Banks Act, 1990 (Act No. 94 of 1990)RegulationsRegulations relating to BanksChapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof23. Credit risk: monthly returnDirectives and interpretations for completion of monthly return concerning credit risk (Form BA 200)Subregulation (12) Credit risk mitigation: foundation IRB approachSubregulation (12)(g) Double default |
(g) Double default
| (i) | In respect of each eligible exposure, a bank that obtained the prior written approval of the Registrar to adopt the foundation IRB approach for the measurement of the bank's exposure to credit risk may apply either the substitution approach envisaged in paragraphs (d) and (e) above or double default approach specified in this paragraph (g), provided that a bank that wishes to apply the double default approach— |
| (A) | shall continuously comply with the relevant minimum requirements specified in this paragraph (g); |
| (B) | in respect of the said eligible exposure shall calculate the relevant risk-weighted exposure amount and any related required amount of capital and reserve funds in accordance with the formulae and requirements specified in subparagraph (iv) below; |
| (C) | shall calculate the risk weights and required amount of capital and reserve funds relating to all exposures to a particular obligor, other than eligible exposures envisaged in this paragraph (g), in accordance with the relevant requirements specified in subregulations (11) and (12), including any risk weight or required amount of capital and reserve funds relating to any unhedged or unprotected portion of an exposure in respect of which the hedged or protected portion of the said exposure is subject to the provisions of this paragraph (g); |
| (D) | may apply the said double default approach to any eligible exposure, irrespective whether the exposure is held in the bank's banking book or trading book. |
| (ii) | Eligible exposure |
A bank that obtained the prior written approval of the Registrar to adopt the IRB approach for the measurement of the bank's exposure to credit risk may apply the double default approach only when—
| (A) | the relevant underlying obligation or exposure constitutes— |
| (i) | a corporate exposure as envisaged in subregulation (11) (c) (i), provided that no specialised lending exposure subject to and mapped into the risk grades specified in subregulation (11)(d)(iii)(C) shall be eligible for treatment in terms of the double default approach; |
| (ii) | a claim on a public-sector entity, provided that no sovereign exposure shall be eligible for treatment in terms of the double default approach; |
| (iii) | a loan extended to a small business and categorised as a retail exposure as envisaged in subregulation (11) (c) (iv) (A) (iii), |
Provided that in no case shall any exposure in respect of which the underlying obligation relates to—
| (aa) | a financial entity or institution as envisaged in subparagraph (iii)(B)(i) below; or |
| (bb) | a member of the same group as the protection provider, be eligible for treatment in terms of the double default approach. |
| (B) | the protection provider is a financial entity or institution specified in subparagraph (iii)(B)(i) below; |
| (C) | the bank obtained protection in respect of the said underlying exposure and the protection obtained relates to— |
| (i) | a single-name unfunded credit-derivative instrument such as a credit-default swap; |
| (ii) | a single name guarantee; |
| (iii) | a first-to-default basket product, in which case the double default approach shall be applied to the asset within the basket with the lowest risk-weighted amount; |
| (iv) | an nth-to-default basket product, in which case the protection obtained shall be eligible in terms of the double default approach only when the reporting bank also obtained eligible (n-1)th default protection or (n-1) of the assets within the basket have already defaulted, |
that is, under no circumstances shall protection relating to—
| (aa) | multiple name credit derivative instruments, other than nth-to-default basket products; |
| (bb) | multiple name guarantees; |
| (cc) | index-based products; |
| (dd) | synthetic securitisation and other tranched products that fall within the scope of the exemption notice relating to securitisation schemes; |
| (ee) | covered bonds to the extent such instruments are externally rated; and |
| (ff) | funded credit derivative instruments such as a credit linked note, |
be eligible for the double default approach.
| (iii) | Specific minimum requirements relating to the double default approach |
A bank that obtained the prior written approval of the Registrar to adopt the IRB approach for the measurement of the bank's exposure to credit risk, which bank wishes to apply the double default approach envisaged in this paragraph (g), shall continuously comply with the requirements specified in this subparagraph (iii).
