AI Summary of Article 223 Financial Collateral Comprehensive Method
The regulations mandate that institutions apply volatility adjustments to the market value of collateral when utilising the Financial Collateral Comprehensive Method. When there is a currency mismatch between collateral and exposure, additional adjustments for currency volatility must be made. Moreover, under recognised netting agreements for OTC derivatives, a uniform volatility adjustment applies, even with multiple currencies involved.
Institutions must calculate the volatility-adjusted values of collateral and exposure using specified formulas, ensuring compliance with regulatory standards. The provisions also detail the calculation of exposure values for off-balance-sheet items, ensuring that risk mitigation is appropriately accounted for.
Article 223 Financial Collateral Comprehensive Method
1. In order to take account of price volatility, institutions shall apply volatility adjustments to the market value of collateral, as set out in Articles 224 to 227, when valuing financial collateral for the purposes of the Financial Collateral Comprehensive Method.
Where collateral is denominated in a currency that differs from the currency in which the underlying exposure is denominated, institutions shall add an adjustment reflecting currency volatility to the volatility adjustment appropriate to the collateral as set out in Articles 224 to 227.
In the case of OTC derivatives transactions covered by netting agreements recognised by the competent authorities under Chapter 6, institutions shall apply a volatility adjustment reflecting currency volatility when there is a mismatch between the collateral currency and the settlement currency. Even where multiple currencies are involved in the transactions covered by the netting agreement, institutions shall apply a single volatility adjustment.
2. Institutions shall calculate the volatility-adjusted value of the collateral (CVA) they need to take into account as follows:
CVA = C · (1 - HC - Hfx)
where:
C = the value of the collateral;