SA-CCR — Replacement cost (Art. 275)¶

The replacement cost (RC) is the netting-set-grain measure of current counterparty exposure — the loss the institution would suffer today if the counterparty defaulted and every trade in the netting set had to be closed out at prevailing market prices, net of any collateral already held. RC is the first of the two components of the SA-CCR exposure formula (Art. 274(2)):

EAD = α × (RC + PFE)         α = 1.4

SA-CCR carries two RC branches:

• Unmargined netting sets — Art. 275(1) — RC = max(V − C, 0). No CSA, so the bank carries the full mark-to-market shortfall whenever collateral does not cover the positive netting-set value.
• Margined netting sets — Art. 275(2) — RC = max(V − C, TH + MTA − NICA, 0). A CSA caps the counterparty's uncollateralised exposure at the threshold (TH) plus the minimum-transfer-amount buffer (MTA), net of any independent collateral already pledged (NICA). Even a fully-collateralised netting set retains a residual RC because the bank can only call for variation margin once losses breach TH + MTA.

The two formulas share inputs V (per-netting-set MTM aggregate) and C (haircut-adjusted net collateral held) and differ only in the right-hand floor that the margined branch adds. This page documents the two formulas, the NICA / TH / MTA definitions, the engine entry points, and the worked examples pinned by the unit test suite. The upstream MPOR_eff cascade that feeds the margined maturity factor sits one level up the chain on maturity-factor.md — RC itself is independent of MPOR_eff, but the margined branch only engages on netting sets that also satisfy the Art. 285 margined-NS gate.

Regulatory citation¶

Primary source: PRA PS1/26 Counterparty Credit Risk (CRR) Part — Article 275 (replacement cost) and Article 272 (definitions of margin agreement, NICA, threshold, MTA). The UK regime is a verbatim re-export of the onshored CRR text with the Basel 3.1 calibration retained. References below follow the PRA-priority convention: PRA Art. numbers first, BCBS CRE52 cross-reference second.

(a) Unmargined formula — Art. 275(1)¶

For a netting set without a legally enforceable margin agreement, the replacement cost is the larger of (i) the current market exposure net of collateral, and (ii) zero:

RC_unmargined = max( V − C, 0 )

where:

• V = v_net — the signed sum of mark-to-market values over every trade in the netting set. Positive V means the netting set is in-the-money to the bank (counterparty owes); negative V means out-of-the-money (bank owes).
• C = c_net — the net collateral held against the netting set, haircut-adjusted per the Title II CRM rules and signed positive when held by the bank. Collateral pledged by the bank (negative c_net) enlarges V − C and therefore RC.

The max(·, 0) floor reflects the asymmetric default payoff: a bank cannot owe the counterparty a positive replacement cost — if the counterparty defaults while owing money to the bank (V − C > 0) the bank loses; if the bank is the one out-of-the-money (V − C < 0) the bank simply walks away from the obligation, RC = 0.

Worked example — positive V¶

V        = +2,000,000        (in-the-money to the bank)
C        = +1,850,000        (collateral held, haircut-adjusted)
V − C    = +150,000
RC       = max(150,000, 0) = 150,000

Worked example — negative V¶

V        = −500,000          (out-of-the-money to the bank)
C        = 0                 (no collateral)
V − C    = −500,000
RC       = max(−500,000, 0) = 0

The negative-V case demonstrates the asymmetry: even though the bank has an economic loss embedded in the trades today, the replacement cost — the loss given counterparty default — is zero. The bank's liability survives the counterparty's default and is unaffected by SA-CCR.

Engine entry point¶

from rwa_calc.engine.ccr.rc import compute_rc_unmargined

def compute_rc_unmargined(netting_sets: pl.LazyFrame) -> pl.LazyFrame:
    """RC_unmargined = max(v_net − c_net, 0). Reads ``v_net`` and
    ``c_net`` on the netting-set-grain LazyFrame; writes a
    ``rc_unmargined: Float64`` column."""

