| (20) | Specific matters relating to delivery-versus-payment transactions, and non-delivery-versus-payment or free-delivery transactions |
| (a) | A bank shall in respect of— |
| (i) | any delivery-versus-payment transaction, that is, any transaction settled through a delivery-versus-payment system— |
| (A) | which system makes provision for the simultaneous exchanges of securities for cash, including payment versus payment; |
| (B) | which transaction exposes the reporting bank to a risk of loss equal to the difference between the transaction valued at the agreed settlement price and the transaction valued at current market price, that is, the positive current exposure amount; |
(C) which transaction may include—
| (i) | the settlement of commodities; |
| (ii) | the settlement of foreign exchange; |
| (iii) | the settlement of securities; |
| (iv) | settlement through a licensed exchange, clearing house or central counterparty, and which transactions are subject to daily mark-to-market, payment of daily variation margins and involve a mismatched trade; |
| (ii) | any non-delivery-versus-payment or free-delivery transaction, that is, any transaction in respect of which cash is paid out without receipt of the contracted receivable, which receivable may include a security, foreign currency, gold or a commodity, or conversely, any transaction in respect of which deliverables were delivered without receipt of the contracted cash payment, which transaction exposes the reporting bank to a risk of loss equal to the full amount of the cash amount paid or deliverables delivered, |
calculate its required amount of capital and reserve funds in accordance with the relevant requirements specified in paragraph (b) below, provided that—
| (A) | the provisions of this subregulation (20) shall not apply— |
| (i) | to any repurchase agreement, resale agreement, securities lending transaction or securities borrowing transaction that has failed to settle, |
| (ii) | to any forward contract or one-way cash payment due in respect of an OTC derivative transaction, |
which agreement, contract or transaction shall be subject to the relevant requirements specified in subregulations (16) to (19) above, or subregulations (6) to (14);
| (B) | in the case of a system wide failure of a settlement or clearing system, or a central counterparty, the Registrar may, subject to such conditions as may be specified in writing by the Registrar, exempt a bank from the requirements specified in paragraph (b) below; |
| (C) | a failure of a counterparty to settle a trade as envisaged in this subregulation (20) will not necessarily fall within the ambit of default for the purpose of measuring the reporting bank's exposure to credit risk as envisaged in this regulation 23. |
| (b) | Minimum required amount of capital and reserve funds |
A bank shall in the case of—
| (i) | any delivery-versus-payment transaction in respect of which payment has not taken place in the period of five business days after the contracted settlement date calculate its required amount of capital and reserve funds by multiplying the relevant positive current exposure amount with the relevant percentage specified in table 21 below. |
Table 21
Number of working days after
the contracted settlement date
|
Risk multiplier
|
From 5 to 15
|
8%
|
From 16 to 30
|
50%
|
From 31 to 45
|
75%
|
46 or more
|
100%
|
| (ii) | any non-delivery-versus-payment or free-delivery transaction, after the first contractual date relating to payment or delivery when the relevant second leg has not been received at the end of the relevant business day, treat the relevant payment made as a loan exposure, that is, a bank that adopted— |
| (A) | the IRB approach shall calculate its risk-weighted exposure and related required amount of capital and reserve funds in accordance with the relevant formulae and requirements specified in subregulations (11) and (13); |
| (B) | the standardised approach shall calculate its risk-weighted exposure and related required amount of capital and reserve funds in accordance with the relevant requirements specified in subregulations (6) and (8), |
provided that—
| (i) | when the relevant exposure amount is not material, the reporting bank may choose to apply a risk weight of 100 per cent to the said exposure amount; |
| (ii) | when five business days have lapsed following the second contractual payment or delivery date and the second leg has not effectively taken place, the bank that made the first payment leg shall assign to the full amount of value transferred plus any relevant replacement cost a risk weight of 1250 per cent, until the said second payment or delivery leg is effectively made; |
[Proviso (ii) of subregulation (20)(b)(ii) substituted by regulation 2(ii) of Notice No. R. 261 dated 27 March 2015]
| (iii) | when determining a risk weight in respect of any failed freedelivery exposure, a bank that adopted— |
| (aa) | the IRB approach for the measurement of the bank's exposure to credit risk may in respect of a counterparty in respect of which the bank has no other banking book exposure assign a PD ratio, based on the relevant counterparty's external rating; |
| (bb) | the advanced IRB approach for the measurement of the bank's exposure to credit risk may apply an LGD ratio of 45 per cent, in lieu of estimating an LGD ratio, provided that the bank shall apply the said ratio to all failed trade exposures; or |
| (cc) | the IRB approach for the measurement of the bank's exposure to credit risk may apply the risk weights specified in the standardised approach, in subregulation (8), or a risk weight of 100 per cent. |
