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 (9) Credit risk mitigation: standardised approach |
| (9) | Credit risk mitigation: standardised approach |
When a bank that adopted the standardised approach for the measurement of its exposure to credit risk in respect of positions held in its banking book obtains eligible collateral, guarantees or credit-derivative instruments, or enters into a netting agreement with a client that maintains both debit and credit balances with the reporting bank, a reduction in the credit risk exposure arising from a position held in the banking book of the bank shall be allowed to the extent that the bank achieves an effective and verifiable transfer of risk. Provided that when the bank is unable to comply with all the relevant disclosure requirements that may be specified from time to time, the Authority may direct the bank in writing to limit the reduction in the bank’s exposure to credit risk to such an extent as may be directed in writing by the Authority.
A bank shall ensure that the effect of credit risk mitigation is in no case double-counted, that is, the bank shall, for example, disregard the effect of credit risk mitigation when the risk weight or any risk component of any relevant underlying exposure already reflects the effect of that risk mitigation.
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.
[Words preceding Regulation 23(9)(a) substituted by section 2(ff) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (a) | On-balance-sheet netting |
When a bank entered into a netting agreement in respect of loans and deposits as envisaged in subregulation (7)(a) above, the bank—
| (i) | may in the case of loans and deposits with no maturity or currency mismatches calculate its exposure to credit risk in accordance with the relevant provisions of the simple approach specified in this subregulation (9); |
| (ii) | shall in all other cases calculate its risk exposure in accordance with the relevant provisions of the comprehensive approach specified in this subregulation (9), |
provided that the bank shall at all times comply with the relevant conditions specified in subregulation (7)(a) above.
| (b) | Collateral |
| (i) | When a bank’s exposure or potential exposure to credit risk is secured by the pledge of eligible financial collateral, the bank may recognise the effect of such collateral— |
| (A) | in the case of exposures held in the banking book, in accordance with either the simple approach or comprehensive approach, but not both approaches; |
| (B) | in the case of OTC derivative transactions, in accordance with the comprehensive approach specified in this subregulation (9) read with the relevant requirements specified in subregulations (15) to (19); |
| (C) | in the case of exposures held in the bank’s trading book, in accordance with the comprehensive approach specified in this subregulation (9), |
provided that—
| (i) | the bank shall comply with the relevant minimum requirements specified below; |
| (ii) | when the bank decides to apply the simple approach for financial collateral, the bank may only recognise the effect of such collateral in cases where no maturity mismatch exists; |
| (iii) | when the bank wishes to adopt the comprehensive approach the bank shall inform the Authority in writing of its decision, and comply with such further conditions as may be specified in writing by the Authority; |
| (iv) | in all relevant cases, when the bank lends securities or post collateral, the bank shall calculate and maintain the relevant required amount of capital and reserve funds related to— |
| (aa) | the credit risk and/ or market risk of the securities, if that risk remains with the bank; and |
| (bb) | the counterparty credit risk arising from the risk that the borrower of the securities may default. |
| (v) | when the bank lends or posts non-eligible instruments as collateral in the case of a securities financing transaction, the bank shall apply to the relevant exposure a haircut of 30 per cent; |
| (vi) | when the bank borrows non-eligible instruments in the case of a securities financing transaction, the bank may not apply credit risk mitigation in respect of the relevant exposure in terms of the provisions of these Regulations. |
[Regulation 23(9)(b)(i) substituted by section 2(gg) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (ii) | Minimum requirements: general |
A bank that adopted the standardised approach for the measurement of its exposure to credit risk shall in addition to the requirements specified in this subregulation (9), comply with—
| (A) | all the relevant requirements and conditions relating to eligible collateral specified in subregulation (7)(b); and |
| (B) | the relevant requirements relating to disclosure, specified in regulation 43 or as directed in writing by the Authority from time to time. |
[Regulation 23(9)(b)(ii) substituted by section 2(hh) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (iii) | Eligible financial collateral: simple approach |
For risk mitigation purposes, the instruments specified below shall be regarded as eligible collateral in terms of the simple 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, including certificates of deposit or comparable instruments issued by the reporting bank, on deposit with the bank that is exposed to credit risk. |
When cash on deposit, certificates of deposit or comparable instruments issued by the lending bank are held as collateral at a third-party bank in a non-custodial arrangement, the bank may assign the risk weight related to the third-party bank to the exposure amount protected by the collateral, provided that—
| (i) | the cash/instruments are pledged/assigned to the lending bank; |
| (ii) | the pledge/assignment is unconditional and irrevocable; and |
| (iii) | the bank has applied the relevant haircut specified below in respect of any currency risk. |
| (B) | Credit-linked notes issued by the reporting bank in order to protect an exposure in the banking book. |
| (C) | Gold. |
| (D) | In the case of a jurisdiction that allows the use of external ratings for purposes of calculating minimum required capital and reserve funds, debt securities rated by an eligible external credit assessment institution, which debt securities have been assigned the ratings specified below: |
| (i) | BB- or better when issued by sovereigns or a public sector entity treated by the relevant national supervisor as sovereign exposure or equivalent to sovereign exposure. |
| (ii) | BBB- or better when issued by other institutions, including banks and other prudentially regulated financial institutions, such as securities firms. |
| (iii) | A-3/P-3 or better in respect of short-term debt instruments. |
| (E) | In the case of a jurisdiction that allows the use of external ratings for purposes of calculating minimum required capital and reserve funds, debt securities not rated by an eligible external credit assessment institution, which debt securities— |
| (i) | were issued by a bank; and |
| (ii) | are listed on a licensed exchange; and |
| (iii) | are classified as senior debt; and |
| (iv) | all rated issues of the same seniority issued by the bank envisaged in subitem (i) have been rated at least BBB- or A-3/P-3 by an eligible external credit assessment institution, and the bank holding the securities as collateral has no information suggesting or justifying a rating lower than BBB- or A-3/P-3, as the case may be, |
Provided that when the Authority is of the opinion that the aforementioned instruments are no longer sufficiently liquid, the Authority may determine that such instruments no longer qualify as eligible collateral.
| (F) | In the case of a jurisdiction that does not allow the use of external ratings for purposes of calculating minimum required capital and reserve funds: |
| (i) | Debt securities issued by a sovereign or public sector entity treated by the relevant national supervisor as sovereign exposure or equivalent to sovereign exposure; |
| (ii) | Debt securities issued by a bank included in Grade A under the category of SCRA banks in subregulation (8)(a); |
| (iii) | Debt securities issued by an “investment grade” entity envisaged in table 1 in subregulation (8)(a) read with subregulation (8)(a)(v); and |
| (iv) | Securitisation exposures assigned a risk weight lower than 100 per cent, |
Provided that when the Authority is of the opinion that the aforementioned instruments are no longer sufficiently liquid, the Authority may determine that such instruments no longer qualify as eligible collateral.
