[Regulation 24(6) heading substituted by section 3(a) of Notice No. 943, GG46159, dated 31 March 2022 : effective 1 April 2022]
| (6) | Matters related to concentration risk, primarily credit concentration risk |
| (a) | in order to, among others— |
| (i) | protect a bank or controlling company's solvency in the event of the default or insolvency of— |
| (A) | a single counterparty; or |
| (B) | a group of connected or closely related counterparties, which shall for the purposes of this subregulation (6) be regarded as a single counterparty; |
| (ii) | promote the stability of the financial system |
| (iii) | limit the size of a bank or controlling company's exposure to— |
| (B) | a group of closely related borrowers, which shall for the purposes of this subregulation (6) be regarded as a single counterparty, |
in relation to the sum of the bank or controlling company's qualifying common equally tier 1 capital and reserve funds and additional tier 1 capital and reserve funds;
| (A) | other risk-based capital requirements specified in these Regulations; and |
| (B) | any limits that may be included in the bank or controlling company's policies, processes or procedures, implemented as a result of matters related to its board-approved risk appetite or risk profile; |
| (v) | promote diversification of a bank or controlling company's credit risk exposure; |
| (vi) | ensure that banks and controlling companies— |
| (A) | have in place sufficiently robust policies, processes and procedures to— |
| (i) | identify concentration risk; |
| (ii) | assess relationships among persons or counterparties; |
| (iii) | measure concentration risk; |
| (iv) | evaluate concentration risk; |
| (v) | monitor concentration risk; |
| (vi) | report concentration risk; and |
| (vii) | control or mitigate concentration risk, |
on a timely basis;
| (B) | consistently measure, aggregate and control exposures to single counterparties or to groups of connected counterparties across their books and operations , |
| (vii) | mitigate risks related to— |
| (B) | the shadow banking system; |
| (viii) | ensure that material losses in one systemically important bank or controlling company do not threaten the solvency of other systemically important financial institutions, |
a bank or controlling company shall calculate and report its credit concentration risk at every relevant tier within the banking group, that is, as a minimum, at every relevant branch, bank solo and consolidated level, in accordance with the relevant requirements specified in these Regulations, provided that when a bank or controlling company fails to or is unable to comply with any relevant requirement specified in this regulation 24, the bank or controlling company shall immediately report that failure or inability to comply in writing to the Authority , stating the reason(s) for such failure or inability to comply, the measures taken to ensure compliance as soon as possible and the date by when the bank or controlling company expects to comply with the relevant requirement.
| (b) | Without derogating from any of the provisions of section 73 of the Act, for the purposes of this subregulation (6)— |
| (i) | two or more natural or legal persons shall be deemed to be a group of connected counterparties, which shall for the purposes of this subregulation (6) be regarded as a single counterparty, if— |
| (A) | one of the persons or counterparties directly or indirectly has control over the other(s), which relationship shall for the purposes of this subregulation (6) be referred to as a control relationship; or |
| (B) | as a result of one of the counterparties experiencing financial problems , such as, for example, funding or repayment difficulties, the other(s) are likely to also encounter funding or repayment difficulties, which relationship shall for the purposes of this subregulation (6) be referred to as economic interdependence. |
That is, based on the aforesaid, a group of connected counterparties, which must for the purposes of this subregulation (6) be regarded as a single counterparty, means two or more natural or legal persons with a specific control relationship or specific interdependencies such that, should one of the persons or counterparties fail or experience substantial financial difficulties, the other relevant counterparties are very likely to fail or also experience substantial financial difficulties, provided that the relevant requirements specified hereinbefore related to connected counterparties shall not apply in relation to exposures to central counterparties , arising from clearing activities.
