|
(iii)
The simple approach
Minimum
conditions
182.
For collateral to be recognised in the simple
approach, the collateral must
be
pledged
for at least the life of the exposure and it
must be marked to market and
revalued
with
a minimum frequency of six months.
Those
portions of claims collateralised by the market
value of recognised collateral receive the risk
weight applicable to the collateral instrument.
The risk weight on the collateralised portion
will be subject to a floor of 20% except under
the conditions specified in paragraphs 183 to
185. The remainder of the claim should be
assigned to the risk weight appropriate to the
counterparty.
A
capital requirement will be applied to banks on
either side of the collateralised transaction:
for example, both repos and reverse repos will
be subject to capital
requirements.
Exceptions
to the risk weight floor
183.
Transactions which fulfil the criteria outlined
in paragraph 170 and are with a
core
market
participant, as defined in 171, receive a risk
weight of 0%. If the counterparty to
the
transactions
is not a core market participant the transaction
should receive a risk weight of
10%.
184.
OTC derivative transactions subject to daily
mark-to-market, collateralised by
cash
and
where there is no currency mismatch should
receive a 0% risk weight. Such
transactions
collateralised
by sovereign or PSE securities qualifying for a
0% risk weight in the
standardised
approach can receive a 10% risk
weight.
185.
The 20% floor for the risk weight on a
collateralised transaction will not be
applied
and
a 0% risk weight can be applied where the
exposure and the collateral are
denominated
in
the same currency, and either:
•
the
collateral is cash on deposit as defined in
paragraph 145 (a);
or
•
the
collateral is in the form of sovereign/PSE
securities eligible for a 0% risk
weight,
and
its market value has been discounted by
20%.
(iv)
Collateralised OTC derivatives
transactions
186.
Under the Current Exposure Method, the
calculation of the counterparty credit
risk
charge
for an individual contract will be as
follows:
counterparty charge =
[(RC + add-on) – CA] x r x
8%
where:
RC
= the replacement cost,
add-on
= the amount for potential future exposure
calculated under the 1988
Accord,
CA
= the
volatility adjusted collateral amount under the
comprehensive
approach
prescribed in paragraphs 147 to 172, or zero if
no eligible
collateral
is applied to the transaction,
and
r =
the risk weight of the
counterparty.
187.
When effective bilateral netting contracts are
in place, RC will be the net
replacement cost and
the add-on will be ANet
as
calculated under the 1988 Accord.
The
haircut
for currency risk (Hfx) should be applied when
there is a mismatch between the
collateral
currency and the settlement currency.
Even
in the case where there are more than two
currencies involved in the exposure, collateral
and settlement currency, a single haircut
assuming a 10-business day holding period scaled
up as necessary depending on the frequency of
mark-to-market will be applied.
187
(i). As an alternative to the Current Exposure
Method for the calculation of
the
counterparty
credit risk charge, banks may also use the
Standardised Method and, subject to supervisory
approval, the Internal Model Method as set out
in Annex 4 of this Framework.
4.
On-balance sheet
netting
188.
Where a bank,
(a)
has a well-founded legal basis for concluding
that the netting or offsetting
agreement
is
enforceable in each relevant jurisdiction
regardless of whether the counterparty
is
insolvent
or bankrupt;
(b)
is able at any time to determine those assets
and liabilities with the same
counterparty
that are subject to the netting
agreement;
(c)
monitors and controls its roll-off risks;
and
(d)
monitors and controls the relevant exposures on
a net basis,
it
may use the net exposure of loans and deposits
as the basis for its capital
adequacy
calculation
in accordance with the formula in paragraph 147.
Assets (loans) are treated as
exposure
and liabilities (deposits) as collateral. The
haircuts will be zero except when
a
currency
mismatch exists.
A
10-business day holding period will apply when
daily mark-tomarket is conducted and all the
requirements contained in paragraphs 151, 169,
and 202 to 205 will
apply.
5.
Guarantees and credit
derivatives
(i)
Operational requirements
Operational
requirements common to guarantees and credit
derivatives
189. A guarantee (counter-guarantee) or credit
derivative must represent a direct claim on the
protection provider and must be explicitly
referenced to specific exposures or a pool of
exposures, so that the extent of the cover is
clearly defined and incontrovertible.
