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 (14) Credit risk mitigation: advanced IRB approach

Subregulation (14)(d) Credit-derivative instruments
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(d)Credit-derivative instruments

 

(i)Minimum requirements

 

As a minimum, a bank that adopted the advanced 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 minimum requirements specified in subregulation (9)(d)(xi) above;

 

(B)shall in the case of single-name credit-derivative instruments assign to all relevant obligors and eligible protection providers a borrower rating and calculate its own estimates of LGD in respect of its various exposures, provided that the bank shall have in place duly specified criteria—
(i)to adjust its borrower grades;
(ii)to adjust its LGD estimates;
(iii)to allocate exposures to relevant retail or receivable pools, which criteria—
(aa)shall comply with the relevant minimum requirements for assigning borrower or facility ratings specified in subregulation (11)(b) above;
(bb)shall be plausible and intuitive;
(cc)shall take into account all relevant information;
(dd)shall comprehensively address matters relating to payment, including the impact that payments may have on the level and timing of recoveries;
(ee)shall duly state that the reference asset shall not differ from the underlying asset unless—
(i)the reference asset and the underlying exposure relate to the same obligor, that is, the same legal entity;
(ii)the reference asset ranks pari passu with or more junior than the underlying asset in the event of bankruptcy;
(iii)legally effective cross-default clauses, for example, cross-default or cross-acceleration clauses apply;

provided that the terms and conditions of the credit-derivative contract shall at no time contravene the terms and conditions of the underlying asset or reference asset;

(ff)        shall incorporate—

(i)the protection provider's ability and willingness to honour its commitments in terms of the protection provided;
(ii)any correlation between the protection provider's ability to honour its commitments in terms of the protection provided and the obligor's ability to repay any amounts due;
(iii)the effects of any residual risk, such as a currency mismatch between the protection and the underlying exposure;

 

(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(14)(d)(i)(C) substituted by section 2(ppppppp) 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

 

A bank that adopted the advanced IRB approach for the recognition of risk mitigation relating to credit-derivative instruments may recognise the effect of protection obtained from any protection provider, provided that—

 

(A)the credit-derivative instrument shall comply with the relevant minimum requirements specified in subregulation (9)(d)(xi) above;

 

(B)the bank shall have in place a comprehensive policy and criteria in respect of the types of protection providers acceptable to the bank for risk mitigation purposes;

[Regulation 23(14)(d)(ii)(B) substituted by section 2(qqqqqqq) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]

 

(C)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 obtained from 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;

[Regulation 23(14)(d)(ii)(C) inserted by section 2(rrrrrrr) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]

 

(D)when the bank applies the standardised approach in respect of any direct exposure to a protection provider, the bank shall recognise any relevant protection obtained from the protection provider by also applying the relevant standardised approach risk weight to the portion of the exposure covered by the relevant eligible credit derivative instrument;

[Regulation 23(14)(d)(ii)(D) inserted by section 2(sssssss) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]

 

(E)when the bank applies the foundation IRB approach in respect of any direct exposures to a protection provider, the bank shall recognise any relevant protection obtained from the protection provider by determining the risk weight for the comparable direct exposure to the protection provider in accordance with the relevant requirements specified in the foundation IRB approach in subregulations (11) and (12);

[Regulation 23(14)(d)(ii)(E) inserted by section 2(ttttttt) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]

 

(F)when the bank obtained the prior written approval of the Authority to use its own estimates of LGD, the bank may recognise the risk mitigating effects of any first-to-default credit derivative instrument, but the bank shall in no case recognise the risk mitigating effects of any second-to-default or any more generally nth-to-default credit derivative instrument.

[Regulation 23(14)(d)(ii)(F) inserted by section 2(uuuuuuu) 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 advanced IRB approach for the measurement of the bank's risk-weighted credit exposure obtains—

(A)protection from a protection provider in respect of the bank's credit exposure to a corporate institution, sovereign or bank, the bank—
(i)shall reflect the risk mitigation effect of the protection by way of an adjustment to either the PD ratio or LGD ratio of the relevant exposure, provided that, whichever option the bank chooses, the bank shall apply the adjustments to the PD ratio or LGD ratio of the exposure in a consistent manner; or

[Regulation 23(14)(d)(iii)(A)(i) substituted by section 2(vvvvvvv) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]

(ii)may reflect the risk mitigation effect of the protection in accordance with the relevant requirements relating to the recognition of credit-derivative instruments in terms of the foundation IRB approach specified in subregulation (12)(e) above.

[Regulation 23(14)(d)(iii)(A)(ii) substituted by section 2(wwwwwww) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]

 

(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 shall apply the relevant adjustment to the PD ratio or LGD ratio in a consistent manner in respect of a given type of guarantee, and over time.

[Regulation 23(14)(d)(iii)(B) substituted by section 2(xxxxxxx) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]

 

(C)[Regulation 23(14)(d)(iii)(C) deleted by section 2(yyyyyyy) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]