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Division 1 The calculation of the adjusted value of the collateral shall meet all of the following conditions:

United Kingdom

Original text. Later amendments are not shown.

  1. (a)

    counterparties shall base the calculation on a 99th percentile, one-tailed confidence interval;

  2. (b)

    counterparties shall base the calculation on a liquidation period of at least 10 business days;

  3. (c)

    counterparties shall calculate the haircuts by scaling up the daily revaluation haircuts, using the following square-root-of time formula:

    H = H M × N R + T M − 1 T M

    where:

    H

  4. the haircut to be applied;

    5. HM

  5. the haircut where there is daily revaluation;

    6. NR

  6. the actual number of business days between revaluations;

    7. TM

  7. the liquidation period for the type of transaction in question;

  • (d)

    counterparties shall take into account the lesser liquidity of low quality assets. They shall adjust the liquidation period upwards in cases where there are doubts concerning the liquidity of the collateral. They shall also identify where historical data may understate potential volatility. Such cases shall be dealt with by means of a stress scenario;

  • (e)

    the length of the historical observation period institutions use for calculating haircuts shall be at least 1 year. For counterparties that use a weighting scheme or other methods for the historical observation period, the length of the effective observation period shall be at least 1 year;

  • (f)

    the market value of the collateral shall be adjusted as follows:

    Cvalue = C · (1 – H)

    where:

    C

  • the market value of the collateral;

    • H

  • the haircut as calculated in point (c) above.