| (ii) | in order to determine— |
| (A) | whether a control relationship or connectedness envisaged in subparagraph (i)(A) above exists, the bank or controlling company— |
| (i) | shall automatically accept that such a control relationship exists when one person or entity owns more than 50% of the voting rights of the other person or entity; |
| (ii) | shall, as a minimum, duly take into account— |
| (aa) | any relevant voting agreement, such as, for example, an agreement with other shareholders to control a majority of the voting rights; |
| (bb) | any significant influence being exercised in relation to the appointment or dismissal of any relevant administrative, management or supervisory body, such as, for example, the right to appoint or remove a majority of the members, or the fact that a majority of such members have been appointed solely as a result of the exercise of an individual person or entity's voting rights; |
| (cc) | significant influence that may be or have been exercised in relation to the senior management, such as, for example, an entity that has the power, pursuant to a contract or otherwise , by means of consent rights or otherwise, to exercise a controlling influence over the management, key policies or key decisions of the other entity; |
| (dd) | other relevant criteria related to a control relationship specified in any relevant internationally agreed accounting or financial reporting standard, |
Provided that, in exceptional cases, when control has been established based upon any of the aforementioned criteria, and the bank or controlling company is of the opinion that such control does not necessarily result in the entities concerned constituting a group of connected counterparties that has to be regarded as a single counterparty, the bank or controlling company shall demonstrate to the satisfaction of the Authority that due to the existence of specific circumstances or corporate governance safeguards, such a group should not be regarded as a group of connected counterparties and should not be regarded as a single counterparty;
| (B) | whether a situation of economic interdependence or connectedness envisaged in subparagraph (i)(B) above exists, the bank or controlling company shall, as a minimum, duly take into account the factors specified below: |
| (i) | When 50% or more of the one counterparty's— |
| (aa) | gross annual receipts is derived from; or |
| (bb) | gross annual expenditures relates to, |
transactions with the other counterparty, such as, for example, the owner of a residential/commercial property and the tenant who pays a significant part of the rent;
| (ii) | When the one counterparty has fully or partly guaranteed the exposure of the other counterparty, or is liable by other means, and the exposure is so significant that the guarantor is likely to default or experience substantial financial difficulties if a claim occurs; |
| (iii) | When a significant part of the one counterparty 's production/output is sold to the other counterparty, and it cannot easily be replaced by other customers; |
| (iv) | When the expected source of funds to repay the loans of two or more counterparties is the same source for the respective counterparties, and the said counterparties do not have another Independent source of income from which to fully repay the loan; |
| (v) | When financial problems or difficulties of the one counterparty is likely to cause difficulties for the other counterparties in terms of full and timely repayment of liabilities; |
| (vi) | When the insolvency or default of the one counterparty is likely to be associated with the insolvency or default of the other counterparty(ies) ; |
| (vii) | When two or more counterparties rely on the same source for the majority of their funding and, in the event of the common provider's default, it is unlikely that an alternative provider would be found, that is, the funding problems of the one counterparty are likely to spread to another due to a one-way or two-way dependence on the same main funding source, |
Provided that—
| (aa) | in exceptional cases, when economic interconnectedness has been established based upon any of the aforementioned criteria , and the bank or controlling company is of the opinion that such economic interdependence does not necessarily result in the entities concerned constituting a group of connected counterparties that has to be regarded as a single counterparty, the bank or controlling company shall demonstrate to the satisfaction of the Authority that a counterparty that is economically closely related to another counterparty is likely to overcome the seemingly financial difficulties , or even the second counterparty's default, by finding alternative business partners or funding sources within an appropriate time period acceptable to the Authority, and the bank or controlling company shall thereafter comply with such requirements related to those entities as may be directed in writing by the Authority; |
| (bb) | when the sum of the bank or controlling company's exposures to one individual counterparty exceeds 5% of the sum of the bank or controlling company's qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds, as reported in item 77, column 1, of the form BA 700, as at the end of the reporting date immediately preceding the reporting date to which the current form BA 210 relates, the bank or controlling company shall carefully consider possible connected counterparties on the basis of economic interdependence. |
| (iii) | covered bonds mean bonds— |
| (A) | issued by a bank or mortgage institution; |
| (B) | subject by law to special public supervision designed to protect the relevant bond holders; |
| (C) | of which the proceeds derived from the issuance thereof must be invested in conformity with the relevant legislation, in assets that— |
| (i) | during the entire period of the validity of the bonds, are capable of covering claims attached to the bonds; and |
| (ii) | in the event of the failure of the issuer, will be used on a priority basis for the repayment of the relevant principal amount and any relevant amount related to accrued interest. |
| (c) | Subject to the provisions of subregulation (8) below, a bank or controlling company— |
| (i) | shall calculate its credit concentration risk exposure to a single counterparty or a group of connected counterparties, which shall for the purposes of this subregulation (6) be regarded as a single counterparty, as the sum of all relevant on-balance-sheet and off balance-sheet credit exposures, including transactions in instruments that give rise to counterparty credit risk, envisaged in these Regulations, included in either its banking book or trading book, provided that— |
| (A) | in the case of on-balance sheet non-derivative assets held in the bank or controlling company's banking book, the exposure value shall either be— |
