Prudential Standard APS Capital Adequacy: Standardised Approach to Credit Risk. I, John Francis Laker, delegate of APRA:. Standardised Approach to Credit Risk made under that Determination; and. Standardised Approach to Credit Risk in the form set out in the attached Schedule, which applies to ADIs and authorised NOHCs to the extent provided in paragraphs 2 to 4 of the prudential standard.

This instrument takes effect on 1 January APRA means the Australian Prudential Regulation Authority. Standardised Approach to Credit Risk comprises the 70 pages commencing on the following page.

Prudential Standard APS Objective and key requirements of this Prudential Standard. This Prudential Standard requires an authorised deposit-taking institution to hold sufficient regulatory capital against credit risk exposures. The key requirements of this Prudential Standard are that an authorised deposit-taking institution:. Risk-weights are based on credit rating grades or fixed weights broadly aligned with the likelihood of counterparty default; and. Use of ratings of external credit assessment institutions.

Attachment A - Risk-weights for on-balance sheet assets. Attachment B - Credit equivalent amounts for off-balance sheet exposures. Attachment D - Residential mortgages. Attachment E - Unsettled and failed transactions.

Attachment F - Short-term and long-term credit ratings. Attachment G - Guarantees. Attachment H - Simple and comprehensive approaches to the recognition of collateral Attachment I - Credit derivatives in the banking book.

Attachment J - Netting. This Prudential Standard is made under section 11AF of the Banking Act the Banking Act. This Prudential Standard applies to all authorised deposit-taking institutions ADIs with the exception of: Internal Ratings-based Approach to Credit Risk APS A reference to an ADI in this Prudential Standard, unless otherwise indicated, is a reference to: If an ADI to which this Prudential Standard applies is: Terms that are defined in Prudential Standard APS Definitions appear in bold the first time they are used in this prudential standard.

This Prudential Standard, subject to paragraphs 7 and 8applies to all on-balance sheet assets held by an ADI and all its off-balance sheet exposures. The following items are excluded from the scope of this Prudential Standard: Measurement of Capital APS. Items subject to capital requirements under Prudential Standard APS Capital Adequacy: Market Risk APS are excluded for the purpose of calculating risk-weighted assets for credit risk under this Prudential Standard, but not for the purpose of calculating counterparty credit risk capital requirements refer to Attachment C.

The following definitions are used in this Prudential Standard: A CCP becomes counterparty to trades with market participants through novation, an open offer system, or another legally binding arrangement. For the purposes of the capital framework, a CCP is a financial institution. An economic loss would occur if the transactions or portfolio of transactions with the counterparty has a positive economic value at the time of default.

A deliverable obligation is relevant for credit derivatives that are to be physically settled. Initial margin does not include contributions to a CCP for mutualised loss-sharing arrangements.

The result is to legally substitute a single net amount for the previous gross obligations. Loans are to be treated as an exposure and deposits with a lending ADI that are subject to on-balance sheet netting are to be treated as cash collateral as defined in Attachment H.

Payments netting is not recognised for credit risk mitigation CRM purposes under this Prudential Standard. A reference obligation is relevant for obligations that are to be cash settled on a par-less-recovery basis [1]. An ADI must apply risk-weights to its on-balance sheet assets and off-balance sheet exposures in accordance with the risk classes set out in this Prudential Standard for Regulatory Capital purposes.

Risk-weights are based on credit rating grades or fixed risk-weights as determined by this Prudential Standard and are broadly aligned with the likelihood of counterparty default.

An ADI must, where appropriate, use the ratings of ECAIs to determine the credit rating grades of an exposure, as set out in Attachment A and Attachment F. An ADI may, subject to meeting the requirements of this Prudential Standard, use certain CRM techniques in determining the capital requirement for a transaction or exposure.

The CRM techniques allowed in this Prudential Standard are the recognition of eligible collateral, lenders mortgage insurance, guarantees and the use of credit derivatives and netting. APRA may, in writing, determine the risk-weighted amount of a particular on-balance sheet asset or off-balance sheet exposure of an ADI if APRA considers that the ADI has not risk-weighted the exposure appropriately. The risk-weighted amount of an on-balance sheet asset is determined by multiplying its current book value including accrued interest or revaluations, and net of any specific provision or associated depreciation by the relevant risk-weight in Attachment A.

Off-balance sheet exposures [2]. The risk-weighted amount of an off-balance sheet transaction that gives rise to credit exposure must be calculated by the following two-step process:. Where the transaction is secured by eligible collateral or there is an eligible guarantee, credit derivative or netting arrangement in place, the CRM techniques detailed in Attachments G, H, I and J may be used to reduce the capital requirement of the exposure.

An ADI must include all market-related off-balance sheet transactions including on-balance sheet unrealised gains on market-related off-balance sheet transactions held in the banking and trading books in calculating its risk-weighted credit exposures. Refer to Attachment C for the capital treatment for counterparty credit risk.

An ADI may only use the solicited ratings [3] of ECAIs to determine the credit rating grades that correspond to the risk-weights for counterparties and exposures. Ratings must be used consistently for each type of claim. An ADI may not use credit ratings for one entity within a corporate group to determine the risk-weight for other unrated entities within the same group.

An ADI may not recognise additional CRM on claims where the risk-weight is mapped from an ECAI issue-specific rating and that rating already reflects CRM. For an ADI to obtain capital relief for use of a CRM technique, all documentation must be binding on all parties and legally enforceable in all relevant jurisdictions.

Structured Product Review | Structured Product List

The ADI must have undertaken sufficient legal review to be satisfied of the legal enforceability of the technique and its documentation. The ADI will be expected to undertake periodic reviews to confirm the ongoing enforceability of the technique and its documentation.

An ADI must have policies and procedures to manage the risks associated with its CRM techniques. Where multiple CRM techniques cover a single exposure, an ADI will be required to divide the exposure into portions covered by each CRM technique. The risk-weighted assets of each portion must be calculated, and then totalled.

Credit rating grade [4]. Class I - Cash items. All Australian dollar balances and other Australian dollar claims on the Reserve Bank of Australia. Gold bullion held on an unallocated basis by another party, though backed by gold liabilities, is weighted as a claim on the counterparty unless a lower risk-weight is approved in writing by APRA.

Cash items in the process of collection e. Class II - Claims on Australian and foreign governments and central banks. All Australian dollar claims on the Australian Government. Claims on overseas central governments and state or regional governments, State or Territory Governments in Australia including State or Territory central borrowing authoritiescentral banks including the Reserve Bank of Australia and foreign currency claims on the Australian Government refer to Attachment F.

Claims on local governments and non-commercial public sector entities in Australia and overseas refer to Attachment F. Class III - Claims on international banking agencies, regional development banks, ADIs and overseas banks.

Claims on international banking agencies and multilateral regional development banks refer to Attachment F [5]. Claims other than equity [6] on ADIs and overseas banks, being claims with an original maturity of three months or less refer to Attachment F.

Claims other than equity [7] on ADIs and overseas banks with an original maturity of more than three months refer to Attachment F. Class IV - Claims secured against eligible residential mortgages. Refer to the risk-weighting schedule in Attachment D.

Class V - Unsettled and failed transactions. Refer to Attachment E. Class VI - Past due claims. Class VII — Other assets and claims. Claims other than equity [10] on Australian and international corporate counterparties including insurance and securities companies and commercial public sector entities refer to Attachment F. Alternatively, if an ADI has obtained approval in writing from APRA, it may risk-weight all claims other than equity held on the banking book on Australian and international corporate counterparties including insurance and securities companies and commercial public sector entities at per cent [11].

If an ADI has obtained approval in writing to use a per cent risk-weight for these claims, it must do so in a consistent manner and not use any credit ratings for any of these claims. All claims other than equity [12] on private sector counterparties other than ADIs, overseas banks and corporate counterparties [13].

Investments in premises, plant and equipment and all other fixed assets. Claims on all fixed assets under operating leases. Equity exposures as defined in paragraphs 49 to 52 of APS that are not deducted from capital [14] and that are listed on a recognised exchange.

