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 (7) Credit risk mitigation: simplified standardised approach |
| (7) | Credit risk mitigation: simplified standardised approach |
Credit risk mitigation relates to the reduction of a bank's credit risk exposure by obtaining, for example, eligible collateral or guarantees or entering into a netting agreement with a client that maintains both debit and credit balances with the reporting bank.
When a bank that adopted the simplified standardised approach for the calculation of the bank's credit exposure in its banking book obtains eligible collateral or guarantees, a reduction in the credit risk exposure of the reporting bank shall be allowed to the extent that the bank achieves an effective and verifiable transfer of risk.
No transaction in respect of which the reporting bank obtained credit protection shall be assigned a risk weight higher than the risk weight that applies to a similar transaction in respect of which no credit protection was obtained.
| (a) | On-balance-sheet netting |
When a client maintains both debit and credit balances with a bank and the bank enters into a netting agreement in respect of the relevant loans and deposits with the said counterparty, the bank may in the calculation of the bank's risk exposure regard the exposure as a collateralised exposure in accordance with the provisions of paragraph (b) below, provided that the bank—
| (i) | shall have a well-founded legal basis for concluding that the netting or offsetting agreement is enforceable in each relevant jurisdiction, regardless whether the counterparty is insolvent or bankrupt; |
| (ii) | shall at any time be able to determine the loans and deposits with the same counterparty that are subject to the netting agreement; |
| (iii) | shall monitor and control any potential roll-off risk in respect of the said debit and credit balances; |
| (iv) | shall monitor and control the relevant exposures on a net basis. |
(b) Collateral
(i) When—
| (A) | a bank's exposure or potential exposure to credit risk is secured by the pledge of eligible collateral; and |
| (B) | the bank meets the minimum requirements set out in subparagraph (iii) below, |
the bank may in the calculation of its required amount of capital and reserve funds in terms of the provisions of subregulation (6) recognise the effect of such collateral in accordance with the relevant provisions of this paragraph (b).
| (ii) | Eligible collateral |
The collateral instruments specified below shall constitute eligible collateral for risk mitigation purposes in terms of the simplified standardised approach, 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.
| (A) | Cash on deposit with the reporting bank; |
| (B) | Certificates of deposit or comparable instruments issued by the reporting bank; |
| (C) | Credit-linked notes issued by the reporting bank in order to protect an exposure in the banking book; |
| (D) | Gold; |
| (E) | Securities issued by a sovereign, which sovereign is assigned a rating equal to or better than category 4 of table 1 above; |
| (F) | Securities issued by public-sector bodies that are treated as sovereigns in their country of incorporation with a rating equal to or better than category 4 of table 1 above; |
| (G) | Securities issued by the Central Government of the RSA, provided that the reporting bank's exposure and the said securities are denominated in Rand; |
| (H) | Securities issued by the Reserve Bank, provided that the reporting bank's exposure and the said securities are denominated in Rand. |
| (iii) | Minimum requirements relating to collateral |
| (A) | General requirements |
A reduction in the risk exposure of a bank shall be allowed to the extent—
| (i) | that such collateral was not already taken into account in the calculation of the reporting bank's risk exposure. For example, no reduction in the risk exposure of the reporting bank shall be allowed in respect of an exposure for which an issue specific rating was issued, which rating already reflects the effect of the risk mitigation; |
| (ii) | that the bank complies with the relevant requirements relating to disclosure, prescribed in regulation 43; |
| (iii) | that the bank is able to establish title to the collateral in order to liquidate it; |
| (iv) | that such collateral can be realised by the reporting bank under normal market conditions, that is, the value at which the collateral can be realised in the market does not materially differ from its book value, provided that a bank shall maintain an appropriate margin of collateral in excess of the amount in respect of which a reduction in the risk exposure is allowed in order to provide for fluctuations in the market value of the relevant collateral. |
| (B) | Specific requirements |
| (i) | Legal certainty |
Collateral is effective only when the legal process by which collateral is given is robust and ensures that the reporting bank has clear rights over the collateral, and may liquidate or retain it in the event of a default, insolvency or bankruptcy (or an otherwise defined credit event set out in the transaction documentation) of the obligor and, where applicable, the custodian holding the collateral.