| (G) | Equities, including convertible bonds, that are included in a main index. |
| (H) | Undertakings for collective investments in transferable securities (“UCITS”) and mutual funds, provided that— |
| (i) | a price for the units is publicly quoted on a daily basis; and |
| (ii) | the UCITS/mutual fund may only invest in the instruments specified in this subparagraph (iii). |
| (I) | Securities issued by the Central Government of the RSA, provided that the reporting bank’s exposure and the said securities are denominated in Rand. |
| (J) | Securities issued by the Reserve Bank, provided that the reporting bank’s exposure and the said securities are denominated in Rand. |
[Regulation 23(9)(b)(iii) substituted by section 2(ii) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (iv) | Eligible financial collateral: comprehensive approach |
| (A) | In addition to the instruments specified in subparagraph (iii) above, which instruments qualify as eligible collateral in terms of the simple approach, the instruments specified below shall be regarded as eligible collateral in terms of the comprehensive approach for the recognition of risk mitigation in respect of the bank's banking book exposures, 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. |
| (i) | Equities and convertible bonds that are not included in a main index but are listed on a licensed exchange. |
| (ii) | UCITS/mutual funds which include the equities or convertible bonds specified in subitem (i) above. |
[Regulation 23(9)(b)(iv)(A)(i) and (ii) substituted by sections 2(jj) and (kk) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (B) | When a bank includes repurchase or resale agreements in the bank's trading book, any instrument obtained as collateral in respect of the bank's exposure to counterparty risk shall be regarded as eligible collateral, provided that— |
| (i) | the said collateral instruments shall be included in and be managed as part of the bank's trading activities; |
| (ii) | 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; |
| (iii) | in the case of a bank that applies— |
| (aa) | the standardised haircuts specified in subparagraph (xi) below, the bank shall apply the haircuts relating to nonmain index equities listed on a licensed exchange; |
| (bb) | its own haircuts to collateral, the bank shall comply with the relevant minimum requirements relating to own estimates specified in subparagraphs (xii) and (xiii) below; |
| (cc) | the VaR approach for the measurement of the bank's credit exposure to credit risk, the bank shall comply with the minimum requirements relating to VaR estimates specified in subparagraph (xvii) below, |
in respect of all collateral instruments that do not otherwise than in accordance with this item (B) qualify as eligible collateral.
| (v) | Proportional cover |
In respect of both the simple approach and the comprehensive approach for the recognition of risk mitigation, when—
| (A) | a bank obtained collateral of which the value is less than the amount of the bank’s exposure to credit risk, or |
| (B) | when losses are shared pari passu on a pro rata basis between the bank and the protection provider, |
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 requirements specified in this paragraph (b) and the remainder of the credit exposure shall be regarded as unsecured.
[Regulation 23(9)(b)(v) substituted by section 2(ll) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (vi) | Risk weighting: Simple approach |
A bank that adopted the simple approach relating to credit risk mitigation shall risk weight its exposures in accordance with, and comply with, the relevant requirements specified in subregulation (7)(b).
| (vii) | Risk weighting: Comprehensive approach |
A bank that obtained eligible financial collateral and that adopted the comprehensive approach for the measurement of the bank's protected exposure—
| (A) | shall calculate an adjusted exposure in accordance with the relevant formulae set out in subparagraphs (viii) to (x) below; |
| (B) | shall in the calculation of the bank's adjusted exposure— |
| (i) | make use of the haircut percentage specified in table 1 in subparagraph (xi) below, in order to adjust both the amount of the exposure and the value of the collateral; or |
| (ii) | in the case of transactions subject to further commitment, that is, repurchase or resale agreements— |
| (aa) | apply a haircut of zero per cent, provided that the bank complies with the minimum conditions relating to a haircut of zero per cent specified in subparagraph (xv) below; |
| (bb) | recognise the effects of bilateral master netting agreements, provided that the bank complies with the minimum conditions relating to bilateral master netting agreements specified in subparagraph (xvi) below; or |
| (cc) | apply the results of a VaR model approach to reflect the price volatility of the exposure and the collateral, provided that the bank complies with the minimum conditions relating to the VaR model approach specified in subparagraph (xvii) below. |
Notwithstanding the choice made between the standardised approach and the foundation IRB approach for the measurement of the bank’s exposure to credit risk, a bank shall use the standard haircut percentages specified in table 1 in subparagraph (xi) below.
[Regulation 23(9)(b)(vii)(B) substituted by section 2(mm) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (C) | shall calculate its risk weighted exposure by multiplying the adjusted exposure with the risk weight of the relevant counterparty. |
| (viii) | Comprehensive approach: formula for the calculation of a bank's adjusted exposure in the case of a collateralised transaction |
A bank—
| (A) | shall in the case of a collateralised transaction, other than a collateralised OTC derivative transaction, calculate its adjusted exposure through the application of the formula specified below, which formula is designed to take into account the effect of the collateral and any volatility in the amount relating to the exposure or collateral. The formula is expressed as: |
E* = max {0, [E x (1 + He) - C x (1 - Hc - Hfx)]}
where:
| E* | is the amount of the exposure after the effect of the collateral is taken into consideration, that is, the adjusted exposure |
| E | is the current value of the exposure before the effect of the collateral is taken into consideration |
| He | is the relevant haircut that relates to the exposure |
| C | is the current value of the collateral obtained by the bank |
| Hc | is the haircut that relates to the collateral |
| Hfx | is the haircut that relates to any currency mismatch between the collateral and the exposure |
The haircut that relates to currency risk shall be 8 per cent, based on a ten-business day holding period and daily mark-to-market, as set out in subparagraph (xi)(D) below.
| (B) | shall in the case of a collateralised OTC derivative transaction, calculate its adjusted exposure in accordance with the relevant formula and requirements specified in subregulation (18) or (19), as the case may be. |
[Regulation 23(9)(b)(viii) substituted by section 2(nn) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (ix) | Comprehensive approach: formula for the calculation of a bank’s adjusted exposure when the effect of a master netting agreement is taken into consideration |
A bank that applies the standard haircuts specified in subparagraph (xi) below in relation to its securities financing transactions and wishes to recognise the effects of bilateral master netting agreements, shall calculate its adjusted exposure through the application of the formula specified below, which formula includes the relevant current exposure, an amount for systematic exposure of the securities based upon the net exposure, an amount for the idiosyncratic exposure of the securities based upon the gross exposure, and an amount for currency mismatch, provided that the bank shall comply with the minimum requirements relating to bilateral netting agreements specified in subparagraph (xvi) below. The formula is expressed as:
where:
| E* | is the adjusted exposure value of the relevant netting set, after the effect of risk mitigation is taken into consideration |
| Ei | is the relevant current value of all cash and securities lent, sold with an agreement to repurchase or otherwise posted to the counterparty under the netting agreement |
| Cj | is the relevant current value of all cash and securities borrowed, purchased with an agreement to resell or otherwise held by the bank under the netting agreement |
| Es | is the absolute value of each relevant security issuance under the relevant netting set |
| Hs | is the relevant haircut that relates to Es, that is— |
Hs is a positive number when the security is lent, sold with an agreement to repurchase, or transacted in a manner similar to either securities lending or a repurchase agreement; and
Hs is a negative number when the security is borrowed, purchased with an agreement to resell, or transacted in a manner similar to either a securities borrowing or reverse repurchase agreement
| N | is the relevant number of security issues contained in the relevant netting set, provided that issuances in respect of which the value Es is less than one tenth of the value of the largest Es in the netting set shall be excluded from the count |
| Efx | is the relevant absolute value of the net position in each relevant currency fx that differs from the settlement currency |
| Hfx | is the relevant haircut in respect of the currency mismatch of currency fx |
The haircut that relates to currency risk shall be 8 per cent, based on a ten-business day holding period and daily mark-to-market, as set out in subparagraph (xi)(D) below.
