Two of a series. Part one of the story for SACCR provided critical background regarding key terms and concepts. This Part Two of our Mechanics and Definitions of SACCR covers the maturity factor and how different CSAs and/or treatments of derivatives impact the Exposure at Default (EAD) calculations.

Maturity Factors under SACCR

Please excuse the lack of introductory waffle for today’s blog. Please read Part One if you are unfamiliar with SACCR. Suffice to say, we expect SACCR to be a very hot topic for the derivatives industry over the coming months and years.

The Maturity Factor for Derivatives

To examine the impact of SACCR on different derivatives, we need to first understand what type of margin agreement the whole set of derivatives operates under. This is important because:

Let’s look at some exact examples under SACCR.

CSAs with more than 5,000 trades

Many large interdealer relationships will govern trades across Equities, Credit, Rates, FX and Commodities. Just imagine all of those Equity TRS, FX Options and Swaptions that are written each day and remain uncleared. These will typically live under a single CSA between any two dealers. Whilst dealers might have multiple CSAs between themselves, these will be split into “legacy” and “on the run” agreements. All new trades written will normally fall under the same CSA (as we understand it). Therefore, it is not hard to imagine a CSA agreement running to over 5,000 trades.

In this case, the Maturity Factor is calculated using a Margin Period of Risk that is floored at 20 days:

\( \tag {1} Maturity Factor = MF_{i} = \dfrac{3}{2} \sqrt{\frac{MPOR}{1 year}} = \dfrac{3}{2} \sqrt{\frac{20}{250}} = 0.42 \)

CSAs with hard to value derivatives

Just as CSAs with loads of trades are deemed “complex” and carry a relative high margin period of risk, so do complex derivatives. The BIS state that:

[For] OTC derivatives transactions referencing securities whose fair value is determined by models with inputs that are not observed in the market [the floor on the margin period of risk is 20 business days]

CRE52 – Standardised approach to counterparty credit risk

I imagine this means that most Swaptions portfolios will run a significant risk of hitting a 20 day floor as well. And maybe even Inflation trades? Never mind exotics and the such like. As above, the Maturity Factor for these trades is:

\( \tag {2} Maturity Factor = MF_{i} = \dfrac{3}{2} \sqrt{\frac{MPOR}{1 year}} = \dfrac{3}{2} \sqrt{\frac{20}{250}} = 0.42 \)

CSAs with disputes

This is a real killer under SACCR. The BIS state that any CSAs with two disputes lasting more than the margin period of risk (i.e. more than 10 or 20 days) will see their MPOR DOUBLE for the next two quarters. Ouch!

[For M]ore than two margin call disputes, the bank must reflect this history appropriately by doubling the applicable supervisory floor on the margin period of risk for that netting set for the subsequent two quarters.

CRE52 – Standardised approach to counterparty credit risk

From a maturity factor perspective, this means that either a large netting set or a netting set containing complex derivatives could end up with an MPOR of 40 days and hence a maturity factor of 0.6!

\( \tag {3} Maturity Factor = MF_{i} = \dfrac{3}{2} \sqrt{\frac{MPOR}{1 year}} = \dfrac{3}{2} \sqrt{\frac{40}{250}} = 0.60 \)

Ouch!

CSAs with less than 5,000 trades, no complex derivatives and no disputes

Assuming there are some “simple” portfolios out there, OTC derivatives carry a floor on their Margin Period of Risk of 10 business days:

Ten business days for non-centrally-cleared transactions subject to daily margin agreements.

CRE52 – Standardised approach to counterparty credit risk

Therefore, the lowest possible value we can imagine a margined netting set carrying for the maturity factor is:

\( \tag {4} Maturity Factor = MF_{i} = \dfrac{3}{2} \sqrt{\frac{MPOR}{1 year}} = \dfrac{3}{2} \sqrt{\frac{10}{250}} = 0.30 \)

And What About Cleared Trades?

Cleared trades get significant benefits when calculating the Maturity Factor:

  1. The 5,000 cap does not apply for CCP netting sets. There is no doubling of the MPOR for cleared trades.
  2. CCPs do not offer a “right of dispute” for their margin calls! Portfolios are subject to the CCPs valuations, therefore there is no risk of suddenly doubling the MPOR for cleared trades.
  3. CCPs tend not to offer hard to value/mark to model products for clearing.
  4. “A minimum MPOR of 10 days must be used for the calculation of trade exposures to CCPs for OTC derivatives.”

To clarify what this means for a collateralised exposure that is cleared at a CCP, the maturity factor is calculated as follows for cleared trades:

\( \tag {5} Maturity Factor = MF_{i} = \dfrac{3}{2} \sqrt{\frac{MPOR}{1 year}} = \dfrac{3}{2} \sqrt{\frac{10}{250}} = 0.30 \)

What About Settle to Market?

To date, Maturity Factors have all been impacted by the Margin Period of Risk (MPOR) associated with a CSA agreement. But what if trades are not covered by a CSA? What if they don’t have an MPOR? This is precisely the case assumed for trades that are Settled to Market. From the BIS:

Trades with daily settlement should be treated as unmargined transactions with a maturity factor given by the formula in CRE52.48, with the parameter Mi set to its floor value of 10 business days. 

FAQ1 Paragraph 52.32 CRE52 – Standardised approach to counterparty credit risk

The precise equation referenced to calculate the Maturity Factor is below. Note that the maturity is floored at 10 days, even though the time to the next reset is typically one day. The main consideration is that the 3/2 multiplier now disappears.

\( \tag {6} Maturity Factor = MF_{STM} = \sqrt{\frac{10D}{1 year}} = \sqrt{\frac{10}{250}} = 0.20 \)

Et Voila! The STM treatment of trades under SACCR is very simple and yields the lowest Maturity Factor from all of our scenarios.

In Summary

Summarising today’s blog is super simple:

MPORMaturity FactorComment
400.60Disputed CSAs
200.42Hard to value trades;
5,000+ netting sets
100.30CCPs, “clean” CSAs
STM (Settled to Market)0.20Settled to Market

Keep an eye out for Part 3 in this series. I will look at the definition of netting sets and hence how to work out the Exposure at Default for actual portfolios.

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