A bank shall take all steps necessary to fulfil contractual requirements in respect of the enforceability of security interest, for example, by registering a security interest with an issuer or a registrar. When the collateral is held by a custodian, the bank shall seek to ensure that the custodian ensures adequate segregation of the collateral instruments and the custodian's own assets.
In cases of uncertainty, a bank shall obtain legal certainty by way of legal opinions confirming the enforceability of the collateral arrangements in all relevant jurisdictions, and that the bank's rights are legally well founded.
Legal opinions shall be updated at appropriate intervals in order to ensure continued enforceability.
| (ii) | Documentation |
The collateral arrangements shall be duly documented with a clear and robust procedure in place for the timely liquidation of collateral. A bank's procedures shall be sufficiently robust to ensure that any legal conditions required for declaring the default of the client and liquidating the collateral are observed.
| (iii) | Low correlation with exposure |
In order for collateral to provide effective protection, the credit quality of the obligor and the value of the collateral shall not have a material positive correlation.
(iv) Mismatches
No currency mismatch shall exist between the underlying exposure and the collateral.
Collateral obtained by the bank as security against an exposure of the bank shall be pledged as security for the full duration of the bank's exposure.
| (v) | Rating |
The rating issued in respect of the collateral instrument shall not relate only to the principal amount.
| (vi) | Robust risk-management process |
While collateral reduces credit risk, it simultaneously increases other risks to which a bank is exposed, such as legal risk, operational risk, liquidity risk and market risk. Therefore, a bank shall employ robust procedures and processes to control all material risks.
As a minimum, a robust risk-management process relating to collateral management shall include the fundamental elements specified below:
| (aa) | Strategy |
A duly articulated strategy for the use of collateral shall form an intrinsic part of a bank's general credit strategy and overall liquidity strategy.
| (bb) | Focus on underlying credit |
A bank shall continue to assess a collateralised exposure on the basis of the borrower's creditworthiness. A bank shall obtain and analyse sufficient financial information to determine the obligor's risk profile and its riskmanagement and operational capabilities.
| (cc) | Valuation |
A bank shall mark its collateral to market and revalue its collateral at regular intervals but not less frequently than once every six months.
| (dd) | Policies and procedures |
Clear policies and procedures shall be established and maintained in respect of collateral management, including:
| (i) | the terms of collateral agreements, types of collateral and enforcement of collateral terms (for example, waivers of posting deadlines); |
| (ii) | the management of legal risks; |
| (iii) | the administration of agreements; and |
| (iv) | the prompt resolution of disputes, such as valuation of collateral or positions, acceptability of collateral, fulfilment of legal obligations and the interpretation of contract terms. |
A bank shall regularly review its policies and procedures in order to ensure that the said policies and procedures remain appropriate and effective.
| (ee) | Systems |
A bank's policies and procedures shall be supported by collateral management systems capable of tracking the location and status of posted collateral.
| (ff) | Concentration risk |
A bank shall have in place a duly defined policy with respect to the amount of concentration risk that it is prepared to accept, that is, a policy in respect of the taking as collateral of large quantities of instruments issued by the same obligor.
A bank shall take into account collateral and purchased credit protection when it assesses the potential concentrations in its credit portfolio, including when determining its concentration risk in terms of section 73 of the Act.
| (iv) | Proportional cover |
When a bank obtains collateral of which the value is less than the amount of the bank's exposure to credit risk, the bank shall recognise the credit protection on a proportional basis, that is, the protected portion of the exposure shall be risk weighted in accordance with the relevant provisions of this paragraph (b) and the remainder of the credit exposure shall be regarded as unsecured.