[Regulation 23(9)(b)(ix) substituted by section 2(oo) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (x) | [Regulation 23(9)(b)(x) deleted by section 2(pp) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025] |
| (xi) | Comprehensive approach: standard haircuts |
| (A) | Subject to the provisions of items (C) to (E) below, in the case of a jurisdiction that allows the use of external ratings for purposes of calculating minimum required capital and reserve funds, a bank that adopted the comprehensive approach shall in the calculation of its relevant adjusted exposure amounts after risk mitigation apply the respective haircuts specified in table 1 below in relation to the relevant collateral (Hc) and exposure (He), which haircuts are based on the presumption of daily mark-to-market, daily remargining and a 10-business day holding period, and are expressed as percentages: |
Table 1: Standard haircut 1 |
||||||||||||||
Issue rating in respect of debt securities |
Residual maturity |
Sovereigns 2 |
Other issuers |
Securitisation exposure 5 |
||||||||||
AAA to AA-/A-1 |
≤ 1 year |
0.5 |
1 |
2 |
||||||||||
> 1 year; ≤ 3 years |
2 |
3 |
8 |
|||||||||||
> 3 year; ≤ 5 years |
4 |
|||||||||||||
> 5 year; ≤ 10 years |
4 |
6 |
16 |
|||||||||||
> 10 years |
12 |
|||||||||||||
A+ to BBB-/ A-2/ A-3/ P-3 and unrated bank securities qualifying as eligible collateral in terms of the simple approach |
≤ 1 year |
1 |
2 |
4 |
||||||||||
> 1 year; ≤ 3 years |
3 |
4 |
12 |
|||||||||||
> 3 year; ≤ 5 years |
6 |
|||||||||||||
> 5 year; ≤ 10 years |
6 |
12 |
24 |
|||||||||||
> 10 years |
20 |
|||||||||||||
BB+ to BB- |
All |
15 |
Not eligible |
|||||||||||
Securities issued by the Central Government of the RSA or the Reserve Bank |
≤ 1 year |
1 |
||||||||||||
> 1 year; ≤ 3 years |
3 |
|||||||||||||
> 3 year; ≤ 5 years |
||||||||||||||
> 5 year; ≤ 10 years |
6 |
|||||||||||||
> 10 years |
||||||||||||||
Main index equities, including convertible bonds, and gold |
20 |
|||||||||||||
Other equities and convertible bonds listed on a recognised exchange |
30 3 |
|||||||||||||
UCITS/ Mutual funds |
Highest haircut applicable to any security in which the fund may invest, unless the bank is able to apply the look-through approach (LTA) for equity investments in funds, in which case the bank may use a weighted average of haircuts applicable to instruments held by the fund. |
|||||||||||||
Eligible cash in the same currency 4 |
0 |
|||||||||||||
|
||||||||||||||
| (B) | Subject to the provisions of items (C) to (E) below, in the case of a jurisdiction that does not allow the use of external ratings for purposes of calculating minimum required capital and reserve funds, a bank that adopted the comprehensive approach shall in the calculation of its relevant adjusted exposure amounts after risk mitigation apply the respective haircuts specified in table 1 below in relation to the relevant collateral (Hc) and exposure (He), which haircuts are based on the presumption of daily mark-to-market, daily remargining and a 10-business day holding period, and are expressed as percentages: |
Table 1: Standard haircut 1 |
||||||||||||||
Relevant instrument |
Residual maturity |
Issuer’s risk weight 2 |
Other investment-grade securities 3 |
|||||||||||
0% |
20% or 50% |
100% |
Non- securitisation exposures |
Senior securitisation exposures with risk weight < 100% |
||||||||||
Debt securities |
≤ 1 year |
0.5 |
1 |
15 |
2 |
4 |
||||||||
> 1 year; ≤ 3 years |
2 |
1 |
15 |
4 |
12 |
|||||||||
> 3 year; ≤ 5 years |
6 |
|||||||||||||
> 5 year; ≤ 10 years |
4 |
3 |
15 |
12 |
24 |
|||||||||
> 10 years |
20 |
|||||||||||||
Main index equities, including convertible bonds, and gold |
20 |
|||||||||||||
Other equities and convertible bonds listed on a recognised exchange |
30 |
|||||||||||||
UCITS/ Mutual funds |
Highest haircut applicable to any security in which the fund may invest, unless the bank is able to apply the look-through approach (LTA) for equity investments in funds, in which case the bank may use a weighted average of haircuts applicable to instruments held by the fund. |
|||||||||||||
Eligible cash in the same currency 4 |
0 |
|||||||||||||
Other exposure types |
30 |
|||||||||||||
|
||||||||||||||
| (C) | When a bank obtained collateral that consists of a basket of instruments, the haircut in respect of the basket of instruments shall be calculated in accordance with the formula specified below, which formula is designed to weight the collateral in the basket. |
H = Σ ai Hi
where:
ai is the relevant weight of the asset, measured in terms of the relevant currency units, in the basket
Hi is the haircut applicable to the relevant asset
| (D) | When an exposure and the relevant collateral obtained by the bank are denominated in different currencies, the bank shall in addition to any haircut that may apply in terms of the provisions of item (A) or (B) above, apply a haircut for currency risk (Hfx) equal to 8% in respect of that relevant exposure, which haircut for currency risk is based on a 10-business day holding period and daily mark-to-market. |
| (E) | Haircut floors in relation to specified securities financing transactions (SFTs) |
| (i) | A bank shall in the case of— |
| (aa) | any non-centrally cleared SFT in respect of which financing is provided, that is, when the bank lends cash against collateral, other than government securities, to counterparties not supervised by a regulator imposing prudential requirements similar to the relevant prudential requirements specified in these Regulations; |
| (bb) | any relevant collateral upgrade transaction with a counterparty envisaged in sub-sub-item (aa) hereinbefore, that is— |
| (i) | a transaction in terms of which the bank lends a security to its counterparty envisaged in sub-subitem (aa) hereinbefore and that counterparty pledges as collateral a security of lower quality; |
| (ii) | when the counterparty envisaged in sub-sub-item (aa) hereinbefore exchanges a lower quality security for a higher quality security of the bank, |
apply the relevant haircut floors specified in table 1 in sub-item (ii) below or calculate the floor in accordance with the relevant formulae and requirements specified in sub-items (iii) and (iv) below, provided that—
| (i) | the respective requirements specified in this item (E) do not apply in relation to any jurisdiction that prohibits banks from conducting the transactions envisaged hereinbefore below the minimum haircut floors specified in subitem (ii) below; |
| (ii) | the respective haircut floors envisaged and specified in this item (E) shall not apply to any SFT concluded with any central bank; |
| (iii) | the respective haircut floors envisaged and specified in this item (E) shall not apply to any cash-collateralised securities lending transactions in respect of which securities are lent to the bank at long maturities and the lender of the securities reinvests the cash at the same or shorter maturity, therefore not giving rise to any material maturity or liquidity mismatch; |
| (iv) | the respective haircut floors envisaged and specified in this item (E) shall not apply to any cash-collateralised securities lending transactions in respect of which securities are lent to the bank at call or at short maturities, giving rise to liquidity risk, when the lender of the securities reinvests the cash-collateral into a reinvestment fund or account subject to rules or regulations complying with such requirements for reinvestment of cash collateral by securities lenders as may be directed in writing by the Authority; |
