Banks Act, 1990 (Act No. 94 of 1990)

Regulations

Regulations relating to Banks

Chapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof

23. Credit risk: monthly return

Directives and interpretations for completion of monthly return concerning credit risk (Form BA 200)

Subregulation (12) Credit risk mitigation: foundation IRB approach

Subregulation (12)(e) Credit-derivative instruments
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(e)Credit-derivative instruments

 

(i)Minimum requirements

 

As a minimum, a bank that adopted the foundation IRB approach for the recognition of risk mitigation relating to credit protection obtained in the form of a credit-derivative instrument—

 

(A)shall comply with the relevant requirements specified in subregulation (9)(d);

 

(B)shall, except in the case of retail exposures and purchased retail receivables, use the LGD ratios in respect of its various exposures as specified in writing by the Registrar;

 

(C)shall not in the calculation of the bank’s risk-weighted exposure reflect the effect of double default, that is, the adjusted risk weight relating to a particular exposure shall not be less than a comparable direct exposure to the relevant protection provider,

[Regulation 23(12)(e)(i)(C) substituted by section 2(dddddd) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]

provided that whenever credit protection obtained in respect of an exposure results in a higher capital requirement for the reporting bank than before the recognition of such credit protection, the reporting bank may ignore the effect of the said credit protection.

 

(ii)Eligible protection providers

 

In addition to the eligible protection providers specified in the standardised approach in subregulation (9)(d)(iii), a bank that adopted the foundation IRB approach for the recognition of risk mitigation relating to credit-derivative instruments obtained in respect of corporate institutions, sovereigns or banks may also recognise the effect of protection obtained from a protection provider that is rated internally by the bank, provided that—

 

(A) the said protection shall comply with the relevant minimum requirements specified in subregulation (9)(d)(xi) above;

 

(B) 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 protection provided by the parent foreign institution or any other branch of the parent foreign institution in respect of an exposure incurred by the branch in the Republic shall be regarded as eligible protection;

 

(C) when the bank applies the standardised approach to any direct exposure to the relevant protection provider, the bank shall also apply the relevant standardised approach risk weight to the relevant portion of the exposure protected by the relevant credit derivative instrument.

[Regulation 23(12)(e)(ii) substituted by section 2(eeeeee) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]

 

(iii)        Risk weighting

 

When a bank that adopted the foundation IRB approach for the measurement of the bank's risk-weighted credit exposure obtains—

 

(A)protection from an eligible protection provider in respect of the bank's credit exposure to a corporate institution, sovereign or bank, the bank—
(i)shall divide the relevant exposure into a protected portion and an unprotected portion;
(ii)shall in respect of the protected portion, apply—
(aa)the risk-weight function relating to the relevant protection provider; and
(bb)the PD ratio related to the relevant protection provider,

provided that, based upon its seniority or any collateralisation of a protected exposure, the bank may replace the LGD ratio of the underlying transaction with the relevant LGD ratio related to the said protected position;

[Regulation 23(12)(e)(iii)(A)(ii) substituted by section 2(ffffff) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]

(iii)shall in respect of the unprotected portion, apply the risk weight relating to the underlying obligor;
(iv)shall in the case of—
(aa)proportional protection comply with the relevant requirements specified in subregulation (9)(d)(x) above;
(bb)a currency mismatch between the underlying obligation and the protection obtained comply with the relevant requirements specified in subregulation (9)(d)(xi) above;

 

(B)protection in respect of a retail exposure or pool of retail exposures, the bank may reflect the risk reducing effect of the protection through an adjustment to the relevant PD ratio or LGD ratio, provided that the bank—
(i)shall comply with the relevant minimum requirements specified in subregulation (14)(d)(i) below;
(ii)shall apply the relevant adjustment to the PD ratio or LGD ratio in a consistent manner in respect of a given type of credit-derivative instrument, and over time.

 

(C)[Regulation 23(12)(e)(iii)(C) deleted by section 2(gggggg) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]