Banks Act, 1990 (Act No. 94 of 1990)

Regulations

Regulations relating to Banks

Chapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof

23. Credit risk: monthly return

Directives and interpretations for completion of monthly return concerning credit risk (Form BA 200)

Subregulation (18) Calculation of counterparty credit exposure or EAD in terms of the standardised approach

Subregulation (18)(c) Matters relating to hedging sets
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(c)Matters relating to hedging sets

 

A bank that adopted the standardised method for the measurement of the bank's exposure to counterparty credit risk—

 

(i)shall in the case of any interest rate position arising from debt instruments of low specific risk, that is, any debt instrument subject to a specific risk capital requirement of 1,6 per cent or lower in terms of the relevant requirements relating to the standardised approach for market risk envisaged in regulation 28(4) read with the relevant requirements specified in regulation 28(7), and in respect of each relevant currency, map the relevant position into one of six hedging sets specified in table 20 below, provided that—

 

(A)the bank shall assign relevant interest rate positions arising from the payment legs to the same hedging sets as interest rate risk positions from debt instruments of low specific risk;

 

(B)the bank shall assign interest rate positions arising from money deposits received from a counterparty as collateral to the same hedging sets as interest rate risk positions from debt instruments of low specific risk;

 

(C)in the case of any underlying debt instrument such as a floating rate note, or payment legs such as floating rate legs relating to interest swaps, in respect of which the interest rate is linked to a reference interest rate that represents a general market interest level such as a government bond yield, a money market rate or swap rate, the bank shall base the rate adjustment frequency on the length of the time interval up to the next re-adjustment of the reference interest rate. Otherwise, the remaining maturity shall be the remaining life of the underlying debt instrument or, in the case of any payment leg, the remaining life of the transaction;

 

(D)there shall be one hedging set in respect of each relevant issuer of a reference debt instrument that underlies a credit-default swap;

 

(E)there shall be one hedging set in respect of each relevant issuer of a debt instrument of high specific risk, that is, any debt instrument subject to a specific risk capital requirement of more than 1,6 per cent in terms of the relevant requirements relating to the standardised approach for market risk envisaged in regulation 28(4) read with the relevant requirements specified in regulation 28(7), or when deposits are placed as collateral with a counterparty with no debt obligations outstanding of low specific risk;

 

(F)when a payment leg emulates a debt instrument of high specific risk, such as a total-return swap contract with one leg emulating a bond, there shall be one hedging set in respect of each relevant issuer of the said reference debt instrument provided that the reporting bank may assign risk positions that arise from debt instruments relating to a specific issuer or from reference debt instruments of the same issuer that are emulated by payment legs or that underlie a credit-default swap to the same hedging set,

 

which hedging sets shall be defined per currency, based on a combination of—

(i)the nature of the reference interest rate, that is, a sovereign rate or a rate other than a sovereign rate;
(ii)the remaining maturity or rate adjustment frequency of the relevant instrument, that is, one year or less, more than one year to five years, and more than five years, as specified in table 19 below:

 

Table 19

Hedging sets for interest rate risk positions, per currency

Remaining maturity or

rate-adjustment

frequency

Sovereign-referenced

interest

rates

Non-sovereign

referenced interest

rates

One year or less

X

X

More than one year to five years

X

X

More than five years

X

X

 

(ii)shall in the case of underlying financial instruments other than debt instruments, such as equity instruments, precious metals or commodities, assign the relevant instrument to the same hedging set only when the said instruments are identical or similar instruments, where similar instruments in the case of—

 

(A)equity instruments mean instruments issued by the same issuer provided that the reporting bank shall treat an equity index as a separate issuer;

 

(B)precious metals mean instruments relating to the same metal provided that the reporting bank shall treat a precious metal index as a separate precious metal;

 

(C)commodities mean instruments relating to the same commodity provided that the reporting bank shall treat a commodity index as a separate commodity;

 

(D)electric power include delivery rights and obligations that relate to the same peak or off-peak load time interval within any relevant 24 hour interval.