| (d) | Matters relating to cross-product netting |
| (i) | A bank that obtained the approval of the Registrar to adopt the internal model method for the measurement of the bank's exposure to counterparty credit risk may include in a particular netting set relating to a particular counterparty any exposure arising from a securities financing transaction or both a securities financing transaction and an OTC derivative contract, provided that— |
| (A) | in all cases the bank shall have in place a legally sound bilateral netting agreement, which agreement shall comply with the relevant requirements and criteria specified in subparagraph (ii) below; |
| (B) | at all times, the bank shall comply with such procedural requirements or additional requirements as may be specified in writing by the Registrar. |
(ii) Legal and operational criteria
A bank that wishes to include in a netting set relating to a particular counterparty, exposures that arise from securities financing transactions or both securities financing transactions and OTC derivative contracts shall have in place a legally sound written bilateral netting agreement with the said counterparty, which agreement shall create a single legal obligation covering all relevant bilateral master agreements and transactions, such that the bank would have either a claim to receive or obligation to pay only the net sum of the relevant positive and negative close-out amounts and mark-to-market values in the event of any failure of the counterparty to perform in accordance with the said transactions, contracts or agreements, irrespective whether or not the said failure relates to default, bankruptcy, liquidation or similar circumstances, provided that—
| (A) | the bank shall have in place written and reasoned legal opinion that conclude with a high degree of certainty that in the event of legal challenge the relevant courts or administrative authorities would find the bank's exposure in terms of the said cross-product netting agreement to be the cross-product net amount under the laws of all relevant jurisdictions— |
| (aa) | as a minimum, shall address the validity and enforceability of the said cross-product netting agreement under its terms and the impact of the cross-product netting agreement on the material provisions of any included bilateral master agreement; |
| (bb) | shall generally be recognised in all relevant jurisdictions or communities. |
| (ii) | which laws of all relevant jurisdictions include— |
| (aa) | the law of the jurisdiction in which the counterparty is chartered or incorporated and if the foreign branch of a counterparty is involved, the law of the jurisdiction in which the branch is located; |
| (bb) | the law that governs the relevant individual transactions; |
| (cc) | the law that governs any contract or agreement necessary to effect the netting. |
| (B) | the bank shall have in place robust internal procedures to verify, prior to including a transaction in a netting set, that the transaction is covered by legal opinions that comply with the aforesaid criteria; |
| (C) | the bank shall regularly update all relevant legal opinions in order to ensure continued enforceability of the cross-product netting agreement in light of any possible changes in relevant law; |
| (D) | the cross-product netting agreement shall not contain any walkaway clause, that is, any provision that permits a non-defaulting counterparty to make only limited payments or no payment at all to the estate of the person that defaulted, even when the defaulting person is a net creditor; |
| (E) | each relevant bilateral master agreement and transaction included in across-product netting agreement shall continuously comply with any relevant legal requirement specified in these Regulations that may have an impact on the legal recognition or enforceability of the said bilateral agreement, contract or transaction; |
| (F) | the reporting bank shall duly maintain record of all relevant and required documentation; |
| (G) | the reporting bank shall aggregate the relevant credit risk amounts relating to each relevant counterparty in order to obtain the single legal exposure amount across products and transactions covered by the cross-product netting agreement, which aggregated amount, amongst other things, shall form part of the bank's risk management processes relating to credit risk, credit limits and economic capital; |
| (H) | the reporting bank shall demonstrate to the satisfaction of the Registrar that the bank effectively integrates the risk-mitigating effects of cross-product netting into its risk management and other information technology systems. |
