Prudential Requirements (Part III)

Question 1

How is counterparty risk on unsettled uncertificated securities transactions on behalf of non-controlled clients calculated?

Answer 1

1. Where CSDP has committed – nil
2. Where CSDP has not committed
   a. On trade date 2% of the aggregate value of uncommitted purchases or sales in each security on each client’s account
   b. On T + 1 after trade date NIL (as these transactions are subject to margin).
   c. On T + 2 after trade and thereafter 100% of difference between the transaction value and market value plus position risk requirement on each security on each client’s account.

Question 2

How is counterparty risk on the following unsettled securities calculated?
1. Transactions executed on BESA
a. 0-1 day after settlement.
b. More than 1 day after settlement.
2. Free deliveries: Non payment against securities delivered where the client is a bank or regulated institution.
3. Non delivery of securities against payment where the client is not a bank or regulated institution.

Answer 2

1. Transactions executed on BESA
   a. 50% of (transaction value - market value).
   b. 100% of (transaction value - market value) + PRR on market value of securities.
2. Free deliveries
   a. 1 day since delivery Nil
   b. 1 - 7 days since delivery 25% of amount due
   c. Over 7 days since delivery 100% of amount due
3. 100% of market value of securities.

Question 3

How is counterparty risk calculated on the following?
1. Options purchased for a client
a. Non payment of purchase price 1 day after purchase.
b. Thereafter.
2. Exchange traded margined transactions.
a. 1 day since shortfall.
b. 2 days and over since shortfall.
3. Repurchase or reverse repurchase agreements (including lending and borrowing and sale and buy back agreements)

Answer 3

1. Options purchased for a client
   a. Purchase price - market value or if market value not readily available 100% of premium.
   b. 100% of option premium unpaid.
2. Exchange traded margined transactions
   a. Nil.
   b. 100% of margins unpaid
3. On the difference between the current market values of the asset received and the security provided or the asset provided and the security received. During the period of the agreement:
   a. Where the counterparty is a regulated financial institution or a regulated banking institution – Nil
   b. All other counterparties - 25%
   c. Subsequent to settlement date, all counterparties - 100%

Question 4

How is counterparty risk on swaps, forward contracts, OTC options, contracts for differences and off exchange futures calculated?

Answer 4

“Credit equivalent amount” as defined, multiplied by the appropriate risk %
1. State or state guaranteed entity - 0%
2. Regulated exchanges, JSE members, Supranational organisations and Regulated banking institutions - 2%
3. Any other counterparty - 10%

Question 5

How is counterparty risk on the following calculated?
1. Amounts due for payment or owed on closed out transactions unless adequately secured.
2. Loans to clients.
3. Other receivables.

Answer 5

1. 100% of amount unsecured.
2. 100% of amount unsecured.
3. 100% of amounts due for more than 30 days.

Question 6

A member’s records reflect the following positions:
Short 10 INDI 25 Futures
Short 20 ALSI 40 Futures
Long 30 FINI 15 Futures
Long 20 FINDI 30 Futures
Long 10 RESI 20 Futures
Each Futures contract is for 10 underlying

Calculate the position risk requirement, given that the spot values are:
INDI 4800
ALSI 5000
FINI 2200
FINDI 5200
RESI 6000
Show your workings

Answer 6

Equity Equivalent
INDI 10 x (4 800) x 10 (480 000)
ALSI 20 x (5 000) x 10 (1 000 000)
FINI 30 x 2 200 x 10 660 000
FINDI 20 x 5 200 x 10 1 040 000
RESI 10 x 6 000 x 10 600 000

General Risk per Table
INDI 8% x 480 000 (38 400)
ALSI 8% x 1 000 000 (80 000)
FINI 8% x 660 000 52 800
FINDI 8% x 1 040 000 83 200
RESI 8% x 600 000 48 000
65 600

Specific Risk Nil
Total PRR = R65 600

Question 7

How is the foreign exchange requirement calculated unless permission is obtained from the Director: Market Regulation to use a simulation technique?

Answer 7

A member shall calculate a net open position for all currencies and shall translate them to rand using prevailing spot rates.
The FER is 10% of the higher of:
1. The aggregate of the net open long positions in each currency and
2. The aggregate of the net open short positions in each currency.