- The Maturity Factor is a key variable in determining bank capital under SACCR.
- It varies according to the type of margining agreement (CSA) in place.
- It also varies according to the number and type of underlying derivatives within a netting set.
- We look at large netting sets, CSAs with hard to value derivatives and settled to market examples.
- We show how the Maturity Factor can change by 300% (from 0.2 to 0.6) depending on the agreement governing a given set of trades.
Please note: this is Part Two of a series. Part one of the story for SACCR provided critical background regarding key terms and concepts. This Part Two of our Mechanics and Definitions of SACCR covers the maturity factor and how different CSAs and/or treatments of derivatives impact the Exposure at Default (EAD) calculations.
Maturity Factors under SACCR
Please excuse the lack of introductory waffle for today’s blog. Please read Part One if you are unfamiliar with SACCR. Suffice to say, we expect SACCR to be a very hot topic for the derivatives industry over the coming months and years.
The Maturity Factor for Derivatives
To examine the impact of SACCR on different derivatives, we need to first understand what type of margin agreement the whole set of derivatives operates under. This is important because:
- If trades are under a margin agreement, the precise details of the margin agreement will govern the size of the maturity factor under SACCR. Amir covered a lot of these details in our first ever blog on SACCR. With the advent of Uncleared Margin Rules, most bilateral trades will now fall under a CSA (a Collateral Support Annex under an ISDA Master Agreement). These agreements govern how and when variation margin needs to be posted. (And remember that this is separate to Initial Margin agreements). Trades under a Margin Agreement/CSA have a Margin Period of Risk associated with them (MPOR). The MPOR of a CSA directly impacts the size of the Maturity Factor under SACCR.
- Trades may also exist outside of a margin agreement. There are three ways that this can happen:
- The trades are completely unmargined – i.e. there is no CSA between the counterparties and the trade exposures are uncollateralised. Whilst this was pretty frequent pre-GFC, this is becoming increasingly rare. SACCR will likely only serve to increase the popularity of margining and make uncollateralised exposures even rarer.
- Trades are versus a CCP/Exchange. Most trades in Rates and Exchange Traded Derivatives are considered “Settled to Market” (STM). Settle To Market – What You Need to Know about STM is one of the most popular blogs that I have written for Clarus. It goes into some detail regarding STM, and for the purposes of SACCR it should be noted that STM trades are considered “unmargined”.
- Trades remain bilateral but are part of an STM netting set. Counterparties can find ways of arranging bilateral STM treatments so that the NPV of a trade is settled every day. This is somewhat more complex for bilateral derivatives as the NPV must be bilaterally agreed, and disputes must be resolved almost immediately, before the daily settlement of NPVs has to take place.
Let’s look at some exact examples under SACCR.
CSAs with more than 5,000 trades
Many large interdealer relationships will govern trades across Equities, Credit, Rates, FX and Commodities. Just imagine all of those Equity TRS, FX Options and Swaptions that are written each day and remain uncleared. These will typically live under a single CSA between any two dealers. Whilst dealers might have multiple CSAs between themselves, these will be split into “legacy” and “on the run” agreements. All new trades written will normally fall under the same CSA (as we understand it). Therefore, it is not hard to imagine a CSA agreement running to over 5,000 trades.
In this case, the Maturity Factor is calculated using a Margin Period of Risk that is floored at 20 days:
\( \tag {1} Maturity Factor = MF_{i} = \dfrac{3}{2} \sqrt{\frac{MPOR}{1 year}} = \dfrac{3}{2} \sqrt{\frac{20}{250}} = 0.42 \)CSAs with hard to value derivatives
Just as CSAs with loads of trades are deemed “complex” and carry a relative high margin period of risk, so do complex derivatives. The BIS state that:
[For] OTC derivatives transactions referencing securities whose fair value is determined by models with inputs that are not observed in the market [the floor on the margin period of risk is 20 business days]
CRE52 – Standardised approach to counterparty credit risk
I imagine this means that most Swaptions portfolios will run a significant risk of hitting a 20 day floor as well. And maybe even Inflation trades? Never mind exotics and the such like. As above, the Maturity Factor for these trades is:
\( \tag {2} Maturity Factor = MF_{i} = \dfrac{3}{2} \sqrt{\frac{MPOR}{1 year}} = \dfrac{3}{2} \sqrt{\frac{20}{250}} = 0.42 \)CSAs with disputes
This is a real killer under SACCR. The BIS state that any CSAs with two disputes lasting more than the margin period of risk (i.e. more than 10 or 20 days) will see their MPOR DOUBLE for the next two quarters. Ouch!
