1. Step (a):

   by attaching current market values to contracts (mark to market), the current replacement cost of all contracts with positive values is obtained.

2. Step (b):

   to obtain a figure for potential future credit exposure25, the notional principal amounts or underlying values are multiplied by the following percentages:

   TABLE 12627

   Residual maturity28	Interest-rate contracts	Contracts concerning foreign-exchange rates and gold	Contracts concerning equities	Contracts concerning precious metals except gold	Contracts concerning commodities other than precious metals
   One year or less	0 %	1 %	6 %	7 %	10 %
   Over one year, less than five years	0,5 %	5 %	8 %	7 %	12 %
   Over five years	1,5 %	7,5 %	10 %	8 %	15 %
   Contracts which do not fall within one of the five categories indicated in this table shall be treated as contracts concerning commodities other than precious metals.
   For contracts with multiple exchanges of principal, the percentages have to be multiplied by the number of remaining payments still to be made according to the contract.
   For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, the residual maturity would be equal to the time until the next reset date. In the case of interest-rate contracts that meet these criteria and have a remaining maturity of over one year, the percentage shall be no lower than 0,5 %.

   For the purpose of calculating the potential future exposure in accordance with step (b) the competent authorities may allow credit institutions until 31 December 2006 to apply the following percentages instead of those prescribed in Table 1 provided that the institutions make use of the option set out in Article 11a of Directive 93/6/EEC for contracts within the meaning of paragraph 3(b) and (c) of Annex IV:

   TABLE 1a

   Residual maturity	Precious metals (except gold)	Base metals	Agricultural products (softs)	Other, including energy products
   One year or less	2 %	2,5 %	3 %	4 %
   Over one year, less than five years	5 %	4 %	5 %	6 %
   Over five years	7,5 %	8 %	9 %	10 %

3. Step (c):

   the sum of current replacement cost and potential future credit exposure is multiplied by the risk weightings allocated to the relevant counterparties in Article 43.

1. Step (a):

   the notional principal amount of each instrument is multipliedby the percentages given below:

   TABLE 2

   Original maturity29	Interest-rate contracts	Contracts concerning foreign-exchange rates and gold
   One year or less	0,5 %	2 %
   More than one year but not exceeding two years	1 %	5 %
   Additional allowance for each additional year	1 %	3 %
   In the case of interest-rate contracts, credit institutions may, subject to the consent of their competent authorities, choose either original or residual maturity.

2. Step (b):

   the original exposure thus obtained is multiplied by the risk weightings allocated to the relevant counterparties in Article 43.

The single net amounts fixed by contracts for novation, rather than the gross amounts involved, may be weighted. Thus, in the application of method 1, in

• step (a): the current replacement cost, and in

• step (b): the notional principal amounts or underlying values

may be obtained taking account of the contract for novation. In the application of method 2, in step (a) the notional principal amount may be calculated taking account of the contract for novation; the percentages of Table 2 must apply.

In application of method 1:

• in step (a) the current replacement cost for the contracts included in a netting agreement may be obtained by taking account of the actual hypothetical net replacement cost which results from the agreement; in the case where netting leads to a net obligation for the credit institution calculating the net replacement cost, the current replacement cost is calculated as ‘0’,

• in step (b) the figure for potential future credit exposure for all contracts included in a netting agreement may be reduced according to the following equation:

  ${\mathrm{PCE}}_{\mathrm{red}}{\mathrm{=\; 0,4\; *\; PCE}}_{\mathrm{gross}}{\mathrm{+\; 0,6\; *\; NGR\; *\; PCE}}_{\mathrm{gross}}$

  where:

  — PCE_red

  the reduced figure for potential future credit exposure for all contracts with a given counterparty included in a legally valid bilateral netting agreement,

  — PCE_gross

  the sum of the figures for potential future credit exposure for all contracts with a given counterparty which are included in a legally valid bilateral netting agreement and are calculated by multiplying their notional principal amounts by the percentages set out in Table 1,

  — NGR

  ‘net-to-gross ratio’: at the discretion of the competent authorities either:

  1. (i)

     separate calculation: the quotient of the net replacement cost for all contracts included in a legally valid bilateral netting agreement with a given counterparty (numerator) and the gross replacement cost for all contracts included in a legally valid bilateral netting agreement with that counterparty (denominator), or

  2. (ii)

     aggregate calculation: the quotient of the sum of the net replacement cost calculated on a bilateral basis for all counterparties taking into account the contracts included in legally valid netting agreements (numerator) and the gross replacement cost for all contracts included in legally valid netting agreements (denominator).

  If Member States permit credit institutions a choice of methods, the method chosen is to be used consistently.

For the calculation of the potential future credit exposure according to the above formula perfectly matching contracts included in the netting agreement may be taken into account as a single contract with a notional principal equivalent to the net receipts. Perfectly matching contracts are forward foreign-exchange contracts or similar contracts in which a notional principal is equivalent to cash flows if the cash flows fall due on the same value date and fully or partly in the same currency.

In the application of method 2, in step (a)

• perfectly matching contracts included in the netting agreement may be taken into account as a single contract with a notional principal equivalent to the net receipts, the notional principal amounts are multiplied by the percentages given in Table 2,

• for all other contracts included in a netting agreement, the percentages applicable may be reduced as indicated in Table 3: