3.1 This section sets out the PRA’s determination of when risk exposures arising from securities financing transactions (SFTs) are material and should be deemed covered transactions for the purpose of the own funds requirements for credit valuation adjustment (CVA) risk in accordance with the Credit Valuation Adjustment Risk Part of the PRA Rulebook.

3.2This paragraph has been deleted

3.3 SFTs generally need not be included within the scope of a firm’s CVA charge since they are typically accounted for based on their substance as secured lending arrangements. However, firms can be exposed to CVA risk as a result of SFT transactions. For example, the transfer of an asset and its forward sale (which underpin the legal form of the SFT) would be recognised as a derivative in the event of a subsequent deterioration in the creditworthiness of the counterparty to the SFT. The PRA considers that this CVA risk may be material where the following three conditions are met:

• the SFT’s counterparty has demonstrated a recent deterioration of its creditworthiness;

• a severe deterioration of the SFT’s counterparty’s creditworthiness would lead to a previous transfer being accounted for as a sale and therefore the recognition of a derivative that would be included in the scope of the CVA charge; and

• the SFT transactions do not benefit from adequate credit risk mitigation. An example would be where the SFTs are not included in a master netting agreement that has the effect of reducing exposure to credit risk.