| (i) | the relevant accounting value net of any relevant specific provision or value adjustment, or |
| (ii) | in exceptional cases, after the bank or controlling company informed the Authority in writing of the relevant reasons and subject to such conditions as may be specified in writing by the Authority, the exposure value gross of any relevant specific provision or value adjustment; |
| (B) | in the case of off-balance sheet commitments, excluding OTC derivative instruments or transactions in other instruments that expose the bank or controlling company to counterparty credit risk, held in the bank or controlling company's banking book, the bank or controlling company shall convert the relevant off-balance sheet commitment into a credit exposure equivalent through the use of the relevant credit conversion factors (CCFs) specified in the standardised approach for credit risk in regulation 23(8), subject to a CCF floor of 10%; |
| (C) | in the case of exposures arising from OTC derivative instruments or other instruments that expose the bank or controlling company to counterparty credit risk, other than securities financing transactions, held in the banking book or trading book, the exposure value shall be the relevant exposure at default amount, calculated in accordance with the relevant requirements specified in regulation 23(18) in respect of the standardised approach for counterparty credit risk; |
| (D) | in the case of securities financing transactions, the bank or controlling company shall use the comprehensive approach and the relevant standardised haircuts specified in regulation 23(9); |
| (E) | in the case of any position held in the bank or controlling company's trading book, the bank or controlling company shall calculate the relevant trading book exposure value to be added to the relevant banking book exposure value in accordance with the relevant requirements specified in paragraph (e) below; |
| (F) | in the case of a covered bond, the bank or controlling company shall calculate the relevant exposure value in accordance with the relevant requirements specified in subparagraph (ii) below; |
| (G) | in the case of exposures incurred via structures with underlying assets, the bank or controlling company shall calculate the relevant exposure value in accordance with the relevant requirements specified in subparagraph (iii) below; |
| (H) | in the case of exposures to any central counterparty not exempted from the provisions of this subregulation (6)— |
| (i) | the bank or controlling company shall measure its exposure as the sum of all the relevant clearing exposures and non-clearing exposures envisaged in these Regulations; |
| (ii) | arising from clearing activities, the bank or controlling company shall aggregate those relevant exposures, in accordance with the relevant requirements specified below, provided that when the bank or controlling company acts as a clearing member or is a client of a clearing member, the bank or controlling company shall determine the counterparty to which the relevant exposures must be assigned, based on the relevant requirements specified in these Regulations. |
In the case of—
| (aa) | trade exposures, the exposure value shall be the relevant exposure amount calculated in terms of the relevant requirements specified in these Regulations, such as, for example, the exposure amount arising from specified derivative instruments, calculated in terms of the standardised approach for counterparty credit risk, specified in regulation 23(18); |
| (bb) | segregated initial margin, that is, for example, when initial margin posted is held by a third-party custodian, bankruptcy remote from the relevant CCP, the relevant exposure value shall be equal to zero; |
| (cc) | non-segregated initial margin, the relevant exposure value shall be the nominal amount of the initial margin posted; |
| (dd) | pre-funded default fund contributions, the relevant exposure value shall be the nominal amount of the funded contribution; |
| (ee) | unfunded default fund contributions, the relevant exposure value shall be equal to zero; |
| (ff) | equity interests or exposure, the relevant exposure value shall be the relevant nominal amount; |
| (gg) | any other type of exposure not directly related to clearing services provided by the CCP, such as, for example, funding facilities, credit facilities and guarantees, the relevant exposure value shall be measured in accordance with the relevant requirements specified in this subregulation (6), as for any other type of counterparty exposure. |
| (I) | in the case of any relevant exposure— |
| (i) | deducted from the bank or controlling company's capital and reserve funds, the bank or controlling company, as the case may be, shall exclude that relevant exposure so deducted from the aforementioned calculation when it aggregates all the other relevant exposures to that counterparty for the purposes of this subregulation (6); |
| (ii) | risk weighted at 1,250%, the bank or controlling company, as the case may be, shall Include that exposure so risk weighted in the aforementioned calculation when it aggregates all the relevant exposures to a particular counterparty for the purposes of this subregulation (6); |
| (J) | when the bank or controlling company obtains eligible unfunded credit protection in the form of guarantees or credit derivative instruments, or eligible financial collateral, as envisaged in regulation 23(9), the bank or controlling company, as the case may be, may take that eligible unfunded credit protection into consideration, in accordance with the relevant requirements specified in paragraph (d) below, when it calculates the relevant exposure to that counterparty for the purposes of this subregulation (6). |
| (ii) | shall in the case of a covered bond— |
| (A) | that at inception and throughout the remaining maturity of the relevant covered bond meets all the conditions specified below, assign to the relevant issuing bank or institution such exposure value as may be directed in writing by the Authority, which may range between 20% and less than 100%, but in no case less than 20%, of the relevant nominal value of the bank or controlling company's covered bond holding: |
| (i) | the pool of underlying assets shall consist exclusively of: |
| (aa) | claims on or guaranteed by sovereigns , their central banks, public sector entities or multilateral development banks; |
| (bb) | claims secured by mortgages on residential real estate that— |
| (i) | qualify for a risk weight of 35% or lower in terms of the Standardised Approach for credit risk specified in regulation 23(8); and |
| (ii) | have a loan-to-value ratio of 80% or lower, provided that. in order to calculate the required loan-to-value ratio, the operational requirements specified in regulation 23(12)(b)(ii)(B)(ii) related to the objective market value of collateral and frequent revaluation shall apply. |
