| (i) | Unless specifically otherwise provided, a bank that adopted the foundation IRB approach for the measurement of the bank's exposure to credit risk in respect of positions held in the bank's banking book— |
| (A) | shall apply the comprehensive approach prescribed in subregulation (9)(b) above in order to calculate the bank's adjusted exposure; |
| (B) | shall at all times comply with the relevant minimum requirements— |
| (i) | prescribed in subregulation (7)(b)(iii) above in respect of eligible financial collateral; |
| (ii) | prescribed in subparagraph (ii)(B) below in respect of the further categories of collateral qualifying as eligible collateral in terms of the foundation IRB approach. |
| (A) | Instruments qualifying as eligible financial collateral in terms of the standardised approach shall qualify as eligible collateral in terms of the foundation IRB approach, provided that a bank that adopted the foundation IRB approach— |
| (i) | shall at all times comply with the relevant minimum requirements specified in subregulation (7)(b)(iii) above; or |
| (ii) | shall be able to calculate and comply with the relevant minimum requirements relating to its own estimates of LGD and EAD specified in subregulations (13)(b)(v)(C) and (13)(b)(v)(D) below. |
Provided that, irrespective of its credit rating, a resecuritisation instrument shall in no case constitute an eligible instrument for risk mitigation purposes in terms of these Regulations
| (B) | In addition to eligible financial collateral recognised in terms of the standardised approach, in subregulation (7)(b), the collateral instruments specified below shall be recognised as eligible collateral in terms of the foundation IRB approach in respect of a bank's exposures to corporate institutions, sovereigns or banks, provided that the bank shall comply with the requirements specified below: |
| (i) | Financial receivables, excluding receivables arising from securitisation schemes, sub-participations or credit-derivative instruments. |
When a bank obtains as collateral in respect of its exposure to a corporate institution, sovereign or bank financial receivables other than receivables arising from securitisation schemes, sub-participations or credit-derivative instruments, such collateral shall be recognised as eligible collateral, provided that—
| (aa) | the said financial receivables— |
| (i) | shall consist of claims with an original maturity of less than or equal to one year, the repayment of which claim shall be dependent upon the commercial or financial flows related to the underlying assets of the obligor; |
| (ii) | may include self-liquidating debt arising from the sale of goods or services linked to a commercial transaction or general amounts owed by buyers, suppliers, renters, national and local government authorities, or other non-affiliated persons not related to the sale of goods or services linked to a commercial transaction; |
| (bb) | the legal mechanism in terms of which the collateral was obtained shall be robust and shall ensure that the bank has clear rights over the proceeds from the collateral. |
The bank shall take all steps necessary to fulfil requirements relating to the enforceability of the bank's security interest, such as the registration of a security interest with a registrar.
| (cc) | the collateralised transaction shall be duly documented, which documentation— |
| (i) | shall be binding on all relevant parties; |
| (ii) | shall be legally enforceable in all relevant jurisdictions; |
| (iii) | shall be legally well founded; |
| (iv) | shall be reviewed on a regular basis in order to ensure the transaction's continued enforceability; |
| (v) | shall provide the bank with legal authority to sell or assign the receivables to other parties without the consent of the receivables' obligors; |
| (vi) | shall comprehensively deal with the collection of receivable amounts in distressed situations; |
| (dd) | the bank shall have in place clear and robust procedures, adequate— |
| (i) | to timely collect the proceeds of the relevant collateral; |
| (ii) | to observe any legal conditions required to identify any default event of the obligor; |
| (iii) | to identify any event of financial distress of the relevant obligor; |
| (a) | reports relating to ageing; |
| (b) | control over trade documents; |
| (c) | the frequency of audits relating to collateral; |
| (d) | the confirmation of accounts; |
| (e) | the control over the proceeds of accounts paid; |
| (f) | the analyses in respect of dilution; |
| (ee) | the bank shall have in place sound and robust riskmanagement processes, which risk-management processes— |
| (i) | shall be adequate to determine the credit risk inherent in the receivables, including concentration risk. |
When the bank relies on the obligor to determine the credit risk relating to its customers, the bank shall review the credit policy of the obligor to determine the policy's soundness and credibility.