Source: src/rwa_calc/engine/ccr/rc.py::compute_rc_unmargined.

def compute_rc_unmargined(netting_sets: pl.LazyFrame) -> pl.LazyFrame:
    """Replacement Cost for unmargined transactions (Art. 275(1)).

    Adds an ``rc_unmargined`` column to ``netting_sets`` containing
    ``max(v_net - c_net, 0)``.

    Args:
        netting_sets: LazyFrame with at least ``v_net`` and ``c_net`` columns
            at netting-set grain.

    Returns:
        LazyFrame with an additional ``rc_unmargined`` Float64 column.
    """
    return netting_sets.with_columns(
        pl.max_horizontal(pl.col("v_net") - pl.col("c_net"), pl.lit(0.0)).alias("rc_unmargined")
    )

(b) Margined formula — Art. 275(2)¶

For a netting set covered by a legally enforceable margin agreement (typically an ISDA Master Agreement with a CSA requiring at least daily exchange of variation margin), the replacement cost is the maximum of three terms:

RC_margined = max( V − C,   TH + MTA − NICA,   0 )

The middle term, TH + MTA − NICA, is the largest exposure the bank can hold without triggering a margin call — and therefore the smallest RC the bank can guarantee on demand. Even a CSA with zero threshold and zero MTA cannot drive RC below −NICA, because independent collateral is posted up-front and not reclaimable on a single-day default. The three-way max enforces three distinct economic floors:

NICA — Net Independent Collateral Amount (Art. 271(7))¶

NICA is independent collateral — collateral posted up-front that secures the netting set regardless of mark-to-market — measured net of the directional flow:

NICA = (independent collateral held by the bank from the counterparty)
     + (segregated initial margin held by the bank from the counterparty)
     − (independent collateral pledged by the bank to the counterparty,
        non-segregated)

The asymmetry between "segregated IM held" (included) and "non-segregated IM pledged" (subtracted) is deliberate: segregated IM posted by the bank is bankruptcy-remote and would be returned on the counterparty's default, so it does not reduce NICA on the bank's balance sheet. Non-segregated IM the bank pledges is at risk and so shows up negatively.

NICA enters Art. 275(2) subtractively because it reduces the buffer above which a margin call would be triggered: a counterparty that has posted £200,000 of segregated IM and a CSA with TH = £50,000, MTA = £10,000 has effectively a negative buffer (50,000 + 10,000 − 200,000 = −140,000), so the IM contributes directly to RC reduction up to (but not below) the zero floor.

TH — Threshold (Art. 272(7))¶

The threshold is the unsecured-exposure amount specified in the CSA that the bank tolerates without calling for variation margin. TH ≥ 0. A "zero-threshold" CSA (TH = 0) collateralises every basis point of exposure; a high-threshold CSA (TH = £25m) lets the counterparty run up to £25m of net positive MTM before any VM call.

MTA — Minimum Transfer Amount (Art. 272 definitions)¶

The minimum transfer amount is the operational floor for any single margin call. MTA ≥ 0. CSAs use MTA to avoid the operational overhead of calling for £100 of margin when the daily MTM moves by a trivial amount — the CSA only calls when the cumulative uncollateralised exposure exceeds TH + MTA. The bank therefore carries both TH and MTA worth of exposure as a structural part of the CSA, which is why both add into the RC floor.

Interaction with the Art. 285 MPOR cascade¶

The Art. 275(2) formula governs the current replacement cost on the reporting date — it does not include any uplift for the margin-period-of-risk close-out window. The MPOR enters SA-CCR one level up the chain via the margined maturity factor MF_margined = 1.5 × sqrt(MPOR_eff / 250), which scales the PFE add-on rather than RC. See maturity-factor.md § MPOR cascade — Art. 285(2)–(5) for the full five-step cascade that derives MPOR_eff. RC and PFE combine into EAD per Art. 274(2):

EAD = α × (RC_margined + PFE_margined)        α = 1.4
                          ↑
                          PFE_margined inherits MPOR_eff via MF_margined

So even when the CSA pins RC to TH + MTA − NICA, an MPOR upgrade (e.g. >5,000-trade netting set forcing MPOR_eff = 20 BD per Art. 285(3)(a)) lifts the PFE branch and therefore the EAD without touching RC itself.

