• Home
  • eAlerts
  • SFA: CAD2 agreement leads to changes in credit risk requirement and large exposure rules

SFA: CAD2 agreement leads to changes in credit risk requirement and large exposure rules

United Kingdom
15/07/1998
Download PDF


Now that a "common position" has been agreed in Brussels to finalise amendments to the Capital Adequacy Directive and the Solvency Ratio Directive (the "CAD2"), SFA has issued a Consultation Document as a prelude to rule changes to implement the CAD2 package (which SFA will be obliged by law to do).

CAD2 requires two changes to the calculation of the Credit Risk Requirement:

  • firms undertaking "physical" transactions in commodities and commodity warrants which fail to settle on a due settlement date must calculate CRR in accordance with the rule for cash against documents transactions (SFA 10-171, 3-171), rather than along with their derivatives exposures (SFA 10-174, 3-173A)
  • where firms undertake commodities repurchase or reverse repurchase transactions, they may be assessed for CRR in accordance with the repo rule (SFA 10-173, 3-176).

CAD2 also makes a change to the calculation of Large Exposures:

  • CAD2 requires, for the first time, that both physical commodities and commodity derivatives are brought within the scope of the Large Exposures Rules. Where counterparty exposures arise from such commodities business and meet the definition of a Large Exposure, they should be treated by utilising "soft limits" in conjunction with the calculation of an additional Large Exposures Requirement, rather than imposing "hard limits" applicable to Non-Trading Book business.

These are substantial changes which SFA is obliged to implement in the near future.

Search Filters

Advanced Search

Related content