8.2.3.7 Valuation Changes

This assumption supports changes in the value of the collateral posted due to changes in market valuation of transaction or changes in the contract value. This further leads to cash outflow.

This assumption impacts the denominator of LCR that is, increase in the outflow for the Legal Entity.

Some derivatives are secured by collateral to cover losses arising from changes in mark-to-market valuations. For changes in the value of the derivative, additional collateral is posted resulting in a cash outflow. The valuation changes can be with Natural currency or Selected Currency. Valuation changes can be specified in Amount or Percentage. Here, both ratings and notches downgrade are not applicable.

The time buckets selected as part of the assumption parameters are the impacted time buckets.

Note:

The assumption specification and computation method for this sub category corresponds to that available as part of the Additional Collateral - Valuation Changes assumption type. This assumption is renamed as Valuation Changes in this version.

Refer section Defining a New Business Assumption, for information on the steps involved in specifying this assumption.

The steps involved in applying the delay in cash flow timing assumption to cash flows are as follows:

1. Identify the original time bucket and calculate the cash outflow occurring in it due to the assumption.
2. Identify the corresponding revised time buckets and the cash inflow occurring in it, including penalties, if any.
3. If time specific or critical obligation, record the delay and indicate a breach.

   An example is as follows:

   Table 7-28 Revised time bucket

   Based On	Assumption Unit	Assignment Method
   Market Value	Percentage	Selected

   Table 7-29 Revised time bucket

   Legal Entity	Product Type	Time Bucket	Valuation Change Impact
   LE 1	PT 1	6-6 Days	100%
   LE 2	PT 1	6-6 Days	80%

   Table 7-30 Valuation Change impact

   Account	Legal Entity	Product Type	Market Value	Valuation Change Impact
   Account 1	LE 1	PT 1	100000	100000 [=100% *100000]
   Account 2	LE 2	PT 1	200000	160000 [=80%*200000]
   Account 3	LE 1	PT 1	300000	300000[=100%*300000]
   Account 4	LE 2	PT 1	400000	320000[=80%*400000]

   Table 7-31 Incremental Cash Flow - Valuation Changes

   Legal Entity	Product Type	Outflow
   LE 1	PT 1	400000[=100000 + 300000]
   LE 2	PT 1	480000[=160000+ 320000]

   Each of these does not calculate the impact of interest and have been explained in a principle perspective.

   The examples provided for business assumption do not illustrate the impact of interest cash flows.

   For information on interest cash flow calculations from the perspective of assumptions, refer section Impact of Assumptions on Interest Cash Flows.

   The example depicted in the section depicts only the additional outflow (delta) in the respective buckets due to the application of the assumption.