| (v) | a bank that lends securities shall be exempted from the relevant haircut floors on collateral upgrade transactions envisaged hereinbefore when the bank demonstrates to the satisfaction of the Authority that it is unable to re-use, or provides appropriate assurance to the satisfaction of the Authority that the bank does not and will not reuse, the securities received as collateral against the securities lent. |
| (ii) | Haircut floors in relation to specified SFTs |
Table 1 |
||||||
Residual maturity of collateral |
Haircut level 1; 2 |
|||||
Corporate and other issuers |
Securitised products |
|||||
≤ 1 year debt securities, and floating rate notes (FRNs) |
0.5% |
1% |
||||
> 1 year, ≤ 5 years debt securities |
1.5% |
|
||||
> 5 years, ≤ 10 years debt securities |
3% |
|
||||
> 10 years debt securities |
4% |
|
||||
Main index equities |
6% |
|||||
Other assets |
10% |
|||||
|
||||||
| (iii) | SFTs not included in a netting set |
In the case of any relevant SFT not included in a netting set, the relevant values of H and f shall be computed as follows:
| (aa) | For a single cash-lent-for-collateral SFT, H and f are known since H is the amount of collateral received and f is specified in table 1 in subitem (ii) above, provided that for purposes of this calculation, collateral that is called by either counterparty can be treated as collateral received from the moment that it is called, that is, the treatment is independent of any relevant settlement period that may apply in relation to the collateral. |
For example, in the case of a SFT that falls within the ambit of this item (E), when 100 cash is lent against 101 of corporate debt security with a 12-year maturity, H is 1% [(101-100)/100] and f is 4%, as specified in table 1 in subitem (ii) hereinbefore.
As such, that SFT shall be treated as an unsecured loan to the relevant counterparty.
| (bb) | In the case of a single collateral-for-collateral SFT, lending collateral A and receiving collateral B, H remains the amount of collateral received but the effective floor of the transaction must integrate the floor of the two types of collateral, and has to be computed in accordance with the formula specified below: |
and the result shall then be compared to the effective haircut of the transaction, that is:
For example, in the case of a SFT that falls within the ambit of this item (E), when 102 of a corporate debt security with a 10-year maturity is exchanged against 104 of equity, the effective haircut H of the transaction is 104/102 – 1 = 1.96%, which has to be compared with the effective floor f of 1.06/1.03 – 1 =2.91%.
As such, the relevant SFT shall be treated as an unsecured loan to the relevant counterparty.
| (iv) | SFTs included in a netting set |
In the case of all relevant trades for which the security received is included in table 1 in subitem (ii) hereinbefore, and in respect of which, within the relevant netting set, the bank is also a net receiver of that security, a bank shall compute an effective portfolio floor, that is, the weighted average floor of the portfolio, in accordance with the formula specified below, provided that, for purposes of the calculation, collateral that is called by either counterparty shall be treated as collateral received from the moment that it is called, that is, the required treatment shall be independent of any relevant settlement period that may apply in relation to the collateral:
where:
| Es | is the relevant net position in each relevant security s, or cash, that is net lent |
| Ct | is the net position that is net borrowed |
fs and ft are the relevant haircut floors for the relevant securities that are net lent and net borrowed respectively
The portfolio does not breach the floor where:
Provided that when the portfolio haircut does breach the floor, the bank shall, as stated hereinbefore, treat the relevant netting set of SFTs as unsecured loans to the relevant counterparty.
[Regulation 23(9)(b)(xi) substituted by section 2(qq) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (xii) | [Regulation 23(9)(b)(xii) deleted by section 2(rr) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025] |
| (xiii) | [Regulation 23(9)(b)(xiii) deleted by section 2(ss) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025] |
| (xiv) | Comprehensive approach: requirements related to adjustments for different holding periods and non-daily mark-to-market or remargining |
| (A) | The framework for collateral haircuts to be applied in terms of the provisions of these Regulations in respect of the comprehensive approach— |
| (i) | distinguishes between— |
| (aa) | repo-style transactions, that is, transactions such as repurchase or resale agreements, and securities lending or borrowing transactions; |
| (bb) | other capital-market-driven transactions, that is, transactions such as OTC derivatives and margin lending; and |
| (cc) | secured lending; |
| (ii) | is summarised in table 1 below, also specifying the relevant respective minimum holding periods: |
Table 1 |
||
Transaction type |
Minimum holding period |
Condition |
Repo-style transaction |
Five business days |
Daily remargining |
Other capital market transactions |
Ten business days |
Daily remargining |
Secured lending |
Twenty business days |
Daily revaluation |
(B) When—
| (i) | a bank entered into a transaction or has a netting set that meets the relevant criteria specified in subregulations (19)(e)(ii)(A) to (19)(e)(ii)(D), the relevant minimum holding period specified in table 1 shall be adjusted to be equivalent to the relevant margin period of risk envisaged in subregulation (19)(e)(ii); |
| (ii) | the frequency of remargining or revaluation is longer than the minimum period specified in table 1 above, the relevant percentage in respect of the relevant specified minimum haircut shall be scaled up depending on the actual number of business days between remargining or revaluation, using the square root of time formula specified below: |
| H | is the relevant haircut |
| H10 | is the relevant 10-business day minimum holding period haircut specified in subregulation (xi) hereinbefore in respect of the relevant specified instrument |
| TM | is the relevant minimum holding period for the type of transaction |
| NR | is the actual number of business days between remargining for capital market transactions or revaluation in respect of secured transactions |
For example, when a bank calculates the volatility on a TN day holding period which is different from the specified minimum holding period TM, the bank shall calculate the relevant haircut HM using the square root of time formula specified below:
where:
| HM= | the adjusted haircut |
| TN= | holding period used by the bank for deriving HN |
| HN= | haircut based on the holding period TN |
Similarly, when the frequency of remargining or revaluation is longer than the minimum period specified in table 1 above, the relevant percentage in respect of the minimum haircut shall be scaled up depending on the actual number of business days between remargining or revaluation, using the relevant square root of time formula.