and/or
| (cc) | claims secured by commercial real estate that— |
| (i) | qualify for a risk weight of 100% or lower in terms of the Standardised Approach for credit risk specified in regulation 23(8); and |
| (ii) | have a loan-to-value ratio of 60% or lower, provided that, in order to calculate the required loan-to-value ratio, the operational requirements specified in regulation 23(12)(b)(ii)(B)(ii) related to the objective market value of collateral and frequent revaluation shall apply. |
| (ii) | the nominal value of the pool of assets assigned to the covered bond instrument(s) by its issuer shall exceed its nominal outstanding value by 10% or more, provided that— |
| (aa) | the issuing bank or institution shall publicly disclose on a regular basis, but not less frequently than once a year, that the cover pool in practice actually meets the minimum requirement of 10% or more envisaged hereinbefore, irrespective of whether or not any other relevant legislative framework stipulates a requirement of at least 10%; |
| (bb) | in addition to the asset types specified in sub-item (i) above, additional collateral may include substitution assets, such as, for example, cash or short-term liquid and secure assets held in substitution of the primary assets, to top-up the cover pool for management purposes, and derivative instruments entered into for the purposes of hedging the risks arising from the relevant covered bond programme; |
| (B) | other than a covered bond envisaged in item (A) above, assign to the relevant issuing bank or institution an exposure value equal to 100% of the nominal value of the bank or controlling company's covered bond holding; |
| (iii) | shall in the case of exposures incurred via structures with underlying assets, such as, for example, exposures to funds, collective investment undertakings and securitisation vehicles, look through the structure to identify the relevant underlying assets and the counterparty corresponding to each of the relevant underlying assets in respect of which the relevant exposure value is equal to or higher than 0.25% of the sum of the bank or controlling company's qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds, as reported in item 77 of the form BA 700, as at the end of the reporting date immediately preceding the reporting date to which the current form BA 210 relates, and add those relevant underlying exposures to any other direct or indirect exposure to that relevant counterparty, provided that— |
| (A) | the bank or controlling company may assign any exposure amount to an underlying asset that is less than 0.25% of the sum of the bank or controlling company's qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds, as reported in item 77 of the form BA 700, as at the end of the reporting date immediately preceding the reporting date to which the current form BA 210 relates— |
| (i) | to any other direct or indirect exposure to the relevant counterparty when the bank is able to look through the structure to Identify the relevant underlying assets and the counterparty corresponding to each of the relevant underlying assets; or otherwise; |
| (ii) | to the structure itself; |
| (B) | the bank or controlling company is not required to look through the structure to identify the underlying assets, if the bank or controlling company, as the case may be, can demonstrate to the satisfaction of the Authority that— |
| (i) | the bank or controlling company's entire investment in that structure is less than 0.25% of the sum of the bank or controlling company's qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds, as reported in item 77 of the form BA 700, as at the end of the reporting date immediately preceding the reporting date to which the current form BA 210 relates; or |
| (ii) | the bank or controlling company's exposure amount to each relevant underlying asset of the structure is smaller than 0.25% of the sum of the bank or controlling company's qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds, as reported in item 77 of the form BA 700, as at the end of the reporting date immediately preceding the reporting date to which the current form BA 210 relates, |
in which case the bank or controlling company may assign the relevant exposure amount to the structure itself, and regard that exposure as a distinct counterparty;
| (C) | when the bank or controlling company is unable to identify the relevant underlying assets of a structure where the total amount of its exposure does not exceed 0.25% of the sum of the bank or controlling company's qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds, as reported in item 77 of the form BA 700, as at the end of the reporting date immediately preceding the reporting date to which the current form BA 210 relates, the bank or controlling company, as the case may be— |
| (i) | shall assign the relevant total exposure amount of its investment to that structure, which shall for the purposes of these Regulations be regarded as an unknown client, and the bank or controlling company shall aggregate all those unknown client exposures as if they related to a single counterparty, which is, the said unknown counterparty; |
| (ii) | shall apply any relevant exposure limit envisaged in this subregulation (6) to that said unknown single counterparty; |
| (D) | when the bank or controlling company, in the opinion of the Authority, potentially abuses the provisions of this subparagraph (iii), by investing in several apparent individually immaterial structures with identical underlying assets, the Authority may impose such additional capital requirements on the bank or controlling company in relation to that potential credit concentration risk exposure arising from those apparent immaterial structures as may be specified in writing by the Authority; |
| (E) | unless specifically otherwise stated, the relevant exposure amount shall be the relevant nominal amount invested by the bank or controlling company; |
| (F) | when the bank or controlling company applies the look-through approach envisaged hereinbefore in respect of a structure— |
| (i) | where all investors rank pari passu, such as, for example, a collective investment undertaking, the relevant exposure value assigned to a specific counterparty shall be equal to the pro-rata share that the bank or controlling company holds in that structure, multiplied by the value of the relevant underlying asset in that structure. |
For example, a bank holding a 1% share in a structure that invests in 20 assets each with a value of 5 shall assign an exposure of 0.05 to each of the relevant counterparties, and add that exposure amount to any other relevant direct or indirect exposure the bank may have to that particular counterparty.