| (ii) | shall include an analysis of the borrower's business and industry type; |
| (iii) | shall be adequate to identify any correlation between the obligor and the receivables pledged as security, provided that no receivables relating to affiliates of a particular obligor, including subsidiaries and employees, shall be recognised as eligible collateral; |
| (ff) | the bank shall ensure that the margin between the amount of the exposure and the value of the receivables takes into account all relevant factors, including the cost of collection, correlations, concentration within the receivables pool pledged as security and potential concentration risk within the bank's total exposures. |
| (ii) | Commercial real estate and residential real estate, excluding income producing real estate that meets the requirements relating to specialised lending specified in subregulation (11)(c)(i)(D) above. |
When a bank obtains as collateral in respect of its exposure to a corporate institution, sovereign or bank commercial real estate or residential real estate, such collateral shall be recognised as eligible collateral, provided that—
| (aa) | the risk relating to the obligor shall not materially be dependent upon the performance of the underlying property or project but rather on the underlying capacity of the obligor to repay the debt due from other sources, that is, the repayment of the facility shall not materially be dependent on any cash flow generated by the underlying commercial real estate or residential real estate serving as collateral; |
| (bb) | the value of the said collateral shall not materially be dependent on the performance of the obligor; |
| (cc) | the bank's claim in respect of the said collateral— |
| (i) | shall be legally enforceable in all relevant jurisdictions; |
| (ii) | shall reflect a perfected lien, that is, all legal requirements shall be fulfilled in order to enforce the bank's claim; |
| (iii) | shall be realisable within a reasonable timeframe; |
| (i) | shall determine and apply the fair value of the collateral, that is, the value at which the property may be sold under private contract between a willing seller and a willing buyer on an armslength basis, or less than the said fair value; |
| (ii) | shall monitor the value of the collateral on a regular basis but not less frequently than once every year; |
| (iii) | may use statistical methods such as reference to house price indices or sampling in order to update the bank's estimates of fair value or identify collateral that may have declined in value; |
| (iv) | shall make use of the services of a qualified professional person to value a particular property when information indicates that the value of the said property may have materially declined relative to general market prices, or when a credit event such as a default has occurred; |
| (a) | the types of commercial real estate and residential real estate that the bank is willing to accept as collateral; |
| (b) | the bank's lending policies, including the advance rates, in respect of commercial real estate or residential real estate as collateral; |
| (vi) | shall ensure that the property is adequately insured against damage or deterioration; |
| (vii) | shall monitor on an ongoing basis— |
| (a) | the extent of any permissible preferred claims such as tax in respect of the property; |
| (b) | the risk of environmental liability arising in respect of the collateral such as the presence of toxic material on the property. |
| (iii) | Leases other than leases that expose the bank to residual risk |
When a bank obtains collateral in the form of a lease agreement in respect of instruments/ assets that qualify as eligible collateral in terms of the foundation IRB approach, such a lease agreement shall be recognised as eligible collateral, provided that the bank shall in addition to the relevant minimum requirements relating to the relevant type of instrument/asset ensure that—
| (aa) | the lessor has in place a robust risk-management process, which risk management process shall comprehensively address matters relating to— |
| (i) | the location of the asset; |
| (ii) | the use of the asset; |
| (iii) | the age and condition of the asset; |
| (iv) | the asset's planned obsolescence; |
| (bb) | the lessor has in place a robust legal framework, which legal framework shall ensure that— |
| (i) | the legal ownership of the lessor in respect of the asset is well established; |
| (ii) | the lessor is able to exercise its rights as owner in a timely manner; |
| (cc) | the difference between the rate of depreciation of a physical asset and the rate of amortisation of the lease payments is not material, causing the risk mitigation effect of the leased asset to be overstated; |
| (iv) | Leases that expose the bank to residual risk |
When a bank obtains collateral in the form of a lease agreement in respect of instruments/ assets that qualify as eligible collateral in terms of the foundation IRB approach, which lease agreement exposes the bank to residual risk, that is, the bank is exposed to a potential loss due to, for example, a decline in the fair value of the equipment below the residual estimate at the inception of the lease agreement, the bank shall risk weight the relevant exposure in accordance with the relevant requirements specified in subparagraph (iii)(C) below.