(v) Risk weighting
For the protected portion of a credit exposure, a bank may substitute the risk weight relating to the collateral for the risk weight of the counterparty or underlying exposure subject to a minimum risk weight of 20 per cent, except in the cases specified below when a lower risk weight may apply.
A bank shall apply the said lower risk weight relating to collateral to the outstanding amount of the relevant protected exposure.
| (vi) | Exceptions to the risk weighting floor of 20 per cent |
A bank may assign a risk weight of zero per cent, or such other percentage as may be specified below, to the protected portion of a credit exposure or potential credit exposure, provided that—
| (A) | the exposure and the collateral shall be denominated in the same currency and the collateral shall consist of cash on deposit with the reporting bank; |
| (B) | the exposure and the collateral shall be denominated in the same currency and the collateral shall consist of securities issued by a sovereign or central bank eligible for a risk weight of zero per cent, when the market value of the security has been reduced by 20 per cent; |
| (C) | the transaction shall be an OTC derivative transaction subject to daily mark-to-market requirements, collateralised by cash, with no currency mismatch. |
When the transaction is collateralised by a security issued by a sovereign or public sector entity that qualifies for a risk weight of zero per cent in terms of the standardised approach, instead of cash, the bank shall risk weight the protected portion of the exposure at 10 per cent;
| (D) | the collateral shall form part of a repurchase or resale agreement, which agreement shall comply with the conditions specified below: |
| (i) | Both the exposure and the collateral shall consist of cash or a sovereign security or public-sector security qualifying for a zero per cent risk weight in terms of the simplified standardised approach. |
| (ii) | Both the exposure and the collateral shall be denominated in the same currency. |
| (iii) | The transaction shall be overnight or both the exposure and the collateral shall be marked to market on a daily basis and shall be subject to daily remargining. |
| (iv) | Following the failure of a counterparty to remargin, the time that is required from the last mark-to-market adjustment, before the failure to remargin occurred, and the liquidation of the collateral, shall be no more than four business days. |
| (v) | The transaction shall be settled across a settlement system proven for the relevant type of transaction. |
| (vi) | The documentation covering the agreement shall be standard market documentation for the said transactions. |
| (vii) | The transaction shall be governed by documentation that specifies that when the counterparty fails to satisfy an obligation to deliver cash or securities or to deliver margin, or otherwise defaults, the transaction shall be immediately terminable. |
| (viii) | Upon any default event, regardless of whether the counterparty is insolvent or bankrupt, the bank shall have the unfettered legally enforceable right to immediately seize and liquidate the collateral for the bank's benefit. |
| (ix) | The agreement shall be concluded with— |
| (aa) | a sovereign; |
| (bb) | a central bank; |
| (cc) | a public-sector entity; |
| (dd) | a bank or securities firm, provided that in the case of a securities firm the firm shall be subject to supervisory and regulatory arrangements comparable to banks in the Republic, including, in particular, risk-based capital requirements and regulation and supervision on a consolidated basis; |
| (ee) | another financial institution, including an insurance company, eligible for a risk weighting of 20 per cent in terms of the simplified standardised approach; |
| (ff) | regulated mutual funds that are subject to capital or leverage requirements; |
| (gg) | regulated pension funds; |
| (hh) | any clearing institution approved in writing by the Registrar. |
When a bank complies with all of the requirements specified above but the repurchase or resale agreement was concluded with a counterparty other than the counterparties specified above, the bank may assign a risk weighting of ten per cent to the protected portion of a credit exposure or potential credit exposure.
(c) Guarantees
(i) Risk weighting
When a bank obtains protection against loss relating to an exposure or potential exposure to credit risk in the form of an eligible guarantee, the risk weight applicable to the guaranteed transaction or guaranteed exposure may be reduced to the risk weight applicable to the guarantor in accordance with the provisions of this paragraph (c).
The lower risk weight of the guarantor shall apply to the outstanding amount of the exposure protected by the guarantee, provided that all the requirements set out in this paragraph (c) are met.