| (ii) | with different seniority levels among investors, such as, for example, a securitisation scheme or vehicle, the relevant exposure value to a counterparty shall be measured for each relevant tranche within the structure, assuming a pro-rata distribution of losses amongst investors in a single tranche. |
To compute the relevant exposure value to the underlying asset, the bank or controlling company—
| (aa) | shall firstly consider the lower of the value of the tranche in which the bank or controlling company invested and the nominal value of each underlying asset included in the underlying portfolio of assets; and |
| (bb) | then apply the pro-rata share of the bank or controlling company's investment in the tranche to the value determined in sub-item (aa) above. |
| (G) | the bank or controlling company shall in all relevant cases— |
| (i) | identify all relevant third parties that may constitute an additional risk factor inherent in a structure itself rather than in relation to the relevant underlying assets, such as, for example, an originator, a fund manager, a liquidity provider or a credit protection provider, which may be a risk factor for more than one structure that the bank or controlling company invests in; |
| (ii) | connect its investments in all relevant structures with a common risk factor, to form a relevant group of connected counterparties. |
For example—
| (aa) | a manager of funds must be regarded as a distinct counterparty, and the sum of the bank or controlling company's investments in all of the funds managed by that particular manager shall be subject to any relevant concentration risk exposure limit envisaged in this subregulation (6), with the exposure value equal to the total value of the respective investments, provided that, when the legal framework governing the regulation of particular funds requires separation between the legal entity that manages the fund and the legal entity that has custody of the fund's assets, that manager may not constitute an additional risk factor in respect of the relevant aggregate amount invested; |
| (bb) | in the case of structured finance transactions or products, a liquidity provider or sponsor of short-term programmes, such as asset-backed commercial paper (ABCP) conduits or structured investment vehicles (SIVs). warrants consideration as an additional risk factor, with the exposure value equal to the relevant amount(s) invested; |
| (cc) | in the case of a synthetic transaction or position, the protection provider, that is, the seller of protection by means of a credit default swap (CDS) or guarantee, may be an additional source of risk and a common factor for interconnecting different structures, with the exposure value equal to the percentage value of the underlying portfolio; |
| (iii) | add its investments in a set of structures associated with a third party that constitutes a common risk factor to other relevant exposures , such as a loan, that the bank or controlling company has to that third party. |
For example, in the case of a credit protection provider, the source of the additional risk for the bank or controlling company investing in a structure is the default of the credit protection provider. In such cases, the bank or controlling company must add the investment in the structure to the direct exposures to that credit protection provider, since both exposures might result in losses in the event that the protection provider defaults.
Provided that when a bank or controlling company considers multiple third parties to be potential drivers of additional risk, the bank or controlling company shall assign all relevant exposures resulting from its investments in the relevant structures to each of those relevant identified third parties.
