Haircut methodology
Acceptable collateral provided by clearing members is subject to a reduction in value (haircut) for margin cover purposes depending on the form of collateral provided.
LME Clear will determine the criteria for acceptable collateral and collateral haircuts in line with regulatory requirements and its own risk policy.
Our haircut methodology is designed to enable stable haircuts, avoid procyclicality and offer protection in stressed market conditions.
It is based upon a weighting between a VaR calculation and the capture of stress periods. Greater weighting towards VaR if current conditions are volatile, greater weighting towards stress periods if current conditions are benign.
Key factors
- Value at Risk (VaR) - based upon 2 year lookback and 99.5% confidence
- Stress – based upon 10 year lookback and worst case stress shifts plus hypothetical scenarios
- Reflects relative price returns across all collateral types and 2 day liquidation period reflecting ability to revalue collateral intra-day and reference to 2 day liquidity in limit setting
- Base haircut subject to increments for:
- Credit - lower tiered collateral
- Foreign Exchange (FX) - where collateral is in different currency to cleared liability
- Liquidity - where illiquidity observed for collateral or groups of collateral
- Wrong Way Risk - where material correlation in credit status between Member and collateral is observed.
Documents
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