Equity exposures as defined in paragraphs 49 to 52 of APS that are not deducted from capital [15] and that are not listed on a recognised exchange. Margin lending against listed instruments [16] on recognised exchanges that is not deducted from capital as required under APS All other assets and claims not specified elsewhere.

For the purposes of calculating counterparty credit risk capital requirements, an ADI must calculate the CEA of its market-related contracts. Where these contracts are not covered by an eligible bilateral netting agreement as set out in Attachment J, the ADI must calculate the CEA by using the current exposure method; this method is the sum of current credit exposure and potential future credit exposure the add-on of these contracts.

Current credit exposure is defined as the sum of the positive mark-to-market value or replacement cost of these contracts. An ADI must, for the purpose of calculating its potential future credit exposure for each transaction, multiply the notional principal amount of each of these transactions by the relevant CCF specified in Table 1.

Precious metal contracts other than gold. Other commodity contracts other than precious metals. The notional or nominal principal amount, or value, of a contract must be the reference amount used to calculate payment streams between counterparties to a contract. Potential future credit exposure must be based on effective rather than apparent notional amounts. In the event that the stated notional amount of a contract is leveraged or enhanced by the structure of the transaction, an ADI must use the effective notional amount when calculating potential future credit exposure.

For contracts that are structured to settle outstanding exposures following specified payment dates where the terms are reset such that the mark-to-market value of the contract is zero on these specified dates, the residual maturity must be set equal to the time until the next reset date.

In the case of interest rate contracts with these features and a remaining maturity of more than one year, the CCF to be applied is subject to a floor of 0. For contracts with multiple exchanges of principal, the CCFs must be multiplied by the number of remaining payments i. An ADI may use all instruments included in its trading book as eligible collateral for securities financing transactions included in the trading book.

Instruments that would otherwise not be treated as eligible collateral for the purposes of this Prudential Standard are subject to a haircut at the level applicable to non-main index equities listed on recognised exchanges. Where an ADI uses the own-estimates approach to haircutting, haircuts must be calculated for each individual security that counts as eligible collateral in the trading book but not the banking book.

An ADI must calculate the counterparty credit risk capital requirement for single name credit default swaps and single name total-rate-of-return swaps in the trading book using the potential future exposure CCFs in Table 2.

Potential future exposure credit conversion factors. Qualifying [18] reference obligation. Qualifying [19] reference obligation. An ADI, in calculating the counterparty credit risk capital requirement for an nth-to-default credit derivative transaction such as a first-to-default transactionmust use the add-on determined by the nth-lowest credit quality underlying asset in the basket.

An ADI must not enter into contracts at off-market prices other than historical rate rollovers on foreign exchange contracts. Transactions outside of the agreed framework must be discussed with APRA to determine their appropriate treatment.

Introduction To Counterparty Risk

With the exception of a default fund guarantee in relation to clearing through central counterparties, the CEA for a non-market-related off-balance sheet transaction is calculated by multiplying the contracted amount of the transaction by the relevant CCF specified in Table 3.

Lending of securities or posting of securities as collateral [20]. Assets sold with recourse. Partly paid shares and securities. Placements of forward deposits. Note issuance and underwriting facilities. Irrevocable standby commitments provided under APRA-approved industry support arrangements. Where a non-market-related off-balance sheet transaction is an undrawn or partially undrawn facility, in calculating the CEA, the ADI must use the amount of undrawn commitment or the maximum unused portion of the commitment available to be drawn during the remaining period to maturity.

Irrevocable commitments to provide off-balance sheet facilities may be assigned the lower of the two applicable CCFs. For capital adequacy purposes, an ADI must include all commitments in its capital calculation regardless of whether or not they contain material adverse change clauses or any other provisions that are intended to relieve the ADI of its obligations under certain conditions.

The capital treatment for a default fund guarantee provided to a central counterparty CCP is provided in paragraphs 27 to 30 of Attachment C. CCR capital requirements apply to off-balance sheet contracts only, including OTC derivatives transactions, exchange-traded derivatives and secured financing transactions SFTs.

For bilateral trades with a counterparty that is not recognised as a qualifying central counterparty QCCPthe CCR capital requirement comprises the counterparty credit default risk capital requirement and the credit value adjustment CVA risk capital charge. For centrally cleared trades with a QCCP, the CCR capital requirement comprises the default fund charge for an ADI accessing the QCCP directly as a clearing memberand a lower risk-weighted counterparty credit default risk charge on trade exposures including posted collateral.

Trades cleared through a non-qualifying CCP, and client trades that do not meet the requirements set out in paragraph 25 of this Attachment, must be treated on a bilateral basis according to paragraph 2 of this Attachment. An ADI, other than an ADI with either funded or unfunded default fund contributions to a central counterparty, may apply to APRA for permission to calculate its CVA risk capital requirement using a simplified approach, instead of the approach set out in paragraphs 8 to 13 of this Attachment.

The risk-weighted assets RWA requirement for counterparty credit default risk for an off-balance sheet transaction that gives rise to credit exposure must be calculated by the following three-step process:. For OTC derivatives, the CEA is calculated on a counterparty level and is then adjusted by subtracting the credit value adjustment CVA amount for that counterparty, which has already been recognised by the ADI as an incurred write-down i. The ADI must calculate the incurred CVA loss according to its own valuation methodology.

The CVA must not include any debit value adjustment. No such adjustment is required for SFT transactions. The counterparty-level CEA for bilateral OTC derivatives and exchange-traded derivatives is calculated by adding together the following: The CEA amount for securities financing transactions SFTs is calculated by adding together the following: An ADI must calculate a CVA risk capital charge to cover the risk of mark-to-market losses on the expected CCR CVA loss to OTC derivatives.

An ADI is not required to include in its CVA risk capital charge: For the purposes of calculating the CVA risk capital charge, an ADI must determine t he weight for a counterparty or credit index by its credit rating grade according to Table 4 below. CVA risk capital formula weights. Long term credit rating grade. An ADI may include eligible CVA hedges in the calculation of the CVA risk capital charge as set out in paragraph 9 c of this Attachment subject to the following conditions:. A tranched or nth-to-default CDS may not be treated as an eligible CVA hedge; and.

If restructuring is not included in the CDS contract then the proportion of that CDS hedge that may be treated as an eligible CVA hedge is as in accordance with the rules regarding specific risk offsetting set out in Attachment D to APS This section outlines the various types of exposures to central counterparties arising from OTC derivatives, exchanged-traded derivatives transactions and SFTs, and the capital and risk management practice requirements applied to them.

Exposures arising from the settlement of cash transactions equities, fixed income, spot FX and spot commodities are not subject to this treatment. An ADI that is either a clearing member or a client of a clearing member for an exchange-traded derivatives transaction for which the clearing member-to-client leg is conducted under a bilateral agreement, must treat the transaction as an OTC derivative for the purpose of calculating capital requirements.

APRA may require an ADI to hold additional capital against its exposures to a QCCP if an external assessment has found material shortcomings in the regulation of the QCCP and the CCP regulator has not since publicly addressed the issues identified. An ADI must monitor and report to senior management and the appropriate committee of the Board on a regular basis all of its exposures to CCPs, including exposures arising from trading through a CCP and exposures arising from CCP membership obligations such as default fund contributions.

An ADI acting as a clearing member to a QCCP i. An ADI acting as a client of a clearing member to a QCCP i. A clearing member ADI that guarantees the trade for its client must hold capital for all of the above exposures.

The risk-weight applied to the trade-related exposures depends on whether and to what extent the conditions set out in paragraph 25 of this Attachment are met. The risk-weights are summarised in paragraphs 23 to 26 of this Attachment. An ADI that has trade exposures to a QCCP must, as part of its capital management planning, assess whether the level of capital held against trade exposures to a QCCP adequately relates to the inherent risks of those transactions.

An ADI that is a clearing member must, as part of its capital management planning, assess through appropriate scenario analysis and stress testing whether the level of capital held against exposures to a QCCP adequately relates to the inherent risks of those transactions. Within three months of a central counterparty ceasing to qualify as a QCCP, an ADI must apply risk-weights for the bilateral counterparties to its trades with the central counterparty.

