ANNEX II
SETTLEMENT AND COUNTER-PARTY RISK
SETTLEMENT/DELIVERY RISK
1. In the case of transactions in which debt instruments and equities (excluding repurchase and reverse repurchase agreements and securities lending and securities borrowing) are unsettled after their due delivery dates, an institution must calculate the price difference to which it is exposed. This is the difference between the agreed settlement price for the debt instrument or equity in question and its current market value, where the difference could involve a loss for the institution. It must multiply this difference by the appropriate factor in column A of the table appearing in paragraph 2 in order to calculate its capital requirement.
2. Notwithstanding paragraph 1, an institution may, at the discretion of its competent authorities, calculate its capital requirements by multiplying the agreed settelement price of every transaction which is unsettled between 5 and 45 working days after its due date by the appropriate factor in column B of the table below. As from 46 working days after the due date it shall take the requirement to be 100 % of the price difference to which it is exposed as in column A.
COUNTER-PARTY RISK
Free deliveries
3.1. An institution shall be required to hold capital against counter-party risk if:
(i) it has paid for securities before receiving them or it has delivered securities before receiving payment for them; and
(ii) in the case of cross-border transactions, one day or more has elapsed since it made that payment or delivery.
3.2. The capital requirement shall be 8 % of the value of the securities or cash owed to the institution multiplied by the risk weighting applicable to the relevant counter-party.
Repurchase and reverse repurchase agreements and securities lending and borrowing
4.1. In the case of repurchase agreements and securities lending based on securities included in the trading book the institution shall calculate the difference between the market value of the securities and the amount borrowed by the institution or the market value of the collateral, where that difference is positive. In the case of reverse repurchase agreements and securities borrowing the institution shall calculate the difference between the amount the institution has lent or the market value of the collateral and the market value of the securities it has received, where that difference is positive.
The competent authorities shall take measures to ensure that the excess collateral given is acceptable.
Furthermore, the competent authorities may allow institutions not to include the amount of excess collateral in the calculations described in the first two sentences of this paragraph if the amount of excess collateral is guaranteed in such a way that the transferor is always assured that the excess collateral will be returned to it in the event of defaults of its counter-party.
Accrued interest shall be included in calculating the market value of amounts lent or borrowed and collateral.
4.2. The capital requirement shall be 8 % of the figure produced in accordance with paragraph 4.1, multiplied by the risk weighting applicable to the relevant counter-party.
OTC derivative instruments
5. In order to calculate the capital requirement on their OTC derivative instruments, institutions shall apply Annex II to Directive 89/647/EEC in the case of interest-rate and exchange-rate contracts; bought OTC equity options and covered warrants shall be subject to the treatment accorded to exchange-rate contracts in Annex II to Directive 89/647/EEC.
The risk weightings to be applied to the relevant counter-parties shall be determined in accordance with Article 2 (9) of this Directive.
OTHER
6. The capital requirements of Directive 89/647/EEC shall apply to those exposures in the form of fees, commission, interest, dividends and margin in exchange-traded futures or options contracts which are neither covered in this Annex or Annex I nor deducted from own funds under paragraph 2 (d) of Annex V and which are directly related to the items included in the trading book
The risk weightings to be applied to the relevant counter-parties shall be determined in accordance with Article 2 (9) of this Directive.