(ii) Proportional cover
When a bank obtains a guarantee for less than the amount of the bank's exposure to credit risk, the bank shall recognise the credit protection on a proportional basis, that is, the protected portion of the exposure shall be risk weighted in accordance with the relevant provisions of this paragraph (c) and the remainder of the credit exposure shall be regarded as unsecured.
(iii) Eligible guarantors
Guarantors qualifying for a risk weight of 20 per cent or better, and a risk weight lower than the protected credit exposure, shall be recognised for risk mitigation purposes in terms of the simplified standardised method, provided that for purposes of calculating the minimum required amount of capital and reserve funds of a branch in terms of the provisions of the Banks Act, 1990, read with these Regulations, no guarantee received from the parent foreign institution or any other branch or subsidiary of the parent foreign institution in respect of an exposure incurred by the branch in the Republic shall be regarded as an eligible guarantee.
[Regulation 23(7)(c)(iii), substituted by regulation 6(i) of Notice No. 297, GG 40002, dated 20 May 2016]
(iv) Minimum requirements relating to guarantees
| (A) | General requirements |
A reduction in the risk weight of a bank's exposure to the risk weight applicable to the relevant guarantor shall be allowed only to the extent—
| (i) | that such guarantee was not already taken into account in the calculation of the reporting bank's risk exposure. For example, no reduction in the risk exposure of the reporting bank shall be allowed in respect of an exposure for which an issue specific rating was issued, which rating already reflects the effect of the guarantee; |
| (ii) | that such guarantee may be realised by the reporting bank under normal market conditions; |
(B) Specific requirements
| (i) | The guarantee shall be an explicitly documented obligation assumed by the guarantor. |
| (ii) | The guarantee shall be legally enforceable in all relevant jurisdictions and the bank's rights in terms of the guarantee shall be legally well founded. |
Legal opinions shall be updated at appropriate intervals in order to ensure continued enforceability of the bank's rights in terms of the guarantee.
(iii) Direct
The guarantee shall constitute a direct claim on the guarantor.
When a qualifying default or non-payment by the obligor occurs, the reporting bank shall pursue the guarantor for amounts outstanding under the loan, rather than having to continue to pursue the obligor.
When the guarantee provides only for the payment of principal amounts, any interest amount and other unprotected payments shall be regarded as unsecured amounts.
Payment by the guarantor in terms of the guarantee may grant the guarantor the right to pursue the obligor for amounts outstanding under the loan.
(iv) Explicit
The guarantee shall be linked to specific exposures, so that the extent of the cover is duly defined and incontrovertible.
(v) Irrevocable
Other than the reporting bank's non-payment of money due in respect of the guarantee, there shall be no clause in the contract that would allow the guarantor unilaterally to cancel the guarantee or increase the effective cost of the protection as a result of deterioration in the credit quality of the protected exposure.
(vi) Unconditional
There shall be no clause in the guarantee that could prevent the guarantor from being obliged to pay out, in a timely manner, in the event of the original obligor failing to make the payment(s) due.
| (vii) | Robust risk-management process |
While guarantees reduce credit risk, they simultaneously increase other risks to which a bank is exposed, such as legal and operational risks.
Therefore a bank shall employ robust procedures and processes to control the aforesaid risks.
As a minimum, a robust risk-management process relating to guarantees shall include the fundamental elements specified below:
| (aa) | Strategy |
A duly articulated strategy for guarantees shall form an intrinsic part of a bank's general credit strategy and overall liquidity strategy.
(bb) Focus on underlying credit
A bank shall continue to assess a guaranteed exposure on the basis of the borrower's creditworthiness. A bank shall obtain and analyse sufficient financial information to determine the obligor's risk profile and its riskmanagement and operational capabilities.
(cc) Systems
A bank's policies and procedures shall be supported by management systems capable of tracking the location and status of guarantees.
