Prudential Regulation Authority Rulebook

1.

Institutions shall calculate the replacement cost RC for netting sets that are not subject to a margin agreement, or are subject to a one way margin agreement where the institution is required to post, but not entitled to receive, variation margin, in accordance with the following formula:

RC = max{CMV – NICA, 0}

For netting sets that are subject to one way margin agreements where the institution is required to post, but not entitled to receive, variation margin, NICA shall include VM (as defined in paragraph 2).

2.

Institutions shall calculate the replacement cost for single netting sets that are subject to margin agreements (other than those subject to the treatment under Article 275(1)) in accordance with the following formula:

RC = max{CMV – VM – NICA, TH + MTA – NICA, 0}

where:

RC = the replacement cost;

VM = the volatility-adjusted value of the net variation margin received or posted, as applicable, to the netting set on a regular basis to mitigate changes in the netting set's CMV;

TH = the margin threshold applicable to the netting set under the margin agreements below which the institution cannot call for collateral; and

MTA = the minimum transfer amount applicable to the netting set under the margin agreements.

3.

Institutions shall calculate the replacement cost for multiple netting sets that are subject to the same margin agreement in accordance with the following formula:

where:

1. RC = the replacement cost;
2. i = the index that denotes the netting sets that are subject to the single margin agreement;
3. CMV_i = the CMV of netting set i;
4. VM_MA = the sum of the volatility-adjusted value of collateral received or posted, as applicable, to multiple netting sets on a regular basis to mitigate changes in their CMV; and
5. NICA_MA = the sum of the volatility-adjusted value of collateral received or posted, as applicable, to multiple netting sets other than VM_MA.

For the purposes of the first subparagraph, NICA_MA may be calculated at trade level, at netting set level or at the level of all the netting sets to which the margin agreement applies depending on the level at which the margin agreement applies.