Until that time, unless APRA otherwise requires, the trades with a former QCCP may be treated as though they continue to be with a QCCP. Trade exposure capital calculations for clearing members.

An ADI that is acting as a clearing member of a QCCP, for its own purposes, must apply a risk-weight of two per cent to its trade exposures to the QCCP [22]calculated in respect of its OTC derivatives, exchange-traded derivatives and SFT transactions with the QCCP.

If an ADI cannot demonstrate that the netting agreements meet the rules set out in Attachment J, it must treat each single transaction as a netting set of its own for the calculation of trade exposure. For capital purposes, a clearing member ADI must treat its CEA to its clients as bilateral trades, and calculate a CVA risk capital charge. However, to recognise the shorter close-out period for cleared transactions, the clearing member ADI may apply a multiplication factor to its CEA to these exposures according to the following scale:.

Margin period of risk [24]. Trade exposure capital calculations for clients of clearing members. Additionally, upon request, the client ADI must provide to APRA an independent, legal opinion, in writing, that proves the validity of this condition in the presence of any legal challenges under relevant laws. Additionally, on request, the client ADI must provide to APRA an independent legal opinion, in writing, that proves the validity of these conditions in the presence of any legal challenges under relevant laws; and.

In such circumstances, the client positions and collateral with the QCCP will be transferred at market value unless the client ADI requests closing out the position at market value. In any other cases, the ADI must, for capital purposes, treat its exposure to the clearing member as bilateral trades, including the calculation of the CVA risk capital charge. Capital treatment of posted collateral. An ADI either as a clearing member or a client of a clearing member that has posted collateral must risk-weight those assets in accordance with the risk-weights that otherwise apply under this Prudential Standard or APS as applicable, if the collateral is held in the banking book, or under APSif the collateral is held in the trading book, regardless of the fact that such assets have been posted as collateral.

In addition, an ADI must apply risk-weights to posted collateral reflecting the circumstances under which the collateral is held and the creditworthiness of the entity holding the collateral. Capital requirements for default fund exposure to a QCCP.

Option (finance) - Wikipedia

Where a default fund is shared between products or types of businesses with settlement risk only and products or types of business that give rise to counterparty credit risk, all of the default fund contributions will receive the risk-weight determined according to the formula set out in paragraph 28 of this Attachment, without apportioning between different classes or types of products.

However, where the default fund contributions from clearing members are segregated by product types and only accessible for specific product types, the capital requirements for those default fund exposures determined according to the formulae and methodology set out in paragraph 28 of this Attachment must be calculated for each specific product giving rise to counterparty credit risk. An ADI must risk-weight its trade exposures to a non-qualifying CCP in accordance with Attachment A [25]and calculate a CVA risk capital charge in respect of those exposures.

An ADI that is a clearing member of a non-qualifying CCP must calculate a capital requirement in respect of its default fund contributions to that CCP according to the following formula: An ADI must at all times have unequivocal enforcement rights over a mortgaged residential property including a power of sale and a right to possession in the event of default by the borrower.

An ADI that outsources any part of its credit assessment process to a third party such as a mortgage originator or broker must ensure that the arrangement complies with Prudential Standard APS Outsourcing [26]. Loans covered by security provided by third parties, where the relevant mortgage is unenforceable under the National Credit Codeare risk-weighted at per cent in the absence of any eligible collateral and guarantees.

Subject to satisfying other criteria set out in this Attachment, loans for purposes other than housing must be secured against mortgages over existing residential property to receive a risk-weight of less than per cent. Loans, for whatever purpose, secured against speculative residential construction or property development do not qualify for a risk-weight of less than per cent. In order to determine the appropriate risk-weight for a residential mortgage, an ADI must classify the loan as either a standard or non-standard eligible mortgage refer to paragraphs 6 and 7 of this Attachment and determine the ratio of the outstanding amount refer to paragraphs 8 and 9 of this Attachment of the loan to the value of the residential property or properties that secure the exposure loan-to-valuation ratio, LVR.

For this purpose, the valuation may be based on the valuation at origination or, where relevant, on a subsequent formal revaluation by an independent accredited valuer. The determination of the appropriate risk-weight is also dependent upon mortgage insurance provided by an acceptable lenders mortgage insurer LMI refer to paragraph 14 of this Attachment. For this purpose, lenders mortgage insurance must provide cover for all losses up to at least 40 per cent of the higher of the original loan amount and outstanding loan amount if higher than the original loan amount.

Risk-weights are as detailed in Table 4. Risk-weights for residential mortgages. Risk-weight no mortgage insurance. A standard eligible mortgage is defined as a residential mortgage where the ADI has: The ADI must also revalue any property offered as security for such loans when it becomes aware of a material change in the market value of property in an area or region. Loans that are secured by residential properties but fail to meet the criteria detailed in paragraph 6 of this Attachment must be classified as non-standard eligible mortgages.

Such loans may be reclassified as standard loans where the borrowers have substantially met their contractual loan repayments to the ADI continuously over the previous 36 months. For the purposes of paragraph 5 of this Attachment, the outstanding amount of a loan must be calculated as the balance of all claims on the borrower that are secured against the mortgaged residential property. This includes accrued interest and fees, as well as the gross value of any undrawn limits on commitments that cannot be cancelled at any time without notice.

If a loan is also secured against a second mortgage, the outstanding amount of the loan must be calculated as the sum of all claims on the borrower secured by both the first and second mortgages over the same residential property for the purpose of assessing the LVR. If a loan is secured by more than one property, the LVR must be determined on the basis of the outstanding amount of all claims on the borrower that are secured against the mortgaged residential properties to the aggregate value of the mortgaged residential properties.

An ADI may, in risk-weighting a loan secured by a residential mortgage, make allowance for eligible collateral and guarantees. The recognition of eligible collateral and guarantees forex subreddit detailed in Attachment G and Attachment H.

A mortgage offset or other similar account may only be netted off against the outstanding amount of the loan where the arrangement meets the requirements for eligible cash collateral as set out in Attachment H. Risk-weights for past due eligible residential mortgages. Where the claim is not mortgage insured with an acceptable LMI [27]. To qualify for a risk-weight of less than per cent, any loans secured by a second mortgage over residential property must, in addition to the requirements in this Attachment, satisfy the following conditions: To qualify as a mortgage insured by an acceptable LMI: The risk-weights for delivery-versus-payment DvP [32] how to make money writing online ehow, [33] transactions with a normal settlement period that remain unsettled after their due delivery dates are detailed in Table 7 [34].

The amount that must be multiplied by the relevant risk-weight is the positive current exposure amount. Number of business days after due settlement date.

An ADI must hold Regulatory Capital against a non-DvP transaction [35] with a normal settlement period where: The capital requirement for a non-DvP transaction referred to in paragraph 2 of this Attachment is calculated as follows: Where a non-DvP transaction is required to be treated as an exposure refer to paragraph 3 a of this Attachment an ADI may apply the relevant risk-weight as detailed in Attachment A.

Alternatively, where exposures are not material, the ADI may apply a per cent risk-weight provided that all such exposures are risk-weighted consistently. For capital adequacy purposes, an ADI may only use an ECAI rating that takes into account all amounts, both principal and interest, owed to it.

Where a counterparty has multiple ECAI general issuer ratings or where an issue has multiple ECAI issue-specific ratings, and these ratings correspond to multiple credit penny plan stock trading platforms grades, an ADI must apply the following principles for capital requirement purposes:.

An ADI must not use an ECAI rating that refers to a claim buyback of shares in cyprus in a particular currency to derive the credit rating grade for another claim on the same counterparty if that claim is denominated in another currency.

Short-term ratings by ECAIs must only be used for short-term claims against ADIs, overseas banks and corporate counterparties. If there is an ECAI issue-specific short-term rating in respect of a claim, an ADI must use this rating to determine the credit rating grade of the claim. However, this ECAI issue-specific short-term rating cannot be used to risk-weight any other claim. The risk-weights in Table 8 apply to ECAI issue-specific short-term ratings:. Risk-weights for short-term claims.

