Treatment of derivativesTreatment of derivatives

Treatment of derivatives

1. An ADI must calculate its exposures associated with all derivative transactions, including where it sells protection using a credit derivative, as:

exposure measure = 1.4*(RC + PFE)

where:

RC = the replacement cost, calculated according to paragraph 19 of this Attachment; and

PFE = the potential future exposure, calculated according to paragraphs 20 and 21 of this Attachment.

1. An ADI must calculate its exposure to:
   1. a single derivatives transaction not covered by an eligible bilateral netting agreement by applying the formula in paragraph 17 of this Attachment to each transaction separately; and
   2. derivatives transactions covered by an eligible bilateral netting agreement by applying the formula in paragraph 17 of this Attachment at the netting set level.[15]

For this purpose, an eligible bilateral netting agreement is one that meets the criteria in Attachment H to APS 112. Cross-product netting (i.e. between derivatives and SFTs) is not permitted.