| (iv) | shall manage its business in such a manner that the aggregate amount of its credit concentration risk exposure, calculated in accordance with the relevant requirements specified in this subregulation |
| (A) | to an institution identified by the Authority or the Reserve Bank from time to time as a domestic systemically important bank (D-SIB) or domestic systemically important financial institution (D-SIFI), does not at any time— |
| (i) | exceed such a percentage as may be specified in writing by the Authority of the sum of the bank or controlling company's qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds, as reported in item 77 of the form BA 700, as at the end of the reporting date immediately preceding the reporting date to which the current form BA 210 relates; |
| (ii) | following the 12'h month after the date that the bank or controlling company itself has been identified as a D-SIB or D-SIFI, exceed such a percentage as may be specified in writing by the Authority of the sum of the bank or controlling company's qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds , as reported in item 77 of the form BA 700, as at the end of the reporting date immediately preceding the reporting date to which the current form BA 210 relates; |
| (B) | to any institution identified as and included in the list of global systemically important banks (G-SIBs), published by the Financial Stability Board from time to time, does not at any time— |
| (i) | exceed such a percentage as may be specified in writing by the Authority of the sum of the bank or controlling company's qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds , as reported in item 77 of the form BA 700, as at the end of the reporting date immediately preceding the reporting date to which the current form BA 210 relates; |
| (ii) | following the 12th month after the date that the bank or controlling company itself has been identified as and included in the said list of G–SIBs, published by the Financial Stability Board from time to time, exceed fifteen per cent of the sum of the bank or controlling company's qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds, as reported in item 77 of the form BA 700, as at the end of the reporting date immediately preceding the reporting date to which the current form BA 210 relates; |
| (C) | to any other single counterparty or group of connected counterparties, which shall for the purposes of this subregulation (6) be regarded as a single counterparty , other than a D-SIB, D-SIFI or G-SIB, does not at any time exceed twenty five per cent of the sum of the bank or controlling company 's qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds, as reported in item 77 of the form BA 700, as at the end of the reporting date immediately preceding the reporting date to which the current form BA 210 relates; |
| (v) | shall manage its business in such a manner that the aggregate amount of its credit concentration risk exposure to such sectors or geographical areas as may be specified in writing by the Authority from time to time, complies with such conditions or limits as may be specified in writing by the Authority from time to time; |
| (vi) | shall manage its business in such a manner that the aggregate amount of such funding sources as may be specified in writing by the Authority from time to time, complies with such conditions or limits as may be specified in writing by the Authority from time to time, in addition to any conditions or limits that may be specified— |
| (A) | in these Regulations; or |
| (B) | by the board of directors of the relevant bank or controlling company; |
| (vii) | shall manage its intragroup exposures in such a manner that the aggregate amount of its exposure to entities within the group complies with such conditions or limits as may be specified in writing by the Authority from time to time, in addition to any conditions or limits that may be specified— |
| (A) | in these Regulations: or |
| (B) | by the board of directors of the relevant bank or controlling company. |
| (d) | A bank or controlling company that obtained eligible credit risk mitigation, such as, for example, eligible financial collateral or unfunded credit protection in the form of guarantees or credit derivative instruments, as envisaged in regulation 23(9), may take that eligible credit risk mitigation into consideration when it calculates the relevant exposure to that counterparty for the purposes of this subregulation (6), provided that— |
| (i) | collateral that are only eligible in terms of the internal-ratings based (IRB) approach, but not in terms of the standardised approach specified in regulation 23(9), such as receivables, commercial real estate and residential real estate, or other forms of collateral, shall not be eligible for a reduction in the credit exposure value for the purposes of the credit concentration risk exposure calculation in terms of the provisions of this subregulation (6); |
| (ii) | any eligible protection with a maturity mismatch may be taken into consideration— |
| (A) | only when its original maturity is equal to or greater than one year and the residual maturity of the protection is not less than three months; |
| (B) | using the same approach as set out in regulation 23(9) ; |
| (iii) | when the bank or controlling company has in place a legally enforceable netting agreement or arrangement for loans and deposits, as envisaged in regulation 23(9), the bank or controlling company may calculate the relevant exposure value for credit concentration risk exposure purposes on the basis of the relevant net credit exposure only if it complies with the relevant specified requirements, and then in accordance with the approach specified in regulation 23(9); |
| (iv) | the reduction in the value of the credit exposure to the relevant counterparty as a result of the aforementioned eligible credit risk mitigation shall in the case of- |
| (A) | unfunded credit protection be equal to the value of the relevant protected portion; |
| (B) | a bank that uses the simple approach for collateralised positions be equal to the value of the eligible financial collateral, as envisaged in regulation 23(9); |
