Settlement Risk (CRR)

In the case of transactions in which debt instruments, equities, foreign currencies and commodities excluding repurchase transactions and securities or commodities lending and securities or commodities borrowing are unsettled after their due delivery dates, an institution shall calculate the price difference to which it is exposed.

The price difference is calculated as the difference between the agreed settlement price for the debt instrument, equity, foreign currency or commodity in question and its current market value, where the difference could involve a loss for the credit institution.

The institution shall multiply that price difference by the appropriate factor in the right column of the following Table 1 in order to calculate the institution's own funds requirement for settlement risk.

Table 1

[Note: This rule corresponds to Article 378 of the CRR as it applied immediately before its revocation by the Treasury]

1.

An institution shall be required to hold own funds, as set out in Table 2, where the following occurs:

1. (a) it has paid for securities, foreign currencies or commodities before receiving them or it has delivered securities, foreign currencies or commodities before receiving payment for them;
2. (b) in the case of cross-border transactions, one day or more has elapsed since it made that payment or delivery.

Table 2 Capital treatment for free deliveries

2.

In applying a risk weight to free delivery exposures treated according to Column 3 of Table 2, an institution using the IRB Approach set out in the Credit Risk: Internal Ratings Based Approach (CRR) Part may assign PDs to counterparties, for which it has no other non-trading book exposure, on the basis of the counterparty's external rating. Institutions using the Advanced IRB Approach may apply the LGD set out in the Credit Risk: Internal Ratings Based Approach (CRR) Part Article 161(1) to free delivery exposures treated according to Column 3 of Table 2 provided that they apply it to all such exposures. Alternatively, an institution using the IRB Approach set out in the Credit Risk: Internal Ratings Based Approach (CRR) Part may apply the risk weights of the Standardised Approach, as set out in the Credit Risk: Standardised Approach (CRR) Part and Chapter 2 of Title II of Part Three of CRR provided that it applies them to all such exposures or may apply a 100% risk weight to all such exposures.

If the amount of positive exposure resulting from free delivery transactions is not material, institutions may apply a risk weight of 100% to these exposures, except where a risk weight of 1250% in accordance with Column 4 of Table 2 in paragraph 1 is required.

3.

As an alternative to applying a risk weight of 1250% to free delivery exposures according to Column 4 of Table 2 in paragraph 1, institutions may deduct the value transferred plus the current positive exposure of those exposures from Common Equity Tier 1 items in accordance with the Own Funds (CRR) Part Article 36(1)(k).

[Note: This rule corresponds to Article 379 of the CRR as it applied immediately before its revocation by the Treasury]

Where a system wide failure of a settlement system, a clearing system or a CCP occurs, the own funds requirements calculated as set out in Articles 378 and 379 do not apply until the situation is rectified. In this case, the failure of a counterparty to settle a trade shall not be deemed a default for purposes of credit risk.

[Note: This rule corresponds to Article 380 of the CRR as it applied immediately before its revocation by the Treasury]