Credit rating grade short-term claims on corporates, ADIs and overseas banks. Notwithstanding paragraph 6 of this Attachment, where the counterparty has a short-term claim that attracts a 50 per cent risk-weight, unrated short-term claims on the same counterparty cannot be risk-weighted at less than per cent. Notwithstanding paragraph 6 of this Attachment, where the counterparty has a short-term claim that attracts a risk-weight of per cent, all unrated claims short-term and long-term on the same counterparty must be risk-weighted at not less than per cent.

Where there is no ECAI issue-specific short-term rating, the general preferential treatment for short-term claims detailed in item 9 of Attachment A may apply to all claims on ADIs and overseas banks that have an original maturity of up to three months. Where there is an ECAI issue-specific short-term rating on a claim held by an ADI, and that rating corresponds to a credit rating grade that is lower than or identical to that derived from the general treatment detailed in item 9 of Attachment A, the ECAI issue-specific short-term rating may be used for the specific claim.

Where there is an ECAI issue-specific rating for a short-term claim on an ADI or overseas bank and that rating corresponds to a higher credit rating grade than that which would be applied by item 9 of Attachment A, the general short-term preferential treatment cannot be used for any short-term claim on the counterparty.

All unrated short-term claims on that counterparty would be assigned the same credit rating grade as that implied by the ECAI issue-specific short-term rating. Recognised long-term ratings and equivalent credit work from home packing products nottingham grades.

Recognised short-term ratings and equivalent credit rating grades. Where a claim on a counterparty is secured by a guarantee from an eligible guarantor refer to paragraph 3 of this Attachmentthe portion of the claim that is supported by the guarantee may be weighted according to the risk-weight appropriate to the guarantor. The unsecured portion of the claim must be weighted according to the risk-weight applicable to the original counterparty refer to Attachment A option trading course in malaysia. A guarantee must represent a direct claim on the guarantor with the extent of the cover being clearly defined and incontrovertible.

A guarantee must be irrevocable such that there must be no clause in the guarantee that would allow the guarantor to cancel unilaterally the cover of the guarantee or that would increase the effective cost of cover as a result of deteriorating credit quality in the guaranteed exposure [37].

A guarantee must also be unconditional; there must be no clause in the guarantee outside the direct control of an ADI that could prevent the guarantor from being obliged to pay out in a timely manner in the event that the original counterparty fails to make the due payment s.

Subject to the conditions in this Prudential Standard, the following entities are recognised as eligible guarantors: This would include guarantees provided by parent, subsidiary and affiliate companies where they have a lower risk-weight than the obligor. Where credit protection is provided to a securitisation exposure, other entities with a credit rating grade of three or better and that were externally rated two or better at the time the credit protection was provided.

This also includes guarantees provided by parent, subsidiary and affiliated companies where they have a lower risk-weight than the obligor. A claim that is indirectly guaranteed by the Australian Government i.

Letters of comfort do not qualify as eligible guarantees for CRM purposes. In addition to the requirements detailed in paragraph 21 of this Prudential Standard and paragraph 2 of this Attachment, in order for a guarantee to be recognised the following conditions must be satisfied:.

The ADI must have the right to receive payment from the guarantor without first having to take legal action in order to pursue the counterparty for payment. Where a guarantee covers payment of principal only, interest and other amounts not covered by the guarantee must be treated as uncovered.

Where a guarantee provides for a materiality threshold on payments below which no payment will be made in the event of loss, this is equivalent to a retained first loss position and must be deducted from Common Equity Tier 1 Capital refer to APS This deduction will be capped at the amount of capital the ADI would be required to hold against the full value of the exposure. Where there is partial coverage of an exposure by a guarantee and the covered and uncovered portions are of equal seniority i.

This means that the covered portion of the exposure will receive the treatment applicable to eligible guarantees with the remainder treated as uncovered.

Where there is partial coverage of an exposure by a guarantee and there is a difference in seniority between the covered and uncovered portions of covered calls stock options exposure, then the arrangement is considered to be a synthetic securitisation and is subject to APS A currency mismatch exists where a guarantee is denominated in a different currency from that in which the exposure is denominated.

In this case the amount of the exposure deemed to be protected G a must be reduced by the application of a haircut H f x as follows: The H fx haircut detailed in paragraph 10 of this Attachment is the same as that applied to collateral in the comprehensive approach refer to Attachment H.

If an ADI uses the comprehensive approach and it uses the standard haircuts, the haircut to be applied for a currency mismatch will be eight per cent assuming daily mark-to-market. If the ADI uses its own-estimate haircuts, the estimates for a currency mismatch must be based on a business day holding period.

Where the ADI uses the simple approach it may use the standard haircut of eight per cent for the currency mismatch assuming daily mark-to-market or own-estimate haircuts based on a business day holding period. Using the formula detailed in paragraph 40 of Attachment H, haircuts must be adjusted depending on the actual frequency of revaluation of the currency mismatch. A maturity mismatch exists where the residual maturity of a guarantee is less than the maturity of the exposure covered by the guarantee.

Where there is a maturity mismatch, a guarantee may only be recognised for CRM purposes where the original maturity of the guarantee is greater than or equal to 12 months. Guarantees with an original maturity of less than 12 months will not be eligible unless the maturity of the guarantee matches the maturity of the underlying exposure.

In all cases where there is a maturity mismatch, a guarantee will not be eligible where it mbfx system trading rev2011 upgrade.rar a residual maturity of three months or less. Where credit protection provided by a single guarantor has different maturities, an ADI must divide the exposure into separate covered portions for risk-weighting purposes.

For capital adequacy purposes, an ADI must take the effective maturity of the underlying articles on binary option brokers in uk to be the longest possible remaining time before the counterparty is scheduled to fulfil its obligation. In the case of a guarantee, an ADI must take into account any clause within the documentation supporting the transaction that may reduce its maturity so that the shortest possible effective maturity is used.

For this purpose, the ADI must consider clauses that give the guarantor the capacity to reduce the effective maturity of the guarantee and those that give the ADI, at origination of the guarantee, a discretion and positive incentive to reduce its effective maturity. Where there is a maturity mismatch between a guarantee and the covered exposure, for capital adequacy purposes an ADI must apply the following adjustment:. A capital requirement will be applied to an ADI on both sides of a collateralised transaction.

An ADI must select either the simple or the comprehensive approach and apply that approach to all its on-balance sheet assets and off-balance sheet exposures on the banking book that are secured by eligible collateral.

For trading book exposures, an ADI must use the comprehensive approach to the recognition of eligible collateral where 3 little pigs forex strategy is pledged against counterparty credit risk exposure. An ADI must ensure that sufficient resources are devoted to the orderly operation of margin agreements with OTC derivative 20 minute binary options strategy securities-financing counterparties, as measured by the timeliness and accuracy of its outgoing calls and response time to incoming calls.

An ADI must have collateral management policies in place to control, monitor and report:. Subject to the conditions set out in this Attachment, the following forms of collateral counterparty risk call option be recognised as eligible collateral: Commonwealth, State and Territory governments in Australia including State and Territory central borrowing authorities ; central, state and regional governments in other countries; the Reserve Bank of Australia; central banks in other countries; and the international banking agencies and multilateral regional development banks that qualify for a zero per cent risk-weight as detailed in Attachment A; or.

This is subject to the condition that all rated issues of the same seniority by the issuing ADI or overseas bank have a long-term or short-term credit rating grade of at least three and the ADI holding the security has no information suggesting that the security justifies a rating below this level; and. Claims secured or collateralised in other ways e. Re-securitisations, irrespective of credit ratings, are not eligible financial collateral.

In the case of cash collateral, this home for sale stockton ca zip code 95205 include a contractual right of set-off on how much is one standard lot in forex balances, but a common law right of set-off is insufficient on its own to satisfy this condition.

The legal mechanism by which collateral is pledged or transferred must allow the ADI the right to liquidate or take legal possession of the collateral icsid arbitration as an option for international construction disputes a timely manner.

This would include clear and robust procedures for the timely liquidation of collateral to ensure that any legal conditions required for declaring the default of the counterparty and liquidating the collateral are observed and that the collateral can be liquidated promptly.