| (A) | The PD ratio, LGD ratio, internal rating, external rating or risk weight associated with the relevant exposure prior to the application of the double default approach shall not already factor in any aspect relating to the relevant credit protection obtained, that is, credit protection shall under no circumstances be double counted. |
| (B) | The protection provider— |
| (i) | shall be a financial entity or institution, which financial entity or institution may be— |
| (aa) | a bank, but under no circumstances any public-sector entity or multilateral development bank that is treated in a manner similar to a bank in terms of these Regulations; |
| (bb) | an investment company or institution; |
| (cc) | an insurance or re-insurance company or entity the business of which includes the provision of credit protection on a regular basis; |
| (dd) | any non-sovereign credit export agency, that is, the credit protection shall not in any manner benefit from any sovereign guarantee or counter-guarantee; |
| (ii) | shall be regulated in a manner similar to a bank, that is, the protection provider shall be subject to minimum required capital or solvency requirements, appropriate supervisory oversight and transparency, that is, minimum requirements relating to market discipline, or the protection provider shall have an external rating from an eligible external credit assessment institution of no less than investment grade; |
| (iii) | at the time the credit protection for the relevant exposure was originally obtained, or for any period of time thereafter, had an internal rating with a PD ratio equivalent to or lower than the PD ratio associated with an external credit assessment or rating of A-; and |
| (iv) | shall have an internal rating with a PD ratio equivalent to or lower than the PD ratio associated with an external investment grade rating or assessment. |
| (C) | The credit protection obtained shall comply with the relevant minimum operational requirements envisaged in paragraphs (d) and (e) above. |
| (D) | The reporting bank shall have the legal right and expect to receive payment from the relevant protection provider without first having to pursue the relevant obligor for payment, that is, the reporting bank shall take all reasonable steps in order to ensure that the protection provider is willing and able to promptly pay when a credit event occurs. |
| (E) | Once a credit event occurs, the purchased credit protection shall make provision for immediate payment in respect of all credit losses incurred by the reporting bank in respect of the hedged portion of the relevant exposure. |
| (F) | When the payout structure of the relevant credit protection obtained makes provision for physical settlement, the reporting bank shall have legal certainty regarding the deliverability of the relevant loan, instrument or contingent liability and when the bank intends to deliver an obligation other than the underlying exposure, the bank shall ensure that the deliverable obligation is sufficiently liquid in order for the bank to purchase the said obligation for delivery in accordance with the relevant requirements of the contract. |
| (G) | The terms and conditions of the relevant credit protection shall be duly documented and legally confirmed in writing by the credit protection provider and the reporting bank. |
| (H) | In the case of protection obtained against dilution risk, the seller of the purchased receivables shall not be a member of the same group as the protection provider. |
| (I) | The reporting bank shall have in place a sufficiently robust process to monitor and control situations in which the performance of the protection provider and the protected obligor or exposure are dependent upon common factors, that is, the reporting bank shall have in place a sufficiently robust process to ensure that the double default approach is not applied to any exposure in respect of which excessive correlation exists between the creditworthiness of the protection provider and the obligor of the relevant underlying exposure. |
For example, situations in which a protection provider guarantees the debt of a supplier of goods or services when the supplier derives a high proportion of its income or revenue from the protection provider shall not be eligible for the double default approach.
| (iv) | Matters specifically related to risk-weighted exposure and the required amount of capital and reserve funds |
In respect of any hedged or protected exposure subject to the double default approach, the reporting bank shall calculate its risk-weighted exposure and related required amount of capital and reserve funds through the application of the formulae specified below, which formulae take into account the relevant risk components related to the said protected exposure.
RWADD = KDD x 12.5 x EADg
where:
RWADD is the risk-weighted asset amount relating to the protected exposure subject to the double default approach
EADg is the relevant exposure at default amount, that is, the protected or hedged exposure amount
and
KDD = Ko x (0.15+160 x PDg)
where:
| KDD | is the capital requirement in respect of the hedged or protected exposure subject to the double default approach |
| PDg | is the PD ratio of the protection provider or guarantor, which PD ratio shall be subject to a minimum of 0,03 per cent |
| Ko | shall be calculated through the application of the relevant formula and in a manner similar to unprotected corporate exposure as envisaged in subregulation (11)(d)(ii), even when the underlying obligation or eligible exposure is a loan extended to a small business qualifying as a retail exposure, provided that in respect of the relevant hedged exposure the risk components specified in the formula below, which risk components relate to the LGD ratio and the maturity adjustment, shall be applied instead of the said risk components specified in the said formula in subregulation (11)(d)(ii). |
(g)(iv).png)
where:
| PD0 | is the PD ratio of the obligor, which PD ratio shall be subject to a minimum of 0,03 per cent |
| Pos | is a correlation factor, which correlation factor shall be calculated in accordance with the relevant formula and requirements for the calculation of "R", specified in subregulation (11)(d)(ii), with PD being equal to PDo |
| LGDg | is the LGD ratio associated with the protected or hedged exposure, that is, the LGD ratio relating to a direct exposure to the relevant protection provider or guarantor, provided that when evidence indicates that in the event both the guarantor and the obligor default during the life of the protected exposure the amount recovered depends upon the financial condition of the obligor, the bank shall apply the LGD ratio relating to an unprotected and direct exposure to the said obligor |
| b | is the maturity adjustment coefficient, calculated according to the relevant formula specified in subregulation (11)(d)(ii), provided that PD shall be the lower of PD, and PDg |
| M | is the effective maturity of the credit protection, which maturity shall in no case be less than one year |