Document ID: chunk:federal_register_of_legislation:F2023L01599:reg:6:p14
Version: federal_register_of_legislation:F2023L01599
Segment Type: reg
Provision Reference: reg 6 (pt 14/35)
Character Range: 61278–64115

be used for both margined[27] and unmargined[28] derivative transactions.

Exposure at default (EAD)
3.             To calculate EAD for:
(a)          unmargined transactions, apply the treatment in paragraphs 4 to 49 of this Attachment;
(b)          margined transactions where the set of transactions under a margin agreement and within the netting set coincide, apply the treatment in paragraphs 4 to 49 of this Attachment;
(c)          margined transactions where the set of transactions under a margin agreement and within the netting set differ, apply the treatment in paragraphs 50 to 52 of this Attachment; and
(d)          transactions where eligible collateral is taken outside of netting sets but is available to offset default losses, apply the treatment in paragraph 53 of this Attachment.
4.             The EAD for all derivative transactions with a counterparty must be calculated as the sum of the EAD for each netting set with the counterparty. The EAD for a netting set must be calculated as:
where RC is the replacement cost (refer to paragraphs 8 to 10 of this Attachment) and PFE is the potential future exposure (refer to paragraphs 12 to 49 of this Attachment).
5.             Bilateral transactions must be treated as margined where a transaction is subject to exchange of variation margin. Bilateral transactions with a one-way margining agreement in favour of an ADI's counterparty (that is, where an ADI posts, but does not collect, variation margin) must be treated as unmargined transactions. Centrally cleared transactions must be treated as either margined or unmargined transactions in accordance with the treatment adopted under paragraph 6 of Attachment B of this Prudential Standard.
6.             The maximum EAD for a margined netting set is the EAD of the same netting set calculated as if it were unmargined.
7.             An ADI may set EAD to zero for sold options that are:
(a)           not in any netting or margining agreements; or
(b)          the only types of exposures in a netting set,
    where all premiums have been paid upfront.

Replacement cost (RC)
8.             The RC must be calculated for each netting set according to:
(a)          paragraph 9 for a netting set of unmargined transactions; or
(b)          paragraph 10 for a netting set of margined transactions.

RC for an unmargined netting set
9.             For an unmargined netting set, the RC must be calculated as:
where:
V = the total current market value of all the derivative transactions within the netting set; and
CH (1 year) = the haircut value of net collateral held by the ADI calculated in accordance with paragraph 11 of this Attachment, with a holding period of one year.

RC for a margined netting set
10.         For a margined netting set, the RC must be calculated as:
where:
V = the total current