| (C) | a bank that uses the comprehensive approach for financial collateral be equal to the adjusted value of the collateral, after applying the relevant standard haircuts specified in regulation 23(9)(b); |
| (D) | any instruments that expose the bank to counterparty credit risk, such as OTC derivative instruments, be equal to the value of the collateral recognised in the calculation of the relevant amount of counterparty credit risk exposure for the said derivative instruments; |
| (v) | the bank or controlling company shall concurrently with the reduction in the relevant exposure value of the counterparty in respect of which eligible credit protection wasobtained, account for the subsequent and related exposure to the provider of the eligible credit risk mitigation, which exposure amount to the provider of the eligible credit risk mitigation— |
| (A) | shall in the case of credit protection in the form of a credit-default swap as envisaged in paragraph (e)(xiii) below, be calculated in accordance with the relevant requirements specified in the said paragraph (e)(xiii) below; |
| (B) | shall in all cases other than credit protection envisaged in item (A) above be equal to the amount by which the exposure to the original counterparty is reduced; |
| (e) | A bank or controlling company shall add to its relevant aggregate credit exposure amount to a counterparty included in its banking book, any relevant credit exposure amount to that counterparty arising from transactions or positions held in the bank or controlling company's trading book, to calculate the relevant required aggregate credit exposure amount to that counterparty for the purposes of this subregulation (6), provided that— |
| (i) | only the relevant credit exposure amount associated with the risk of default of the relevant counterparty, such as, for example, positions in bonds and equities, shall be included in the relevant calculation envisaged in this subregulation (6); |
| (ii) | positions related to commodities or currency shall be excluded from the calculations envisaged in this subregulation (6); |
| (iii) | in the case of a straightdebt or equity instrument, the exposure value shall be the relevant account ing value of the exposure, that is, the relevant market value of the instrument; |
| (iv) | in the case of instruments such as swaps, futures, forwards or credit derivative instruments , the bank or controlling company shall determine the relevant exposure value by decomposing the relevant instrument into its respective individual legs and converting the relevant position that falls within the ambit of the provisions of this subregulation (6), in accordance with the relevant requirements specified in these Regulations, in order to determine the relevant required risk-based capital requirement for that position; |
For example—
| (A) | a future on stock A is decomposed into a long position in stock A and a short position in a risk-free interest rate exposure in the relevant funding currency; and |
| (B) | a typical interest rate swap is represented by a long position in a fixed interest rate exposure and a short position in a floating interest rate exposure, or vice versa. |
| (v) | in the case of a credit derivative instrument that represents sold protection— |
| (A) | the exposure to the referenced name shall be the amount due in the case that the relevant referenced name triggers the instrument, minus the absolute value of the credit protection; |
| (B) | when the market value of the relevant credit derivative instrument is positive from the perspective of the protection seller, such a positive market value shall be added to the exposure of the protection seller to the protection buyer, in accordance with the relevant requirements specified in paragraph (c)(i)(C) hereinbefore, particularly when the present value of already agreed but not yet paid periodic premiums exceeds the absolute market value of the credit protection; |
| (vi) | in the case of a credit-linked note, the protection seller shall consider both the position in the bond of the note issuer and the position in the relevant underlying referenced by the note; |
| (vii) | in the case of an option— |
| (A) | the bank or controlling company shall determine the relevant required exposure value based on the change(s) in option prices that would result from a default of the relevant underlying instrument; |
| (B) | the exposure value in respect of— |
| (i) | a simple long call option shall be its relevant market value; |
| (ii) | a simple short put option shall be equal to the strike price of the option minus its market value; |
| (C) | a default of the underlying would in the case of a short call or long put option lead to a profit, that is, a negative exposure, instead of a loss, resulting in an exposure- |
| (i) | of the option's market value in the case of a short call option; and |
| (ii) | equal to the strike price of the option minus its market value in the case of a long put option; |
| (D) | the bank or controlling company shall then aggregate the relevant positions with those from other relevant exposures and, after aggregation, set any relevant negative net exposure equal to zero; |
| (viii) | in the case of an investment in or a transaction related to an index position, securitisation position, hedge fund or investment fund, the bank or controlling company shall calculate the relevant exposure value in accordance with the relevant requirements set out in paragraph (c)(iii) above, by applying the same principles and requirements specified for a similar instrument held or transaction in its banking book; |
| (ix) | in all relevant cases the bank or controlling company may offset long and short positions related to the same issue, that is, when the issuer, coupon, currency and maturity are identical, the bank or controlling company may include in the calculation of its exposure to a particular counterparty only the relevant net position in respect of that specific issue; |
| (x) | in the case of positions in different issues related to the same counterparty, the bank or controlling company— |
| (A) | may offset the relevant positions only when the short position is junior to the long position, or when the positions are of the same seniority; |