| (v) | Physical collateral other than the types of collateral specified above, excluding any physical assets acquired by the reporting bank as a result of default by an obligor in respect of an underlying exposure, specified in writing by the Registrar, provided that— |
| (aa) | a liquid market shall exist in respect of the said collateral in order to ensure that the collateral can be liquidated in an expeditious and economically efficient manner; |
| (bb) | a well established market with publicly available market prices relating to the said collateral shall exist and the amount realised by the reporting bank in respect of the said collateral shall not substantially deviate from the said market prices; |
| (cc) | except for preferential rights in respect of tax obligations or wages of employees, the bank shall have a priority claim in respect of the proceeds of the said collateral; |
| (dd) | the relevant loan agreement shall include a detailed description of the said collateral and detailed specifications in respect of the manner and frequency of revaluation; |
| (ee) | the bank shall have in place robust policies, processes and procedures relating to physical collateral, which policies, processes and procedures— |
| (i) | shall in the case of inventories such as raw materials or work-in-progress, and equipment, ensure that the bank conducts regular physical inspections of the said collateral; |
| (ii) | shall be subject to regular and appropriate independent review; |
| (i) | shall duly document the types of physical collateral and loan-to-value or lending-to-value ratios acceptable to the bank; |
| (ii) | shall comply with all the relevant minimum requirements relating to commercial real estate and residential real estate specified in sub-item (ii) above and such further conditions as may be specified in writing by the Registrar in respect of such a further category of physical assets qualifying as eligible collateral. |
When a bank that adopted the foundation IRB approach for the measurement of the bank's exposure to credit risk obtains—
| (A) | eligible financial collateral in respect of its exposures to corporate institutions, sovereigns or banks, the bank— |
| (i) | shall calculate an adjusted exposure (E*) in accordance with the relevant formulae specified in subregulation (9)(b) above, provided that the bank shall comply with the relevant requirements that apply to the said formulae; |
| (ii) | shall in the case of transactions other than repurchase and resale agreements subject to master netting agreements, calculate an effective loss-given-default ratio applicable to the collateralised transaction through the application of the formula specified below. |
LGD* = LGD x (E*/E)
where:
| LGD* | is the effective loss-given-default ratio |
| LGD | shall be equal to 45 per cent, that is, the LGD ratio that applies to a senior unsecured exposure |
| E | is the relevant current value of the exposure |
| (iii) | shall in the case of repurchase and resale agreements subject to master netting agreements calculate an adjusted exposure (E*) in accordance with the relevant directives specified in subregulation (9)(b)(ix), which adjusted exposure shall be deemed to represent EAD, that is, the bank shall not recognise the impact of collateral obtained in respect of the said transactions through an adjustment to LGD. |
Similar to a bank that adopted the comprehensive approach in respect of collateral obtained in terms of the standardised approach, a bank that complies with the relevant requirements specified in subregulation (9)(b)(xv) relating to repurchase and resale agreements, may apply a haircut of zero per cent in respect of the said agreements.
| (B) | collateral in respect of the bank's corporate exposure, which collateral is recognised as eligible collateral in terms of the foundation IRB approach but not in terms of the standardised approach, the bank shall, subject to the provisions of item (C) below, in the case of a senior corporate exposure, divide the senior exposure into— |
| (i) | a fully collateralised portion |
The bank shall subsequently calculate the ratio of the current value of the collateral received to the current value of the exposure through the application of the formula specified below.
Ratio = C/E
where:
| C | is the relevant current value of the collateral received |
| E | is the relevant current value of the exposure |
When the said calculated ratio is below the threshold levels denoted C*, specified in table 15 below, the LGD ratio shall be 45 per cent, that is, the LGD ratio shall be similar to the LGD ratio in respect of an unsecured corporate exposure.
When the said calculated ratio exceeds a higher threshold denoted C**, that is, the bank has an over-collateralised position, the bank shall, based on relevant type of collateral, assign to the relevant exposure the LGD ratios specified in table 15 below:
Table 15
|
Minimum LGD
|
Required minimum collateralisation level of the exposure (C*)
|
Required level of over-collateralisation for full LGD recognition (C**)
|
Receivables
|
35%
|
0%
|
125%
|
Commercial real estate and/or residential real estate
|
35%
|
30%
|
140%
|
Other collateral
|
40%
|
30%
|
140%
|
| (ii) | an uncollateralised portion |
The portion of the exposure not covered in terms of sub-item (i) above shall be regarded as unsecured and the bank shall assign to the said portion a LGD ratio equal to 45 per cent.
| (C) | eligible collateral in the form of a lease agreement, which lease agreement exposes the bank to residual risk, the bank shall risk weight— |
| (i) | the discounted lease payments based on the financial strength, that is, the PD ratio, of the lessee, and the LGD ratio specified by the Registrar; |
| (ii) | the residual value at 100 per cent. |