Collateral in the form of securities issued by the counterparty to the credit exposure or by any person or entity related or associated with the counterparty is considered to have a material positive correlation with the credit quality of the original counterparty and is therefore not eligible collateral. With the exception of cash collateral, [40] collateral must be held by an independent custodian, or an equally independent third party, or by the ADI.

Where the collateral is held by an independent custodian or an independent third party, the ADI must take reasonable steps to ensure that the custodian or third party segregates the collateral from its own assets.

Where collateral is lodged with forex css indicator overseas branch of the ADI, the branch holding the collateral must be bound to act in accordance with the agreement between the ADI and the party lodging the collateral. The lender must ensure that the arrangement will not fail for lack of consideration.

For the purposes of paragraph 5 a of this Attachment, cash ways recording artist make money may only attract a zero risk-weight where the cash collateral is lodged with the entity holding the credit exposure, except where: Where cash is lodged with a third party other than a central counterpartythe risk-weight of the counterparty with which the cash has been lodged must be used.

This applies to any cash collateral held by a custodian unless the collateral is in the form of notes and coins. Where cash collateral is lodged in the form of a certificate of deposit or bank bill issued by royal forex trading ceo lending ADI or any eligible entity described in paragraph 15 of this Attachment, the ADI must retain physical possession of the instrument until the collateral obligations are extinguished.

Under the simple approach, the secured portion of a claim may be weighted according to the risk-weight appropriate to the collateral. The risk-weight on the collateralised portion will be subject to a floor of 20 per cent except under the conditions specified in paragraphs 19 to 22 of this Attachment.

The unsecured portion of the claim must be weighted according to the risk-weight applicable to the original counterparty refer to Attachment A. For collateral to be eligible collateral in the simple approach, it must be chadstone shopping centre opening hours anzac day 2013 for at least the life of the exposure and be marked to market with a minimum frequency of six months.

The release of collateral by the lending ADI must be conditional upon the repayment of the exposure. Collateral may be reduced in proportion to the amount of the reduction in the exposure amount. Exceptions to the 20 per cent risk-weight floor.

A zero per cent risk-weight may be applied to collateralised transactions where the exposure and the collateral are denominated in the same currency and either: Securities financing transactions that fulfil the criteria in paragraph 41 of this Attachment may receive risk-weights of zero per cent. If the counterparty to the transaction is not a core market participant as defined in paragraph 42 of this Attachment, the transaction may be risk-weighted at 10 per cent.

OTC derivative transactions may be risk-weighted at zero per cent where:. OTC derivative transactions collateralised by sovereign or public sector entity securities that qualify for a zero per cent risk-weight as detailed in Attachment A may be risk-weighted at 10 per cent.

Under the comprehensive approach an ADI must calculate the adjusted exposure amount to a counterparty to take into account the effects of any eligible collateral as defined in paragraph 25 of this Free gann square of nine calculator for forex the ADI has taken.

Using haircuts, the ADI must adjust both the amount of the exposure volatility-adjusted exposure amount and the value of the collateral volatility-adjusted collateral amount in order to take into account possible future price fluctuations of the exposure or collateral [42]. The difference between the volatility-adjusted exposure amount and the volatility-adjusted collateral amount is the adjusted exposure amount.

The adjusted exposure amount must be weighted according to the risk-weight of the original counterparty refer to Attachment A to obtain the risk-weighted asset amount for the collateralised transaction. Forex hgi ADI may use standard haircuts or, subject to meeting the requirements in paragraphs 31 to 37 of this Attachment, its own-estimate haircuts using internal what is the stock market symbol for john deere of market price volatility.

Where the use of own-estimate haircuts is approved, the estimates must cover the full range of relevant instruments counterparty risk call option by the ADI excluding portfolios that APRA has determined in writing are immaterial. The ADI may use standard haircuts for those immaterial portfolios. Eligible collateral for the comprehensive approach. In addition to the items listed in paragraph 5 of this Attachment and subject to the conditions set out in this Attachment, the following forms of collateral are eligible collateral under the comprehensive approach: Calculation of Regulatory Capital for collateralised transactions.

For a collateralised transaction under the comprehensive approach, the adjusted exposure amount is calculated as follows: Where the collateral is a basket of assets, the haircut on the basket will be:. The standard exposure and collateral haircuts Hexpressed as percentages, are detailed in Table These standard haircuts assume daily mark-to-market, daily remargining and a business day holding period.

Credit rating grade for debt securities. Main index equities including convertible bonds and gold. Other equities including convertible bonds listed on a recognised exchange. Units in listed trusts. Highest haircut applicable stock option fmv any security in which the trust can invest.

Cash in the same currency [46]. For transactions in which an ADI lends non-eligible instruments, the haircut to be applied on the exposure is 25 per cent. If approved in writing by APRA, an ADI may calculate its own exposure and collateral haircuts H based on internal estimates of market price and foreign exchange volatilities.

Approval to calculate own haircuts will be conditional upon APRA being satisfied that the ADI meets the conditions set out in paragraphs 32 to 37 of this Attachment. For debt securities with a credit rating grade below three and eligible equities, haircuts must be calculated for each individual security. For debt securities with a long-term or short-term credit rating grade of three or better, an ADI may calculate a volatility estimate for a group or category of securities. In determining relevant categories, the ADI must take into account the type of issuer of the securities, the relevant rating, residual maturity and modified duration.

An 777 best binary options site to trade must estimate separately the volatility of the collateral instrument and any foreign exchange mismatch. That is, estimated volatilities must not include estimation of the correlation between unsecured exposures, collateral and exchange rates.

An ADI that calculates its own-estimate haircuts must follow the requirements for maturity mismatches as detailed in paragraphs 43 to 47 of this Attachment. Criteria for calculating own-estimate haircuts. In order to be approved by APRA, the model used by the ADI to estimate own-estimate haircuts must capture all material risks and satisfy the following quantitative criteria:. The ADI may use haircut numbers calculated according to shorter holding periods provided these estimates are adjusted by the formula in paragraph 40 of this Attachment.

Holding periods will be required to be adjusted upward in cases where the minimum holding period is inappropriate given the illiquid nature of the collateral. The ADI must also identify where historical data may understate potential volatility e. Such cases must be dealt with by subjecting the data to stress testing.

Where the ADI uses a weighting scheme or other methods for the historical observation period, the effective observation period must be at least one year i. Accordingly, haircuts must be calculated at least every three months. APRA may also require the ADI to calculate its haircuts using a shorter observation period where there is a significant upsurge in price volatility.

In addition to the quantitative criteria detailed in paragraph 36 of this Attachment, an ADI must satisfy the following qualitative criteria in order to obtain approval to use own-estimate haircuts:. Adjustments to standard and own-estimate haircuts for different holding periods and non-daily mark-to-market or remargining.

The minimum conditions and holding periods for securities financing transactions, other capital-market-driven transactions i. OTC derivative transactions and secured lending are detailed in Table Minimum conditions and holding periods. Other capital market transactions. Under the following circumstances, an ADI must apply a higher minimum holding period: An ADI must determine both liquidity and ease of replacement in the context of stressed market conditions. In determining the holding period, an ADI must consider whether trades or securities it holds as collateral are concentrated in a particular counterparty and, if that counterparty exited the market precipitously, whether the ADI would be able to replace its trades; and.

When remargining or revaluation is undertaken less frequently than the minimum specified in paragraph 38 of this Attachment, haircuts must be adjusted depending on the actual number of business days between remargining or revaluation using the formula detailed below.

This adjustment is required for both standard and own-estimate haircuts. Where a haircut is based on a holding period that is different to that detailed in paragraph 38 of this Attachment, the haircut must be adjusted using the formula detailed below. Conditions for a zero haircut.

For securities financing transactions, where the counterparty is a core market participant as defined in paragraph 42 of this Attachmentan ADI may apply a haircut of zero, where the following conditions are satisfied:.