For example, based on the relevant specified square root of time formula, a bank that uses the standard haircuts specified in table 1 in subparagraph (xi) above shall use the relevant ten business day haircut percentages specified in the table as a basis in scaling the said haircut percentages up or down depending on the type of transaction and the frequency of remargining or revaluation, as specified below:
where:
| H= | adjusted haircut |
| H10= | the ten-business day standard haircut in respect of the instrument, specified in table 1 in subparagraph (xi) above |
| NR= | the actual number of business days between remargining for capital market transactions or revaluation for secured transactions |
| TM= | the minimum holding period for the type of transaction |
[Regulation 23(9)(b)(xiv) substituted by section 2(tt) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (xv) | Comprehensive approach: Minimum conditions relating to a haircut of zero per cent in the case of repo-style transactions |
In the case of any relevant securities financing transaction, a bank other than a bank that obtained the approval of the Authority to apply its VaR model to reflect price volatility as envisaged in subparagraph (xvii) below may apply a haircut of zero per cent, provided that—
[Words preceding Regulation 23(9)(b)(xv)(A) substituted by section 2(uu) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (A) | 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 standardised approach; |
| (B) | both the exposure and the collateral shall be denominated in the same currency; |
| (C) | the transaction shall be an overnight transaction or both the exposure and the collateral shall be marked to market on a daily basis and shall be subject to daily remargining; |
[Regulation 23(9)(b)(xv)(C) substituted by section 2(vv) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (D) | following the failure of the 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; |
| (E) | the transaction shall be settled across a settlement system proven for the said type of transaction; |
| (F) | the documentation in respect of the agreement shall be standard market documentation for the said transactions; |
| (G) | 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; |
| (H) | upon any default event, regardless 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; |
| (I) | the agreement shall be concluded with— |
| (i) | a sovereign; |
| (ii) | a central bank; |
| (iii) | a public-sector entity; |
| (iv) | 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; |
[Regulation 23(9)(b)(xv)(l)(iv) substituted by section 2(ww) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (v) | other financial institutions, including an insurance company, eligible for a risk weight of 20 per cent in terms of the standardised approach; |
| (vi) | a regulated mutual fund specified in writing by the Authority, provided that the said mutual fund shall be subject to capital or leverage requirements; |
[Regulation 23(9)(b)(xv)(l)(vi) substituted by section 2(xx) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (vii) | a regulated pension fund specified in writing by the Registrar; |
| (viii) | a qualifying central counterparty specified in writing by the Authority; |
[Regulation 23(9)(b)(xv)(l)(viii) substituted by section 2(yy) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (ix) | subject to such conditions as may be specified in writing by the Registrar, such other person or institution as may be determined by the Registrar. |
| (J) | any netting set that contains any transaction that does not meet the requirements specified hereinbefore shall not be eligible for a haircut of zero per cent. |
[Regulation 23(9)(b)(xv)(J) inserted by section 2(zz) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (xvi) | Comprehensive approach: Minimum conditions relating to bilateral master netting agreements |
A bank—
| (A) | that concludes a securities financing agreement or transaction with a counterparty, which agreement or transaction is included in a bilateral master netting agreement, may recognise the effects of the bilateral master netting agreement, provided that the said netting agreement— |
[Words preceding Regulation 23(9)(b)(xvi)(A)(i) substituted by section 2(aaa) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (i) | shall be legally enforceable in each relevant jurisdiction upon the occurrence of an event of default, regardless of whether the counterparty is insolvent or bankrupt. |
In cases of legal uncertainty, the reporting bank shall obtain a legal opinion to the effect that its right to apply netting of gross claims is legally well founded and would be enforceable in the liquidation, default or bankruptcy of the counterparty or the bank;
[Regulation 23(9)(b)(xvi)(A)(i) substituted by section 2(bbb) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (ii) | shall provide the non-defaulting party upon an event of default, including in the event of insolvency or bankruptcy of the counterparty, the right to terminate and close-out, in a timely manner, all transactions included in the agreement; |
| (iii) | shall make provision for— |
| (aa) | the netting of gains and losses relating to all transactions included in the agreement, including the value of any collateral, which transactions were terminated and closed out, resulting in a single net amount which shall be owed by the one party to the other; |
(bb) the prompt liquidation or set-off of collateral upon an event of default.
| (B) | may net positions held in its banking book against positions held in its trading book, provided that— |
| (i) | all the relevant transactions shall be marked to market daily; and |
[Regulation 23(9)(b)(xvi)(B)(i) substituted by section 2(ccc) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (ii) | the collateral instruments used in the relevant transactions shall constitute eligible financial collateral in the banking book. |
| (xvii) | Comprehensive approach: Minimum conditions relating to the use of VaR models |
As an alternative to the use of the standard haircuts specified in table 1 in subparagraph (xi) hereinbefore, a bank that obtained the prior written approval of the Authority to adopt the internal models approach for the measurement of the bank’s exposure to market risk may use a VaR-models approach for the calculation of the counterparty credit risk requirement envisaged in subregulation (12)(b)(iii) related to single securities financing transactions or securities financing transactions covered by netting agreements on a counterparty-by-counterparty basis, to reflect the price volatility of the exposure and the collateral, and to also provide for correlation effects between security positions, and ultimately, to calculate the bank’s adjusted exposure through the application of the formula specified below:
| E* = | max {0, [(Σ E - Σ C) + VaR output from the internal model]} |
where:
| E* | is the adjusted exposure after the effect of risk mitigation is taken into consideration |
| E | is the relevant current value of the exposure |
| C | is the relevant value of the collateral |
| VaR | is the previous business day’s VaR amount |
Provided that—
| (A) | subject to the prior written approval of and such conditions as may be specified in writing by the Authority, the bank may— |
| (i) | instead of using the VaR approach, calculate an effective expected positive exposure for repo-style and other similar SFTs, in accordance with the relevant requirements specified in subregulation (19) related to the Internal Model Method; |
| (ii) | also apply the VaR approach to margin lending transactions and other transactions similar to repo-style transactions or securities financing transactions; |
| (B) | in the case of a securities financing transaction covered by a netting agreement, the relevant bilateral master netting agreement shall comply with the respective requirements specified in subparagraph (xvi) hereinbefore and any relevant requirements specified in subregulations (18) and (19) below; |
| (C) | the underlying securities shall be unrelated to any securitisation scheme; |
| (D) | in all cases the relevant collateral shall be revalued daily; |
| (E) | a bank other than a bank that obtained the prior written approval of the Authority to adopt the internal models approach for the measurement of the bank’s exposure to market risk may apply for the approval of the Authority to use its internal VaR models for the calculation of its exposure to counterparty credit risk and the related price volatility for SFTs, provided that— |
| (i) | the bank’s model shall comply with the relevant requirements specified in these Regulations and any relevant Prudential Standard issued from time to time related to the calculation of a bank’s exposure to market risk in terms of the internal models approach; |
| (ii) | notwithstanding anything stated to the contrary in any relevant Prudential Standard issued from time to time related to the calculation of a bank’s exposure to market risk in terms of an internal models approach, the bank’s VaR model calculation for the bank’s relevant exposure to counterparty credit risk related to SFTs shall be based on a 99% confidence interval; |
| (iii) | the bank’s VaR model shall pass the relevant backtesting and profit and loss attribution tests specified in any relevant Prudential Standard issued from time to time related to the bank’s exposure to market risk in terms of the internal models approach; |
| (iv) | the requirements related to the default risk charge in terms of an internal models approach for market risk shall not apply in relation to the bank’s VaR model for SFTs; |
