Replacement Cost answers a simple question: if the counterparty defaults today, how much does the institution lose? It is the net mark-to-market value of all trades in the netting set after deducting collateral held. RC is always floored at zero — the institution cannot claim a negative loss.

Collateral reduces exposure in SA-CCR, but its recognised value is adjusted before it enters the Replacement Cost calculation. Three checks apply in sequence: Material Positive Correlation, FX mismatch, and haircut scaling. The result is a post-haircut collateral value computed separately for the margined and unmargined paths.

Collateral reduces exposure, but not at full face value. A haircut is applied to each collateral item to account for the risk that its value may fall before it can be liquidated. Regulatory tables provide base haircuts calibrated to a 10-day liquidation period. These are then scaled up using the square-root-of-time rule to match the actual liquidation period of the netting set — separately for the margined and unmargined cases.

The liquidation period is the number of days used to scale regulatory haircuts on collateral. It represents how long it would take to close out the trades and liquidate the collateral in a netting set following a counterparty default. A longer liquidation period means larger haircuts and therefore less collateral value recognised in the calculation.