For the purpose of applying a zero haircut, the following entities are considered core market participants: A maturity mismatch exists where the residual maturity of the term of lodgement of the collateral is less than the maturity of the exposure covered by the collateral. Where there is a maturity mismatch, the collateral may only be recognised for capital adequacy purposes where the original maturity of the term of lodgement of the collateral is greater than or equal to 12 months.

If the can i make cash deposits at wells fargo atm maturity of the term of lodgement of the collateral is less than 12 months, the collateral will not be eligible unless the term of lodgement matches the maturity of the underlying exposure. In all cases where there is a maturity mismatch, the collateral will not be eligible where it has a residual maturity of three months or less.

In the case of collateral, an ADI must take into account any clause within the documentation supporting the transaction that may reduce its term of lodgement so that the shortest possible effective maturity is used.

For this purpose, the ADI must consider clauses that give the protection provider the capacity to reduce the term of lodgement of the collateral and those that give the ADI at origination of the lodgement of collateral a discretion and positive incentive to reduce the term of lodgement. Adjustment for maturity mismatch. Where there is a maturity mismatch between collateral and the underlying exposure, for capital adequacy purposes an ADI must apply the following adjustment: For the purposes of this Prudential Standard, APRA recognises the following credit derivatives:.

An ADI that transacts more complex credit derivatives that fall outside the scope of this Attachment must, prior to execution of the relevant credit derivative contract, undertake a written assessment of the appropriate Regulatory Capital treatment for the transaction. The ADI must provide its written assessment to APRA upon request. The ADI must apply the treatment set out in its written assessment unless APRA determines in writing an alternative methodology for calculating the Regulatory Capital treatment.

Where an ADI buys credit protection through a credit derivative that forms part of a synthetic securitisation, this Attachment must be read in conjunction with APS Where credit derivatives are used for the purpose of acquiring credit risk exposure or selling credit protectionthis Attachment must be read in conjunction with Attachment A to Attachment F.

An ADI must include in its trading book total-rate-of-return swaps except those that have been transacted to hedge a banking book credit exposure in accordance with the requirements of this Attachment.

An ADI must include open short positions in credit derivatives in its trading book. APRA may grant an exception to this requirement in writing, on a one-off approval basis. An ADI must ensure that, for CRM purposes, there is sufficient credit risk transfer under each credit derivative contract. At a minimum, sufficient credit risk transfer requires that how much is one standard lot in forex events under the terms of the credit derivative contract cover:.

For this purpose, restructuring involves any forgiveness or postponement of principal, interest or fees that results in the charge-off, specific provision or other similar debit to the profit and loss account of the ADI and restructured items where facilities are rendered non-commercial because of concessional contractual changes related to financial difficulties of the customer as defined in Prudential Standard APS Credit Quality.

When restructuring of the underlying exposure is not included within the terms of the credit derivative contract but the requirements of paragraphs 7 a and 7 b of this Attachment are met, an ADI may recognise, for capital adequacy purposes, 60 per cent of the amount of the credit protection purchased refer to paragraph 15 of this Attachment where the amount of credit protection purchased is less than or equal to the amount of the underlying exposure.

If the amount of credit protection purchased exceeds that of the underlying exposure, the amount of eligible credit protection is capped at 60 per cent of the amount of the underlying exposure. An asset mismatch exists where an ADI has purchased credit protection using a credit derivative and the underlying exposure that is protected by the credit derivative is different to either: An asset mismatch for CRM purposes is allowed provided: In order to be recognised for CRM purposes, a credit derivative contract must not contain significant materiality thresholds below which credit protection is deemed not to be provided even if a credit event occurs.

Subject to paragraph 12 of this Attachment, when determining the amount of credit protection purchased using a credit derivative, an ADI must have regard to any materiality threshold specified in the credit derivative contract as equivalent to a retained first loss position and deduct this amount from Common Equity Tier 1 Capital refer to APS This deduction will be capped at the amount of capital the ADI would be required to hold against the full value of the underlying exposure.

When determining the amount of credit protection sold, an ADI must assume that any materiality thresholds included in the credit derivative contract do not reduce the acquired credit risk. In the case of a credit derivative, an ADI that purchases credit protection must take into account any clause within the credit derivative contract that may reduce its maturity so that the shortest possible effective maturity is used.

For this purpose, the ADI must consider clauses that give the protection seller the capacity to reduce the effective maturity of the credit derivative and those that give the ADI at origination of the credit derivative contract a discretion and positive incentive to reduce its effective maturity. Where a credit derivative is not prevented from terminating prior to expiration of any grace period required for a default on the underlying obligation to occur as a result of a failure to pay, the effective maturity of the credit derivative must be reduced by the amount of the grace period.

An ADI that sells credit protection using a credit derivative containing an embedded option to extend the term of the credit derivative must assume the longest possible effective maturity of the credit derivative. This is regardless of any contractual arrangements that may give either the protection buyer or the protection seller the incentive to reduce the contract term. Total-rate-of-return swaps may be recognised for CRM purposes where an ADI records any deterioration in the value of the underlying exposure such as by an addition to reserves in addition to recording the net payments received on the swap as net income.

With the exception of cash-funded credit-linked notes refer to paragraph 26 of this Attachmentwhere an underlying exposure is protected by a credit derivative from an eligible protection seller as defined in paragraph 21 of this Attachmentthe portion of the claim that is protected by the credit derivative or the amount of credit protection purchased as detailed in paragraph 15 of this Attachment may be weighted according to the risk-weight appropriate to the protection seller.

The unprotected portion of the underlying exposure must be weighted according to the risk-weight applicable to the original counterparty refer to Attachment A. In addition to the requirements in paragraph 21 of this Prudential Standard, in order for a credit derivative to be recognised the following conditions must be satisfied: It must be irrevocable; there must be no clause in the credit derivative contract that would allow the protection seller to cancel unilaterally the protection of the credit derivative.

This determination must not be the sole responsibility of the protection seller. An ADI buying the credit protection must have the right to inform the protection seller of the occurrence of a credit event.

Where there is partial coverage of an underlying exposure by a credit derivative and the protected and unprotected portions are of equal seniority i.

This means that the protected portion of the underlying exposure will receive the capital treatment applicable to eligible credit derivatives with the remainder treated as unprotected. Where there is partial coverage of an underlying exposure by a credit derivative and there is a difference in seniority between the protected and unprotected portions of the underlying exposure, then the arrangement is considered to be a synthetic securitisation and is subject to APS Where credit protection is purchased using a credit-default swap referenced to a single reference entity or a total-rate-of-return swap, that portion of the underlying exposure protected by the credit derivative or the amount of credit protection purchased as detailed in paragraph 15 of this Attachment may be weighted according to the risk-weight of the protection seller.

Where credit protection is purchased using a credit-linked note that is funded by cash, the note issued by an ADI must be treated for capital adequacy purposes as a cash-collateralised transaction, subject to the ADI satisfying the requirements for cash collateral as set out in Attachment H.

Where an ADI has purchased credit protection using a credit derivative that is referenced to more than one reference entity and that protection terminates after a credit event occurs on one of those entities i. In this case, that portion of the relevant exposure protected by the credit derivative or the amount of credit protection purchased as detailed in paragraph 15 of this Attachment may be weighted according to the risk-weight of the protection seller.

Where an ADI has purchased credit protection using a credit derivative that is referenced to more than one reference entity and that protection is triggered after a second credit event occurs on one of those entities i.

In this case, the treatment is the same as for first-to-default credit derivatives detailed in paragraph 27 of this Attachment. A maturity mismatch exists where the residual maturity of a credit derivative is less than the maturity of the underlying exposure. Where there is a maturity mismatch, a credit derivative may only be recognised for CRM purposes where the original maturity of the credit derivative is greater than or equal to 12 months.

Credit derivatives with an original maturity of less than 12 months will not be eligible unless the maturity of the credit derivative matches the maturity of the underlying exposure. In all cases where there is a maturity mismatch, a credit derivative will not be eligible where it has a residual maturity of three months or less. Where credit protection provided by a single protection seller has different maturities, an ADI must divide the exposure into separate covered portions for risk-weighting purposes.