Other
than non-payment by a protection purchaser of
money due in respect of the credit protection
contract it must be irrevocable; there must be
no clause in the contract that would allow the
protection provider unilaterally to cancel the
credit cover or that would increase the
effective cost of cover as a
result of deteriorating credit quality in the
hedged exposure. (54) It must
also be
unconditional; there should be no clause in the
protection contract outside the direct control
of the bank that could prevent the protection
provider from being obliged to pay out in a
timely manner in the event that the original
counterparty fails to make the payment(s)
due.
Additional
operational requirements for
guarantees
(54) Note that the irrevocability
condition does not require that the credit
protection and the exposure be maturity matched;
rather that the maturity agreed ex ante may not
be reduced ex post by the protection provider.
Paragraph 203 sets forth the treatment of call
options in determining remaining maturity for
credit
protection.
190.
In addition to the legal certainty requirements
in paragraphs 117 and 118 above,
in
order
for a guarantee to be recognised, the following
conditions must be satisfied:
(a)
On the qualifying default/non-payment of the
counterparty, the bank may in a
timely
manner pursue the guarantor for any monies
outstanding under the
documentation
governing the transaction.
The
guarantor may make one lump sum payment of all
monies under such documentation to the bank, or
the guarantor may assume the future payment
obligations of the counterparty covered by the
guarantee.
The
bank must have the right to receive any such
payments from the guarantor without first having
to take legal actions in order to pursue the
counterparty for payment.
(b)
The guarantee is an explicitly documented
obligation assumed by the
guarantor.
(c)
Except as noted in the following sentence, the
guarantee covers all types of
payments
the underlying obligor is expected to make under
the documentation
governing
the transaction, for example notional amount,
margin payments etc.
Where
a guarantee covers payment of principal only,
interests and other
uncovered
payments should be treated as an unsecured
amount in accordance
with
paragraph 198.
Additional
operational requirements for credit
derivatives
191. In order for a credit derivative contract
to be recognised, the following conditions must
be satisfied:
(a)
The credit events specified by the contracting
parties must at a minimum
cover:
•
failure to pay the
amounts due under terms of the underlying
obligation that are
in
effect at the time of such failure (with a grace
period that is closely in line
with
the
grace period in the underlying
obligation);
•
bankruptcy,
insolvency or inability of the obligor to pay
its debts, or its failure
or
admission
in writing of its inability generally to pay its
debts as they become due,
and
analogous events; and
•
restructuring of the
underlying obligation involving forgiveness or
postponement
of
principal, interest or fees that results in a
credit loss event (i.e.
charge-off,
specific
provision or other similar debit to the profit
and loss account). When
restructuring
is not specified as a credit event, refer to
paragraph 192.
(b)
If the credit derivative covers obligations that
do not include the underlying
obligation,
section (g) below governs whether the asset
mismatch is permissible.
(c)
The credit derivative shall not terminate 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, subject to the provisions of paragraph
203.
(d)
Credit derivatives allowing for cash settlement
are recognised for capital
purposes
insofar as a robust valuation process is in
place in order to estimate
loss
reliably. There must be a clearly specified
period for obtaining
post-creditevent
valuations
of the underlying obligation. If the reference
obligation specified
in
the credit derivative for purposes of cash
settlement is different than
the
underlying
obligation, section (g) below governs whether
the asset mismatch is
permissible.
(e)
If the protection purchaser’s right/ability to
transfer the underlying obligation
to
the
protection provider is required for settlement,
the terms of the underlying
obligation
must provide that any required consent to such
transfer may not be
unreasonably
withheld.
(f)
The identity of the parties responsible for
determining whether a credit event
has
occurred
must be clearly defined. This determination must
not be the sole
responsibility
of the protection seller. The protection buyer
must have the
right/ability
to inform the protection provider of the
occurrence of a credit event.
(g)
A mismatch between the underlying obligation and
the reference obligation
under
the credit derivative (i.e. the obligation used
for purposes of determining
cash
settlement value or the deliverable obligation)
is permissible if
(1)
the reference obligation ranks pari passu with
or is junior to the underlying
obligation,
and
(2)
the underlying obligation and reference
obligation share the
same
obligor (i.e. the same legal entity) and legally
enforceable cross-default or
cross-acceleration
clauses are in place.
(h)
A mismatch between the underlying obligation and
the obligation used for
purposes
of determining whether a credit event has
occurred is permissible if
(1)
the latter obligation ranks pari passu with or
is junior to the underlying
obligation,
and
(2)
the underlying obligation and reference
obligation share the same obligor (i.e. the same
legal entity) and legally enforceable
cross-default or crossacceleration clauses are
in place.
|