[For M]ore than two margin call disputes, the bank must reflect this history appropriately by doubling the applicable supervisory floor on the margin period of risk for that netting set for the subsequent two quarters.
CRE52 – Standardised approach to counterparty credit risk
From a maturity factor perspective, this means that either a large netting set or a netting set containing complex derivatives could end up with an MPOR of 40 days and hence a maturity factor of 0.6!
\( \tag {3} Maturity Factor = MF_{i} = \dfrac{3}{2} \sqrt{\frac{MPOR}{1 year}} = \dfrac{3}{2} \sqrt{\frac{40}{250}} = 0.60 \)Ouch!
CSAs with less than 5,000 trades, no complex derivatives and no disputes
Assuming there are some “simple” portfolios out there, OTC derivatives carry a floor on their Margin Period of Risk of 10 business days:
Ten business days for non-centrally-cleared transactions subject to daily margin agreements.
CRE52 – Standardised approach to counterparty credit risk
Therefore, the lowest possible value we can imagine a margined netting set carrying for the maturity factor is:
\( \tag {4} Maturity Factor = MF_{i} = \dfrac{3}{2} \sqrt{\frac{MPOR}{1 year}} = \dfrac{3}{2} \sqrt{\frac{10}{250}} = 0.30 \)And What About Cleared Trades?
Cleared trades get significant benefits when calculating the Maturity Factor:
- The 5,000 cap does not apply for CCP netting sets. There is no doubling of the MPOR for cleared trades.
- CCPs do not offer a “right of dispute” for their margin calls! Portfolios are subject to the CCPs valuations, therefore there is no risk of suddenly doubling the MPOR for cleared trades.
- CCPs tend not to offer hard to value/mark to model products for clearing.
- “A minimum MPOR of 10 days must be used for the calculation of trade exposures to CCPs for OTC derivatives.”
To clarify what this means for a collateralised exposure that is cleared at a CCP, the maturity factor is calculated as follows for cleared trades:
\( \tag {5} Maturity Factor = MF_{i} = \dfrac{3}{2} \sqrt{\frac{MPOR}{1 year}} = \dfrac{3}{2} \sqrt{\frac{10}{250}} = 0.30 \)What About Settle to Market?
To date, Maturity Factors have all been impacted by the Margin Period of Risk (MPOR) associated with a CSA agreement. But what if trades are not covered by a CSA? What if they don’t have an MPOR? This is precisely the case assumed for trades that are Settled to Market. From the BIS:
Trades with daily settlement should be treated as unmargined transactions with a maturity factor given by the formula in CRE52.48, with the parameter Mi set to its floor value of 10 business days.
FAQ1 Paragraph 52.32 CRE52 – Standardised approach to counterparty credit risk
The precise equation referenced to calculate the Maturity Factor is below. Note that the maturity is floored at 10 days, even though the time to the next reset is typically one day. The main consideration is that the 3/2 multiplier now disappears.
\( \tag {6} Maturity Factor = MF_{STM} = \sqrt{\frac{10D}{1 year}} = \sqrt{\frac{10}{250}} = 0.20 \)Et Voila! The STM treatment of trades under SACCR is very simple and yields the lowest Maturity Factor from all of our scenarios.
In Summary
Summarising today’s blog is super simple:
- The Maturity Factor under SACCR varies according to the type of margin agreement (CSA), what trades it covers and whether a trade is settled to market.
- The Maturity Factor is a huge contributor to the Exposure at Default for a portfolio under SACCR, and hence directly impacts bank capital requirements.
- The table below shows the potential values of the Maturity Factor under SACCR.
| MPOR | Maturity Factor | Comment |
| 40 | 0.60 | Disputed CSAs |
| 20 | 0.42 | Hard to value trades; 5,000+ netting sets |
| 10 | 0.30 | CCPs, “clean” CSAs |
| STM (Settled to Market) | 0.20 | Settled to Market |
Keep an eye out for Part 3 in this series. I will look at the definition of netting sets and hence how to work out the Exposure at Default for actual portfolios.