Engine entry point¶

from rwa_calc.engine.ccr.rc import compute_rc_margined

def compute_rc_margined(netting_sets: pl.LazyFrame) -> pl.LazyFrame:
    """RC_margined = max(v_net − c_net, margin_threshold + minimum_transfer_amount
    − nica, 0) for is_margined=True rows; null otherwise. Reads
    ``v_net``, ``c_net``, ``is_margined``, ``margin_threshold``,
    ``minimum_transfer_amount``, ``nica``; writes ``rc_margined:
    Float64``."""

Source: src/rwa_calc/engine/ccr/rc.py::compute_rc_margined.

def compute_rc_margined(netting_sets: pl.LazyFrame) -> pl.LazyFrame:
    """Replacement Cost for margined transactions (Art. 275(2)).

    Adds an ``rc_margined`` column to ``netting_sets`` containing
    ``max(v_net - c_net, margin_threshold + minimum_transfer_amount - nica, 0)``
    for rows with ``is_margined=True``; null for unmargined rows.

    Args:
        netting_sets: LazyFrame with ``v_net``, ``c_net``, ``is_margined``,
            ``margin_threshold``, ``minimum_transfer_amount``, and ``nica``
            columns at netting-set grain.

    Returns:
        LazyFrame with an additional ``rc_margined`` Float64 column.
    """
    return netting_sets.with_columns(
        pl.when(pl.col("is_margined"))
        .then(
            pl.max_horizontal(
                pl.col("v_net") - pl.col("c_net"),
                pl.col("margin_threshold") + pl.col("minimum_transfer_amount") - pl.col("nica"),
                pl.lit(0.0),
            )
        )
        .otherwise(pl.lit(None, dtype=pl.Float64))
        .alias("rc_margined")
    )

The function deliberately returns null on unmargined rows (is_margined = False) rather than zero, so a downstream coalesce-style join can pick the correct branch without an explicit filter:

rc_effective = pl.coalesce(pl.col("rc_margined"), pl.col("rc_unmargined"))

Worked examples — tests/unit/ccr/test_rc_margined.py¶

All four examples below are pinned by the unit-test suite in tests/unit/ccr/test_rc_margined.py via the fixture builder tests/fixtures/ccr/rc_margined_builder.py.

Example 1 — TH + MTA − NICA floor dominates (NS_A)¶

A marginally in-the-money netting set under a CSA with material threshold and MTA, partially offset by independent collateral:

V                  = +2,000,000      (in-the-money)
C                  = +1,850,000      (haircut-adjusted VM held)
V − C              = +150,000

TH                 = 250,000
MTA                = 100,000
NICA               = 50,000
TH + MTA − NICA    = 300,000

RC_margined        = max(150,000, 300,000, 0) = 300,000

The CSA's TH + MTA = 350,000 permits the counterparty to run up to £350,000 of uncollateralised exposure before a margin call would trigger; the £50,000 of NICA offsets some of that, leaving the bank exposed to £300,000 even though current MTM net of VM is only £150,000. This is the central regulatory point of Art. 275(2): the CSA's structural buffer dominates current MTM whenever the netting set is operating inside the buffer.

Example 2 — V − C arm dominates (NS_B)¶

A deeply in-the-money netting set whose current MTM exceeds the CSA buffer:

V                  = +1,500,000
C                  = +400,000
V − C              = +1,100,000

TH                 = 100,000
MTA                = 50,000
NICA               = 25,000
TH + MTA − NICA    = 125,000

RC_margined        = max(1,100,000, 125,000, 0) = 1,100,000

When the netting set has moved through the CSA buffer, the bank should already have called for additional VM — but until that VM is received and reflected in C, the bank still carries the full V − C shortfall as RC.