| (F) | the bank— |
| (i) | shall at all times comply with the relevant model validation requirements and operational requirements specified in regulations 39(8) and in subregulation (19), and such further requirements as may be specified in writing by the Authority; |
| (ii) | may in the case of margined securities financing transactions apply a minimum holding period of five business days instead of the 10-business day holding period that would otherwise apply, unless a five-business day holding period is inappropriate based on the liquidity of the instrument; |
| (G) | when the bank entered into a repo-style or similar transaction or has a netting set that meets the relevant criteria specified in subregulation (19)(e)(ii), the relevant minimum holding period shall be adjusted to be equivalent to the relevant margin period of risk envisaged in subregulation (19)(e)(ii). |
[Regulation 23(9)(b)(xvii) substituted by section 2(ddd) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (c) | Guarantees |
| (i) | Minimum requirements |
As a minimum, a bank that adopted the standardised approach for risk mitigation relating to guarantees shall comply with—
| (A) | the relevant minimum requirements specified in subregulation (7)(c) above; |
| (B) | the relevant requirements relating to disclosure, specified in regulation 43 or directed in writing by the Authority from time to time; and |
| (C) | such further conditions as may be specified in writing by the Authority. |
[Regulation 23(9)(c)(i) substituted by section 2(eee) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
(ii) Eligible guarantees/guarantors
For risk mitigation purposes in terms of these Regulations, credit protection obtained from guarantors that are assigned a risk weight lower than the protected exposure shall be recognised as eligible guarantees, including guarantees obtained from—
| (A) | sovereigns; |
| (B) | central banks; |
| (C) | public-sector entities; |
| (D) | banks; |
| (E) | multilateral development banks; |
| (F) | securities firms; |
| (G) | other prudentially regulated financial institutions with a risk weight lower than the protected exposure; |
| (H) | in the case of a jurisdiction that allows the use of external ratings for purposes of calculating minimum required capital and reserve funds, other externally rated entities assigned a risk weight lower than the protected exposure; |
| (I) | in the case of a jurisdiction that does not allow the use of external ratings for purposes of calculating minimum required capital and reserve funds, entities that comply with the relevant requirements related to and, as such, are included in the category “investment grade” envisaged in subregulation (8) hereinbefore, |
Provided that—
| (i) | when credit protection is obtained in respect of a securitisation exposure, only credit protection obtained from entities externally rated BBB- or better at the end of the reporting month, and that were externally rated A- or better at the time that the credit protection was obtained, shall constitute eligible protection for purposes of these Regulations, including any relevant credit protection provided by a parent institution, subsidiary or affiliate companies; |
| (ii) | for purposes of calculating the minimum required amount of capital and reserve funds of a branch in terms of the provisions of the Act 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; |
| (iii) | the credit quality of the protected credit exposure shall not have a material positive correlation with the credit quality of the relevant guarantor. |
[Regulation 23(9)(c)(ii) substituted by section 2(fff) 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 standardised approach for risk mitigation obtains protection against loss in the form of an eligible guarantee in respect of the bank's exposure or potential exposure to credit risk, the risk weight applicable to the guaranteed transaction or guaranteed exposure may be reduced to the risk weight applicable to the relevant 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 the bank shall comply with the said relevant minimum requirements.
The unprotected portion of the exposure shall retain the risk weight relating to the relevant counterparty.
(iv) Materiality thresholds
For purposes of these Regulations, a materiality threshold below which no payment will be made by the guarantor in the event of a loss to the reporting bank or that reduces the amount of payment by the guarantor shall be regarded as equivalent to a retained first-loss position and shall be risk weighted in accordance with the relevant requirements specified in subregulation (6)(j) above.
[Regulation 23(9)(c)(iv) substituted by section 2(ggg) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
(v) Proportional cover
When-
| (A) | a bank obtains a guarantee for less than the amount of the bank’s exposure to credit risk; or |
| (B) | losses are shared pari passu on a pro rata basis between the bank and the guarantor, |
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 requirements specified in this paragraph (c) and the remainder of the credit exposure shall be regarded as unsecured.
[Regulation 23(9)(c)(v) substituted by section 2(hhh) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
(vi) Currency mismatches
When a bank obtains credit protection that is denominated in a currency that differs from the currency in which the exposure is denominated, the amount of the exposure deemed to be protected shall be reduced by the application of the formula specified below, which formula is designed to recognise the effect of the currency mismatch. The formula is expressed as:
GA = G x (1 -HFx)
where:
| G | is the relevant nominal amount of the credit protection obtained |
| HFx | is the haircut relating to the currency mismatch between the credit protection and the underlying obligation. |
The currency mismatch haircut for a 10-business day holding period and daily mark-to-market is equal to 8 per cent.
A bank shall use the relevant square root of time formula specified in paragraph (b)(xiv) above to scale up a haircut percentage when the holding period or frequency of mark-to-market adjustment differs from the specified minimum requirements.
[Regulation 23(9)(c)(vi) HFx variable substituted by section 2(iii) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (d) | Credit-derivative instruments |
| (i) | Risk weighting: Protection buyer (seller of credit risk) |
| (A) | For the protected portion of a credit exposure, a bank that is a protection buyer shall substitute the risk weight relating to the eligible protection provider for the risk weight of the reference asset, reference entity or underlying asset. |
The lower risk weight relating to the eligible protection provider shall apply to the outstanding amount of the transaction or exposure protected by the credit-derivative instrument, provided that all the relevant conditions specified in this paragraph (d) are met.
The unprotected portion of the exposure shall retain the risk weight relating to the relevant underlying exposure.
| (B) | When a bank hedges the credit risk relating to an exposure included in the bank's banking book with a credit-derivative instrument included in the bank's trading book, the bank shall only recognise the credit protection to the extent that the bank transferred the relevant credit risk to an eligible third party protection provider. |
| (C) | In the case of a proportional structure, that is, when losses are shared pari passu on a pro rata basis between the bank and the protection provider, the protection buyer may recognise protection in respect of all relevant reference assets, reference entities or underlying assets on a proportional basis, provided that first-to-default and all other nth-to-default credit derivative instruments in terms of which the bank obtains credit protection for a basket of reference names and when the first- or nth–to-default among the reference names triggers the credit protection whereafter the contract is terminated shall not be eligible for risk mitigation purposes in terms of these Regulations. |
[Regulation 23(9)(d)(i)(C) substituted by section 2(jjj) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (D) | When a bank buys protection in the absence of an underlying exposure, or when bought protection is not eligible for recognition in the reporting bank's calculation of required capital in respect of an underlying exposure, the relevant credit-derivative instrument shall be ignored for purposes of calculating the reporting bank's capital requirements relating to banking activities. |
| (E) | A materiality threshold contained in a credit-derivative contract that requires a given amount of loss to occur to the protection buyer before the protection seller is obliged to make payment to the protection buyer or reduces the amount of payment to the protection buyer shall be regarded as equivalent to a first-loss credit-enhancement facility applied in asset securitisation and synthetic securitisation structures. |
A bank that is a protection buyer shall risk weight such a materiality threshold
in accordance with the relevant requirements specified in subregulation (6)(j) above, that is, the bank purchasing the credit protection shall assign a risk weight of 1250 per cent to the portion of the exposure up to the relevant specified materiality threshold. The capital requirement in respect of such bought protection shall be limited to the capital requirement relating to the underlying asset or reference asset when no protection is recognised.
