| (11) | Counterparty credit risk: operational requirements relating to the identification of wrong-way risk |
As a minimum, a bank that wishes to adopt the internal model method for the measurement of the bank's exposure to counterparty credit risk shall have in place policies, processes and procedures to identify, monitor and control exposure to or cases of material—
| (a) | general wrong-way risk, that is, when the probability of default of a counterparty is positively correlated with general market risk factors, provided that, as a minimum, the bank shall— |
| (i) | identify all relevant exposures that give rise to a greater degree of general wrong-way risk; |
| (ii) | develop and conduct relevant stress testing and scenario analyses to identify risk factors that are positively correlated with counterparty credit worthiness, which testing shall include and duly address the possibility of severe shocks occurring when relationships between risk factors have changed; |
| (iii) | continuously monitor general wrong-way risk— |
| (D) | by such other categories that may be relevant to the bank's business; |
| (iv) | regularly report to senior management and the appropriate committee of the Board relevant information related to wrong-way risks, and the steps taken to duly manage the related risk; and |
| (b) | specific wrong-way risk, that is, when future exposure relating to a specific counterparty is highly correlated with the counterparty's probability of default, which situation may arise when a company, for example, write put options in respect of its own stock, which policies, processes and procedures shall be adequate to monitor and control the relevant risk from the inception of the transaction as well as during the life of the said contract. |
