7.1.3.8 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 a 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 subcategory correspond to that available as part of the Additiona Collateral - Valuation Changes assumption type. This assumption is renamed as Valuation Changes in this version.

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

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

  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. For example:

    Table 7-28 Incremental Cash Flow - Valuation Changes

    Based On Assumption Unit Assignment Method
    Market Value Percentage Selected

    Table 7-29 Incremental Cash Flow - Valuation Changes

    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 Incremental Cash Flow - Valuation Changes

    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 has been explained in a principle perspective. The examples provided for the business assumption do not illustrate the impact of interest cash flows.

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

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