Example 3 — zero floor dominates (NS_C)¶

A deeply out-of-the-money netting set with NICA exceeding the CSA buffer:

V                  = −500,000        (out-of-the-money to the bank)
C                  = 0
V − C              = −500,000

TH                 = 50,000
MTA                = 10,000
NICA               = 200,000
TH + MTA − NICA    = −140,000

RC_margined        = max(−500,000, −140,000, 0) = 0

Both the current-exposure arm and the CSA-buffer arm are negative — NICA is so large that the structural buffer goes net negative. The zero floor of Art. 275(2) prevents the bank from booking negative RC against the counterparty.

Example 4 — unmargined pass-through (NS_D)¶

When is_margined = False, the function emits null rather than applying the margined formula. This lets the orchestrator coalesce the margined and unmargined branches in a single pipeline pass without a per-row filter — compute_rc_unmargined handles the same row.

is_margined        = False
margin_threshold   = null
minimum_transfer_amount = null
nica               = null
RC_margined        = null      (pass-through; Art. 275(1) applies)

Pipeline ordering¶

trades → years_to_maturity
       → adjusted_notional         (Art. 279b)
       → supervisory_delta         (Art. 279a)
       → maturity_factor           (Art. 279c — unmargined OR margined per Art. 285)
       → assign_hedging_set        (Art. 277)
       → compute_addon_per_asset_class  (Art. 277a)
       → ↓ per-NS aggregation
netting_sets joined with per-NS v_net, c_net, addon_aggregate
       → compute_rc_unmargined     (Art. 275(1))         ← this page
       → compute_rc_margined       (Art. 275(2))         ← this page
       → compute_pfe               (Art. 278)
       → ead = α × (RC + PFE)      (Art. 274(2))

The orchestrator at engine/ccr/pipeline_adapter.py::ccr_rows_to_exposures currently routes only the unmargined branch — every netting set is treated as unmargined for the CCR-A1 / CCR-A2 acceptance scenarios. The margined function is implemented end-to-end and pinned by the unit-test suite, but is not yet routed through the orchestrator pending the margined-netting-set acceptance batch (CCR-A3, pending engine batch P8.35–P8.38).

Inputs¶

Outputs¶

The two columns coexist on the NS-grain frame so the orchestrator can coalesce them into a single effective RC without re-running either stage. The synthetic exposure row emitted by pipeline_adapter carries rc_unmargined on every row today (margined branch not yet wired); once margined routing lands, both columns travel through to the COREP-reconciliation surface.

References¶

• PRA PS1/26 Counterparty Credit Risk (CRR) Part — Article 275 — unmargined and margined replacement cost.
• PRA PS1/26 Counterparty Credit Risk (CRR) Part — Article 274(2) — consumes RC into the EAD formula α · (RC + PFE).
• PRA PS1/26 Counterparty Credit Risk (CRR) Part — Article 271(7) — definition of Net Independent Collateral Amount (NICA).
• PRA PS1/26 Counterparty Credit Risk (CRR) Part — Article 272(7)–(9) — definitions of margin agreement, margin period of risk, threshold, and minimum transfer amount.
• PRA PS1/26 Counterparty Credit Risk (CRR) Part — Article 285(2)–(5) — margined-NS gate and MPOR cascade; consumed by the margined maturity factor one stage upstream, not by RC itself (maturity-factor.md).
• BCBS CRE52.10–11 — Basel-level RC formulas (unmargined and margined).
• BCBS CRE50.11, CRE50.13, CRE50.16 — Basel-level definitions of margin agreement, MPOR, and NICA.
• src/rwa_calc/engine/ccr/rc.py — engine implementation of compute_rc_unmargined and compute_rc_margined.
• src/rwa_calc/data/schemas.py::NETTING_SET_SCHEMA — netting-set input columns (is_margined, margin_threshold, minimum_transfer_amount, nica).
• tests/unit/ccr/test_rc_margined.py — pinned numeric examples for the three margined arms plus the unmargined pass-through case.
• tests/fixtures/ccr/rc_margined_builder.py — fixture builder for NS_A / NS_B / NS_C / NS_D used by the worked examples above.
• Maturity factor — companion page for the Art. 285 MPOR cascade that feeds the margined MF.
• Adjusted notional — companion page for the per-asset-class d formulas that feed addon_aggregate → PFE.
• CCR index — full SA-CCR specification index and the per-stage status table.