[Regulation 23(9)(d)(i)(E) substituted by section 2(kkk) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
A bank that is a protection buyer shall risk weight such a materiality threshold in accordance with the relevant provisions specified in subregulation (6)(j) above. The capital requirement in respect of such bought protection shall be limited to the capital requirement relating to the underlying asset or reference asset when no protection is recognised.
| (ii) | Risk weighting: Protection provider/seller (buyer of credit risk) |
| (A) | A bank that is a protection provider shall treat the position arising from the credit-derivative instrument as though the bank had a direct credit exposure to the reference asset, reference entity or underlying asset. |
| (B) | When a protection provider— |
| (i) | provides protection in the form of a funded credit-derivative instrument, the protection seller, upon conclusion of the credit-derivative contract, is exposed to the sum of the credit risk relating to the reference asset, reference entity or underlying asset and the credit risk relating to the funds placed with the protection buyer. |
The protection provider shall risk weight the exposure according to the risk weight applicable to the reference asset or underlying asset, or the risk weight applicable to the protection buyer, whichever risk weight is the highest.
The exposure at risk shall be limited to the maximum payment in terms of the credit-derivative contract.
| (ii) | entered into an unfunded credit-derivative contract, the protection seller is exposed only to the credit risk relating to the reference asset, reference entity or underlying asset. |
| (C) | When a bank provides credit protection through a first-to-default, second-to-default or similar type of credit derivative instruments, the bank shall calculate the relevant required risk weighted exposure amounts as follows: |
| (i) | in the case of a first-to-default credit derivative instrument, the bank shall aggregate the relevant risk weights of the respective assets or exposures included in the basket, up to a maximum of 1250 per cent, and multiply the result with the nominal amount of the protection provided by the relevant credit derivative instrument; |
| (ii) | in the case of a second-to-default credit derivative instrument, the bank shall aggregate the relevant risk weights of the respective assets or exposures included in the basket, up to a maximum of 1250 per cent, and multiply the result with the nominal amount of the protection provided by the credit derivative instrument, provided that in aggregating the respective risk weights up to a maximum of 1250 per cent the asset or exposure with the lowest risk-weight may be excluded from the bank’s relevant calculation; |
| (iii) | in the case of a nth-to-default credit derivative instrument, the bank shall aggregate the relevant risk weights of the respective assets or exposures included in the basket, up to a maximum of 1250 per cent, and multiply the result with the nominal amount of the protection provided by the credit derivative instrument, provided that, in aggregating the respective risk weights up to a maximum of 1250 per cent, the n-1 assets with the lowest risk-weights may be excluded from the bank’s relevant calculation. |
[Regulation 23(9)(d)(ii)(C) substituted by section 2(lll) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
Table 11 |
|||||||
External credit assessment 1 |
Long term rating 1 |
||||||
AAA to AA- |
A+ to A- |
BBB+ to BBB- |
BB+ to BB- |
B+ and below or unrated |
|||
Risk weight |
20% |
50% |
100% |
350% |
1250% |
||
External credit assessment 1 |
Short-term rating 1 |
||||||
A-1/P-1 |
A-2/P-2 |
A-3/P-3 |
All other |
||||
Risk weight |
20% |
50% |
100% |
1250% |
|||
|
|||||||
| (D) | In the case of a proportional structure, that is, when losses are shared pari passu on a pro rata basis between the protection buyer and the protection provider, the protection seller shall proportionally attribute the relevant risk weights to all relevant reference assets, reference entities or underlying assets. |
[Regulation 23(9)(d)(ii)(D) substituted by section 2(mmm) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (E) | [Regulation 23(9)(d)(ii)(E) deleted by section 2(nnn) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025] |
| (iii) | Eligible protection providers |
For risk-mitigation purposes in terms of these Regulations, credit protection obtained from protection providers that are assigned a risk weight lower than the protected exposure shall be recognised as eligible protection providers, including protection obtained from:
| (A) | sovereigns; |
| (B) | central banks; |
| (C) | public-sector entities; |
| (D) | multilateral development banks; |
| (E) | banks; |
| (F) | securities firms; |
| (G) | other prudentially regulated financial institutions with a risk weight lower than the protected exposure; |
| (H) | in the case of a jurisdiction that allows the use of external ratings for purposes of calculating minimum required capital and reserve funds, other externally rated entities that are assigned a risk weight lower than the protected exposure; |
| (I) | in the case of a jurisdiction that does not allow the use of external ratings for purposes of calculating minimum required capital and reserve funds, entities that comply with the relevant requirements related to and, as such, are included in the category “investment grade” envisaged in subregulation (8) hereinbefore, |
Provided that—
| (i) | when credit protection is obtained in respect of a securitisation exposure, only credit protection obtained from entities externally rated BBB- or better at the end of the reporting month, and that were externally rated A- or better at the time the credit protection was obtained, shall constitute eligible protection for purposes of these Regulations, including any relevant credit protection provided by a parent institution, subsidiary or affiliate companies; |
| (ii) | for purposes of calculating the minimum required amount of capital and reserve funds of a branch in terms of the provisions of the Act read with these Regulations, no protection 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 eligible protection; |
| (iii) | the credit quality of the protected exposure shall not have a material positive correlation with the credit quality of the relevant protection provider; |
| (iv) | first-to-default and all other nth-to-default credit derivative instruments, that is, instruments in terms of which the bank obtains credit protection for a basket of reference names and where the first- or nth–to-default among the reference names triggers the credit protection and terminates the contract, shall not be eligible as credit risk mitigation instruments. |
[Regulation 23(9)(d)(iii) substituted by section 2(ooo) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (iv) | Funded credit-derivative instruments |
A bank may issue cash instruments, such as credit-linked notes, in respect of which instruments the repayment of the principal amount is linked to the credit standing of a reference asset, reference entity or underlying asset.
For risk-mitigation purposes, a bank shall treat credit-linked notes in a manner similar to cash-collateralised transactions.
| (v) | Unfunded credit-derivative instruments |
| (A) | The capital treatment of the different credit risk-mitigation instruments recognized in terms of these Regulations shall be based on the economic effects of the instruments and not the legal construction of the said instruments. |
Although the legal construction of guarantees may differ from credit-derivative instruments, only credit-default swaps and total-return swaps that provide credit protection equivalent to guarantees shall be recognised as credit risk-mitigation instruments, in addition to credit-linked notes, in terms of these Regulations.
| (B) | When a bank buys credit protection through a total-return swap and records the net payments received on the swap as net income, but does not record the offsetting deterioration in the value of the asset that is protected, either through a reduction in fair value or an adjustment to reserves, the credit protection shall not be recognised. |
| (vi) | Materiality thresholds |
| (A) | Normally, a materiality threshold is specified in a credit-derivative contract in order to ensure that the protection seller is obliged only to make payment in terms of the credit-derivative contract once a material default has occurred in respect of an underlying asset, reference asset or reference entity. |
However, the economic effect of a materiality threshold specified in a credit-derivative contract may be that the protection buyer will suffer a specified amount of loss before payment in terms of the credit-derivative contract is triggered or the amount of payment by the protection seller to the protection buyer may even be reduced.