Where there is a maturity mismatch between a credit derivative and the covered exposure, for capital adequacy purposes an ADI must apply the following adjustment: A currency mismatch exists where an ADI has purchased credit protection using a credit derivative and the credit derivative is denominated in a different currency from that in which the underlying exposure is denominated.

In this case the amount of the exposure deemed to be protected G a must be reduced by the application of an adjustment or haircut H fx as follows: The H fx haircut detailed in paragraph 33 of this Attachment is the same as that applied to collateral in the comprehensive approach refer to Attachment H. Where credit protection is sold via a credit-default swap referenced to a single reference entity, the ADI acquires an exposure to the credit risk of that entity.

The risk-weight that must be applied to the exposure is the risk-weight that would otherwise apply to the reference entity. The amount of the exposure is the maximum possible amount payable under the terms of the credit derivative contract if a credit event were to occur. Where credit protection is sold via a cash-funded credit-linked note, the ADI acquires an exposure to both the protection buyer and the entity where the cash collateral is held, with the amount of the exposure being the face value of the note.

To account for this exposure, the higher of the risk-weights applicable to the protection buyer and the entity where the cash collateral is held must be applied to the exposure. First-to-default basket credit derivatives. The exception to this requirement is where the first-to-default basket product has a credit rating grade from an ECAI.

Introduction to Over-the-Counter Options

In this case, the risk-weight applied will be that applicable to an equivalently rated securitisation tranche as detailed in APS Second-to-default basket credit derivatives. Where an ADI has sold credit protection using a second-to-default basket product, capital must be held against all the reference entities in the basket except for the entity that has the lowest corresponding risk-weighted exposure. The risk-weighted exposure arising from the credit derivative will be the sum of the individual risk-weighted exposures in the basket, excluding the lowest risk-weighted exposure amount, with the amount of capital held capped at the nominal amount of the protection provided by the credit derivative.

An ADI may, for capital adequacy purposes, net i.

This may include netting across different market-related product types, such as credit derivatives, to the extent that they are recognised as market-related transactions for capital adequacy purposes [52] ; and. An ADI may not, however, recognise payments netting. At Level 1, an ADI may only net transactions with related entities for CRM purposes if the transactions comply with the requirements in this Attachment.

At Level 2, an ADI may only net transactions undertaken by an individual member of a consolidated group for CRM purposes if the netting transactions comply with the requirements for netting as set out in this Attachment. An ADI that chooses to net transactions must continue to do so and must apply netting to all transactions in both the banking and trading book covered by a netting agreement.

An ADI may only net positions across the banking and trading book if the netted transactions:. An ADI that uses the close-out netting method must apply the two stages to this process:. The amounts due to both counterparties may be calculated in a single currency, or converted to a single currency, and then netted to a single payment due by one party to the other.

An ADI may only net, for capital adequacy purposes, claims and obligations with a counterparty that are covered by a legally binding eligible bilateral netting agreement including a master agreement netting agreementif the netting agreement:.

For forwards, swaps, options and similar derivative contracts, this will include the positive and negative mark-to-market values of individual transactions; and. An ADI that has obtained a positive legal opinion about the enforceability of a netting agreement must:. A legal opinion may be obtained on a group basis, and an individual member of the consolidated banking group may rely on the opinion for the purposes of this Attachment.

This is provided the ADI and the individual group member have satisfied themselves as to the application of the legal opinion to a netting agreement to which the group member is a counterparty. An ADI must not recognise a netting agreement, for capital adequacy purposes, if there is any doubt as to the enforceability of the netting agreement.

An ADI may rely on a general legal opinion about the enforceability of a netting agreement in a particular jurisdiction if the ADI has determined that the type of netting agreement involved is encompassed by the general legal opinion. An ADI must satisfy itself that a netting agreement and supporting general legal opinion are applicable to each counterparty, transaction and product type undertaken with the counterparty and in all jurisdictions where transactions are originated.

An ADI that applies netting for capital adequacy purposes must have a netting policy, approved by the Board of directors, that sets out its approach to netting and, as a minimum, addresses the requirements of this Attachment.

An ADI must have appropriate systems and controls to be able to monitor and report netted transactions on a gross and net basis. An ADI must have internal procedures to verify that a transaction that is netted is covered by an appropriate legal opinion which satisfies the requirements of this Attachment. An ADI must be able to demonstrate to APRA, if required, the satisfactory application of its netting policy, including netting systems and controls, and must provide details of the policy to APRA if requested to do so.

An ADI that nets transactions for capital adequacy purposes must maintain adequate records to support the application of the netting agreement. Excluded transactions must be reported on a gross basis.

The ADI may, however, continue to net other transactions that originate in jurisdictions where it has obtained a positive legal opinion about the enforceability of a netting agreement. An ADI must have procedures in place to monitor legal developments to ensure that netting agreements continue to be legally enforceable.

The ADI must update its legal opinion covering netting agreements, as necessary, to ensure the continued enforceability of a netting agreement. An ADI must report transactions on a gross basis, including for the purposes of measuring capital adequacy, if legal developments affect the enforceability of a netting agreement.

An ADI may take into account collateral and guarantees when calculating the risk-weight to be applied to the net sum calculated under a netting agreement. An ADI may only assign a risk-weight based on collateral and guarantees if the collateral or guarantees have been posted or are otherwise subject to a legally enforceable agreement and are legally available for all individual transactions making up the net sum of exposures involved. An ADI that has a netting agreement with a counterparty that contains provisions for applying collateral or guarantees to netted exposures outstanding between the ADI and the counterparty, must ensure that the provisions comply with the requirements set out in Attachment G and Attachment H with respect to eligible collateral and guarantees.

An ADI that satisfies the requirements of this Attachment for on-balance sheet netting must use the formula in paragraph 26 of Attachment H to calculate its net on-balance sheet exposure for capital adequacy purposes. The ADI must use a zero haircut in this formula except when a currency mismatch exists. The ADI must also apply a business day holding period when daily mark-to-market is conducted and satisfy paragraphs 29 and 43 to 47 of Attachment H.

An ADI that satisfies the requirements in this Attachment for netting may report, for capital adequacy purposes OTC derivative transactions in both the banking and trading book on a net basis and calculate the CEA of these transactions in accordance with the methodology outlined below.

An ADI must use the current exposure method to calculate the exposure for OTC derivative transactions that fall under netting agreements for capital adequacy purposes.

The CEA of transactions subject to a netting agreement must be calculated as the sum of the net current credit exposure NCCE i. Net current credit exposure. NCCE is the sum of all positive and negative mark-to-market values of all individual contracts covered by a netting agreement i.

If the net sum of individual mark-to-market values is positive, the NCCE is equal to that sum. If the sum of mark-to-market values is zero or negative, the NCCE is set equal to zero. Potential future credit exposure. An ADI must recognise the effects of netting agreements on its potential future credit exposure by applying the formula below to produce an adjusted add-on amount for potential future credit exposure on all contracts subject to the netting agreement.

Potential future credit exposure for each transaction is calculated by multiplying the notional principal amount of the transaction by the appropriate CCF for that transaction as set out in Attachment B. For the purpose of calculating PFCE gross, an ADI may treat matching transactions included in a netting agreement as a single transaction with a notional principal equivalent to the net receipts on those transactions.

For this purpose, matching transactions are defined as forward foreign exchange and other similar market-related transactions in which the notional principal is equivalent to cash flows, where the cash flows fall due on the same value date and are in the same currency. The net to gross ratio NGR is the ratio of the net current exposure of all transactions included in a netting agreement to the gross current credit exposure GCCE of these same transactions. GCCE is the sum of the mark-to-market values of all transactions covered by a netting agreement with a positive mark-to-market value with no offsetting against contracts with a negative mark-to-market value with the exception of transactions covered by paragraph 29 of this Attachment.

The NGR reflects the risk reducing portfolio effects of netted transactions with respect to current credit exposure. The NGR may be calculated using one of the following approaches:. NGR is defined as the NCCE of all transactions with an individual counterparty covered by a netting agreement i. NCCE individual divided by the GCCE of all the transactions with that counterparty covered by the netting agreement i. In calculating GCCE individualnegative mark-to-market values for individual transactions with the same counterparty may not be used to offset positive mark-to-market values for other transactions with the same counterparty; or.