| (B) | may, for example, in order to determine the relative seniority of positions, allocate securities into broad buckets of degrees of seniority, such as "Equity", "Subordinated Debt" and "Senior Debt"; |
| (xi) | in the case of positions hedged by a credit derivative instrument, the bank or controlling company— |
| (A) | may recognise the hedge when the underlying of the hedge and the position hedged comply with the relevant requirements specified in subparagraph (x) hereinbefore, that is, when the short position is junior or of equivalent security to the long position; |
| (B) | shall, subject to the provisions of subparagraph (xiii) below, duly account for the subsequent corresponding exposure to the relevant credit protection provider, based on the principles related to the substitution approach set out in paragraph (d) above; |
| (xii) | when a bank or controlling company is unable to allocate securities to the relevant required levels of subordination or buckets based on relative seniority, the bank or controlling company shall not apply any offsetting between long and short positions in respect of different issues relating to the same counterparty when it calculates its relevant exposure value; |
| (xiii) | when credit protection obtained is in the form of a credit-default swap (CDS), and either the CDS provider or the relevant referenced entity is not a financial entity, the relevant amount assigned to the credit protection provider shall not be the amount by which the exposure to the original counterparty is reduced but, instead, the amount shall be the relevant counterparty credit risk exposure amount calculated in terms of the standardised approach specified in regulation 23(18), provided that, for the purposes of this subparagraph (xiii), financial entities mean— |
| (A) | regulated financial institutions, defined as a parent and its subsidiaries when any substantial legal entity in the consolidated group is supervised by a regulator that imposes internationally agreed prudential requirements similar to, for example,the prudential requirements specified in the Act and in these Regulations or the Insurance Act, in relation to, for example, prudentially regulated insurance companies, broker/dealers, banks, thrifts and futures commission merchants; and |
| (B) | unregulated financial institutions, defined as legal entities of which the main business includes— |
| (i) | the management of financial assets; |
| (v) | provision of credit enhancements; |
| (ix) | central counterparty services; |
| (x) | proprietary trading; and |
| (xi) | such other financial services activities specified in writing by the Authority or identified by any other relevant supervisor; |
| (xiv) | no netting shall be permitted across positions respectively held in the bank or controlling company's banking book and s trading book; |
| (xv) | when the permissible offsetting of positions envisaged in this subregulation (6) ultimately results in a net short position in respect of a particular counterparty, that net short exposure amount related to that counterparty must be excluded from the large exposure calculation envisaged in this subregulation (6); |
| (f) | When the aggregate amount of credit concentration risk exposure, calculated in accordance with the relevant requirements specified in this subregulation (6), exceeds 10% of the sum of the bank or controlling company"s qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds, as reported in item 77 of the form BA 700, as at the end of the reporting date immediately preceding the reporting date to which the current form BA 210 relates, prior to taking into account the effect of any relevant eligible credit risk mitigation, the bank or controlling company shall report the relevant exposure values before and after the application of any relevant eligible credit risk mitigation, as set out on the form BA 210, provided that— |
| (i) | the bank or controlling company shall report the relevant required details related to all exempt exposures with values equal to or above 10% of the sum of the bank or controlling company's qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds, as reported in item 77 of the form BA 700, as at the end of the reporting date immediately preceding the reporting date to which the current form BA 210 relates, separately on the form BA 210; |
| (ii) | the bank or controlling company shall report the relevant required details specified on the form BA 210 related to its largest 20 exposures to counterparties, irrespective of the values of those exposures relative to the sum of the bank or controlling company's qualifying common equity tier 1 capital and reserve funds and additional tier 1 capital and reserve funds, as reported in item 77 of the form BA 700, as at the end of the reporting date immediately preceding the reporting date to which the current form BA 210 relates; |
| (g) | When a bank, controlling company, foreign subsidiary of a bank or controlling company, branch or branch of a bank entered into any transaction in the form of an investment with or a loan, advance or other direct or indirect credit facility granted to any person, as envisaged hereinbefore, which transaction results in the reporting bank, controlling company, foreign subsidiary of a bank or controlling company, branch or branch of a bank being exposed to that person to an amount exceeding an amount representing the percentage of capital and reserve funds envisaged in section 73 of the Act read with this subregulation (6) and subregulation (7), the bank, controlling company, foreign subsidiary of a bank or controlling company , branch or branch of a bank, as the case may be— |
| (i) | shall immediately report its failure or inability to comply with the specified limit in writing to the Authority, stating the reasons for such failure or inability to comply; |
| (ii) | shall submit in writing to the Authority such further information in such a format as may be directed in writing by the Authority. |
[Regulation 24(6) substituted by section 3(a) of Notice No. 943, GG46159, dated 31 March 2022 : effective 1 April 2022]