A bank shall regularly review its policies and procedures in order to ensure that the said policies and procedures remain appropriate and effective.
| (dd) | Concentration risk |
A bank shall have in place a duly defined policy with respect to the amount of concentration risk that it is prepared to accept.
A bank shall take guaranteed positions into account when assessing the potential concentrations in its credit portfolio, including when determining its concentration risk in terms of section 73 of the Act.
In order to mitigate its concentration risk a bank shall monitor general trends affecting relevant guarantors.
(ee) Roll-off risks
When a bank obtains guarantees that differ in maturity from the underlying credit exposure, the bank shall monitor and control its roll-off risks, that is, the fact that the bank will be exposed to the full amount of the credit exposure when the guarantee expires.
The bank may be unable to obtain further guarantees or to maintain its capital adequacy when the guarantee expires.
(d) Treatment of pools of risk mitigation instruments
(i) When a bank obtains—
| (A) | multiple risk mitigation instruments that protect a single exposure, that is, the bank has obtained both collateral and guarantees partially protecting an exposure; or |
| (B) | protection with differing maturities, |
the bank shall subdivide the exposure into portions covered by the relevant types of risk mitigation instruments.
| (ii) | A bank shall separately calculate its risk-weighted exposure relating to each relevant portion in accordance with the relevant provisions of subregulation (6) read with this subregulation (7). |
| (e) | Treatment of risk mitigation in respect of securitisation exposure |
When—
| (i) | a bank obtains protection in the form of on-balance-sheet netting, collateral, guarantees or credit-derivative instruments in order to protect an exposure that arose from a transaction relating to a securitisation scheme, the bank shall recognise such protection in accordance with the relevant requirements specified below: |
In the case of—
| (A) | collateral, only instruments that qualify as eligible collateral in terms of the provisions of subregulation (9)(b) below shall qualify as eligible collateral in respect of the relevant securitisation exposure; |
| (B) | guarantees and credit-derivative instruments, protection obtained from eligible protection providers specified in subregulations (9)(c) and (9)(d) shall qualify as eligible protection providers in respect of the relevant securitisation exposure, provided that— |
| (i) | the said guarantee or credit-derivative instrument shall comply with the relevant minimum requirements specified in subregulations (9)(c) and (9)(d) below; |
| (ii) | no special-purpose institution involved in a securitisation scheme shall qualify as an eligible protection provider; |
| (iii) | the bank shall calculate and maintain capital requirements in respect of the protected and the unprotected portion of the relevant exposure in accordance with the relevant requirements specified in subregulations (9)(c) and (9)(d) below; |
| (C) | a maturity mismatch, the bank shall calculate and maintain a capital requirement in respect of the protected portion of the relevant exposure in accordance with the relevant requirements specified in subregulation (9)(e), provided that when the securitisation exposures in respect of which protection is obtained have different maturities, the bank shall base the relevant capital requirement on the exposure with the longest time to maturity. |
| (ii) | a bank other than a bank that acts as an originator provides protection in respect of a securitisation exposure, the bank shall calculate and maintain a capital requirement in respect of the relevant exposure in accordance with the relevant requirements specified in subregulation (9), provided that when the bank provides protection relating to an unrated credit–enhancement facility, the bank shall treat the exposure as if the bank directly provided an unrated credit-enhancement facility in respect of the relevant securitisation scheme. |
(l)
| (ii) | Where a bank provides full (or pro rata) credit protection to a securitisation exposure, the bank must calculate its capital requirements as if it directly holds the portion of the securitisation exposure on which it has provided credit protection (in accordance with the definition of tranche maturity given in subregulation (6)(h)(xiii). Provided that— |
| (A) | if the conditions set out in subregulation (i) above are met, the bank buying full (or pro rata) credit protection may recognise the credit risk mitigation on the securitisation exposure in accordance with the credit risk mitigation framework as set out in the Regulations |
[Regulation 23(7)(l) inserted by section 2(n) of Notice No. 2561, GG46996, dated 30 September 2022 - effective 1 October 2022]