The NGR is the ratio of the sum of all NCCEs of all transactions with all counterparties subject to any netting agreement i.

NCCE aggregate to the sum of all of the GCCEs for all transactions of all counterparties subject to any netting agreement i.

In calculating GCCE aggregatenegative mark-to-market values of transactions with one counterparty cannot be used to offset positive mark-to-market values of transactions with that counterparty or any other counterparty included in the aggregate calculations. An ADI must consistently use either the counterparty-by-counterparty approach or the aggregate approach to calculate the NGR and must inform APRA of which approach it intends to use. With respect to the netted exposures determined in paragraphs 26 to 35 of this Attachment, an ADI must assign the relevant risk-weight applicable to a counterparty, or if eligible, the risk-weight of a guarantor or collateral to the CEA.

For the purposes of paragraph 27 of Attachment H, potential future exposure is PFCE adj as determined in paragraph 30 of this Attachment. An ADI must multiply the net long or short position of each security included in the netting agreement by the appropriate haircut.

The ADI must also apply the rules in paragraphs 23 and 26 to 47 of Attachment H regarding the calculation of haircuts. An ADI that wishes to use a VaR model to determine its net securities financing transaction exposure for capital adequacy purposes must seek explicit approval to do so from APRA. If approved, the VaR model may be used for securities financing transactions covered by netting agreements on a counterparty-by-counterparty basis.

The minimum holding period is five days, and the ADI must adjust upwards the minimum holding periods for market instruments where such a holding period would be inappropriate given the liquidity of the instrument concerned. Furthermore, under the circumstances described in paragraph 39 of Attachment H, a higher minimum holding period will apply.

Refer to Attachment F and, where relevant, the use of specific short-term ratings for exposures to ADIs, overseas banks and corporate counterparties. For the purposes of this Attachment, a credit rating grade that is unrated refers to a claim that must be assessed as unrated for risk-weighting purposes under paragraph 4 of Attachment F. Refer to paragraph 25 of Attachment D to APS The add-on should be capped to the amount of unpaid premiums.

In such circumstances, the ADI will be required to calculate regulatory capital as if it was the principal. However, it does require that the maturity agreed ex ante may not be reduced ex post by the guarantor. Where cash on deposit, certificates of deposit and bank bills issued by the lending ADI are held as collateral at a third-party ADI or overseas bank in a non-custodial arrangement, if they are pledged or assigned to the lending ADI and the pledge or assignment is unconditional and irrevocable, the exposure amount covered by the collateral may be assigned the risk-weight of the third-party ADI or overseas bank as set out in Attachment A.

However, it requires that the maturity agreed ex ante may not be reduced ex post by the protection provider. In this case the limit described in paragraph 8 of this Attachment applies as if restructuring of the underlying exposure was not included within the terms of the credit derivatives contract.

Under statutory provisions applying in those countries, the appointment of an administrator may not constitute grounds for the triggering of netting agreements. Such provisions do not prevent the recognition of affected netting agreements for the purposes of these guidelines provided that a netting agreement can still take effect in the event the bank under administration does not meet its obligations under transactions as they fall due.

Skip to primary navigation Skip to primary content. Australian Government Federal Register of Legislation Skip to Content. Search Open search Advanced Search. Get legislation updates My Account.

Bookmark this version go to latest. Home Legislative Instruments In force As Made Details: Banking prudential standard determination No. Standardised Approach to Credit Risk Objective and key requirements of this Prudential Standard This Prudential Standard requires an authorised deposit-taking institution to hold sufficient regulatory capital against credit risk exposures.

The key requirements of this Prudential Standard are that an authorised deposit-taking institution: Attachment B Credit equivalent amounts for off-balance sheet exposures Market-related off-balance sheet transactions 1.

Pricing market-related contracts Non-market-related off-balance sheet transactions Direct credit substitutes 2. Performance-related contingencies 50 3.

Trade-related contingencies 20 4. Lending of securities or posting of securities as collateral [20] 5. Assets sold with recourse 6. Forward asset purchases 7. Partly paid shares and securities 8. Placements of forward deposits 9.

Note issuance and underwriting facilities 50 Irrevocable standby commitments provided under APRA-approved industry support arrangements 0 Attachment C Counterparty credit risk for bilateral and centrally cleared transactions Counterparty credit risk CCR capital requirements 1.

Counterparty credit default risk capital treatment 5. The risk-weighted assets RWA requirement for counterparty credit default risk for an off-balance sheet transaction that gives rise to credit exposure must be calculated by the following three-step process: CVA risk capital charge 8.

An ADI may include eligible CVA hedges in the calculation of the CVA risk capital charge as set out in paragraph 9 c of this Attachment subject to the following conditions: Central counterparties CCP Requirements for exposures arising from transactions cleared through a qualifying CCP Trade exposure capital calculations for clearing members However, to recognise the shorter close-out period for cleared transactions, the clearing member ADI may apply a multiplication factor to its CEA to these exposures according to the following scale: Risk-weights for residential mortgages 5.

Past due claims Attachment E Unsettled and failed transactions 1. Attachment F Short-term and long-term credit ratings 1. Where a counterparty has multiple ECAI general issuer ratings or where an issue has multiple ECAI issue-specific ratings, and these ratings correspond to multiple credit rating grades, an ADI must apply the following principles for capital requirement purposes: Domestic and foreign currency claims 3.

Claims that cannot be rated 4. The risk-weights in Table 8 apply to ECAI issue-specific short-term ratings: Short-term claims on ADIs and overseas banks Attachment G Guarantees 1. In addition to the requirements detailed in paragraph 21 of this Prudential Standard and paragraph 2 of this Attachment, in order for a guarantee to be recognised the following conditions must be satisfied: Measurement of maturity Adjustment for maturity mismatch Where there is a maturity mismatch between a guarantee and the covered exposure, for capital adequacy purposes an ADI must apply the following adjustment: Attachment H Simple and comprehensive approaches to the recognition of collateral General principles 1.

An ADI must have collateral management policies in place to control, monitor and report: Minimum conditions for collateralised transactions 8. Additional conditions specific to cash collateral Exceptions to the 20 per cent risk-weight floor OTC derivative transactions may be risk-weighted at zero per cent where: Eligible collateral for the comprehensive approach Calculation of Regulatory Capital for collateralised transactions Where the collateral is a basket of assets, the haircut on the basket will be: Attachment I Credit derivatives in the banking book 1.

For the purposes of this Prudential Standard, APRA recognises the following credit derivatives: Determining the amount of credit protection purchased or sold 6. Required credit events 7. At a minimum, sufficient credit risk transfer requires that credit events under the terms of the credit derivative contract cover: Credit derivatives used for credit risk mitigation purposes Credit-default and total-rate-of-return swaps Cash-funded credit-linked notes First-to-default basket credit derivatives Second-to-default basket credit derivatives Credit derivatives used for acquiring credit risk exposure Attachment J Netting Use of netting 1.

An ADI may only net positions across the banking and trading book if the netted transactions: An ADI that uses the close-out netting method must apply the two stages to this process: Eligible bilateral netting agreements 7. An ADI may only net, for capital adequacy purposes, claims and obligations with a counterparty that are covered by a legally binding eligible bilateral netting agreement including a master agreement netting agreementif the netting agreement: An ADI that has obtained a positive legal opinion about the enforceability of a netting agreement must: Policies, systems and controls Monitoring and reporting of netting agreements Collateral and guarantees On-balance sheet netting transactions Credit equivalent amount Potential future credit exposure The NGR may be calculated using one of the following approaches: Securities financing transactions Comprehensive approach VaR models approach This instrument determines Prudential Standard APS Capital Adequacy: Attachment C - Counterparty credit risk for bilateral and centrally cleared transactions.

Attachment H - Simple and comprehensive approaches to the recognition of collateral. Aaa Aa1 Aa2 Aa3. Caa1 Caa2 Caa3 Ca C. Minimum holding period business days.