Materiality thresholds specified in a credit-derivative contract may therefore result in a significant loss being incurred by the protection buyer on an underlying asset or reference asset without a credit-event payment being made.
| (B) | Materiality thresholds below which no payment will be made in the event of a loss to the protection buyer or that reduce the amount of payment by the protection seller to the protection buyer shall for purposes of these Regulations be regarded as equivalent to a retained first-loss position and shall be risk weighted in accordance with the relevant provisions specified in subregulation (6)(j) above. |
| (C) | A credit-derivative instrument with a materiality threshold that requires a high percentage of loss to occur before the protection seller is obliged to make payment to the protection buyer shall not be recognised for credit-risk mitigation purposes in terms of these Regulations. |
| (vii) | Multiple-name instruments |
| (A) | Multiple-name instruments refer to credit-derivative instruments that reference more than one reference asset, reference entity or underlying asset, that is, a basket of instruments. Multiple-name structures generally include— |
| (i) | first-to-default structures, that is, the first default amongst the reference names triggers the credit protection and the credit event also terminates the protection; |
| (ii) | second-to-default structures, that is, the second default amongst the reference names triggers the credit protection and the credit event also terminates the protection. |
| (B) | When the number of exposures in a basket is significant, the transaction will be regarded as a synthetic securitisation scheme. Such transactions shall be subject to the provisions of the exemption notice relating to securitisation schemes. |
| (C) | For the purposes of these Regulations, the number of exposures in a basket shall be regarded as significant when the envisaged transaction will cause— |
| (i) | the capital requirement of the reporting bank to increase or decrease by 5 per cent or more; or |
| (ii) | the amount of the relevant portfolio of the reporting bank in respect of which the transaction will be concluded to increase or decrease by 5 per cent or more. |
| (viii) | Settlement |
| (A) | Normally, credit-derivative instruments provide for either physical settlement or cash settlement. |
| (B) | Some credit-derivative instruments provide for pre-agreed amounts to be paid when a credit event occurs. These contracts are generally referred to as binary or digital contracts. |
When the payment in terms of a credit-derivative instrument is a fixed amount, that is, a binary payment, the amount of protection shall be the amount of the fixed payment.
| (C) | Physical settlement, for example, involves the delivery by a protection buyer of an obligation of the reference entity specified in the contract in return for cash settlement by the protection seller of the reference amount. |
When obligations in terms of credit-derivative instruments are physically settled, problems associated with the valuation of the reference asset, reference entity or underlying asset following a credit event are avoided.
| (D) | Cash settlement requires a cash settlement amount to be calculated by a calculating agent specified in the contract. Following the occurrence of a credit event in respect of the reference asset, reference entity or underlying asset, the cash settlement amount is normally calculated as— |
| • | the nominal amount of protection purchased; multiplied by |
| • | the value of the reference asset, reference entity or underlying asset at inception (the value is normally expressed as a percentage, for example, 100 per cent); less |
| • | the "final value", which value is normally expressed as a percentage of the reference asset, reference entity or underlying asset on the cash-settlement date. |
| (ix) | Foreign-currency positions |
A bank shall include in the forms BA 320 and BA 325 all relevant foreign-currency positions created by credit-derivative instruments when the bank calculates its aggregate effective net open foreign-currency position.
| (x) | Proportional cover |
When—
| (A) | a bank obtains credit protection for less than the amount of the bank’s exposure to credit risk; or |
| (B) | when losses are shared pari passu on a pro rata basis between the bank and the protection provider, |
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 provisions of this paragraph (d) and the remainder of the credit exposure shall be regarded as unsecured.
[Regulation 23(9)(d)(x) substituted by section 2(ppp) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (xi) | Minimum requirements relating to credit-derivative instruments |
| (A) | General requirement |
| (i) | Notwithstanding the provisions of these Regulations, a bank that wishes to engage in credit-derivative transactions shall ensure that it complies with such rules, conditions or such regulations as may be issued in writing by the Financial Surveillance Department of the Reserve Bank relating to credit-derivative instruments from time to time. |
[Regulation 23(9)(d)(xi)(A)(i) substituted by section 2(qqq) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (ii) | Protection from a credit-derivative contract shall be recognised in terms of these Regulations to the extent— |
| (aa) | that such protection has not already been taken into consideration in the calculation of the reporting bank’s required amount of capital and reserve funds, that is, when any relevant credit assessment or risk weight already reflects the effect of credit risk mitigation, such risk mitigation shall not be taken into consideration again or be double-counted; |
| (bb) | that such protection can be realised by the reporting bank under normal market conditions, that is, the value at which the protection can be realised shall not differ materially from its book value; |
| (cc) | that the bank complies with the relevant requirements relating to disclosure, specified in regulation 43 or directed in writing by the Authority from time to time. |
[Regulation 23(9)(d)(xi)(A)(ii) substituted by section 2(rrr) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (B) | Specific requirements |
A bank that wishes to recognise the risk-mitigation effect of protection obtained in the form of a credit-derivative instrument in the calculation of the bank's credit exposure shall comply with the requirements specified below:
| (i) | Direct |
The credit protection shall constitute a direct claim on the protection seller.
| (ii) | Explicit |
The credit protection shall be linked to specific credit exposures, so that the extent of the cover is duly defined and incontrovertible.
| (iii) | Irrevocable |
Other than a protection buyer's non-payment of money due in respect of the credit protection contract, there shall be no clause in the contract that would allow the protection seller unilaterally to cancel the credit protection, to increase the effective cost of the protection or to change the contracted maturity ex post, due to a deterioration in the credit quality of the protected exposure.
[Regulation 23(9)(d)(xi)(B)(iii) substituted by section 2(sss) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (iv) | Unconditional |
There shall be no clause in the contract other than clauses relating to procedural requirements that could prevent the protection seller from being obliged to make payment in a timely manner should a credit event occur in respect of an underlying asset, reference entity or reference asset.
| (v) | The credit protection shall be legally enforceable in all relevant jurisdictions |
In cases of uncertainty, a bank shall obtain legal opinion confirming the enforceability of the credit protection 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 continuing enforceability.
| (vi) | The protection seller shall not have any formal recourse to the protection buyer in respect of losses incurred by the protection seller. |
| (vii) | In the case of a funded single-name credit-derivative contract, the protection buyer shall not be obliged to repay any funds received from the protection seller in terms of the credit-derivative contract, except at the maturity date of the contract, provided that no credit event has occurred during the period of bought protection or as a result of a defined credit event, and then in accordance with the terms of payment defined in the contract. |
| (viii) | In order to obtain full recognition of the protection obtained, the base currency of a credit-derivative instrument shall be the same currency as the currency in which the credit exposure that is protected is denominated. |
When a credit-derivative instrument is denominated in a currency that differs from the currency in which the credit exposure is denominated, that is, when there is a currency mismatch, the bought protection may be less than expected owing to fluctuations in the exchange rates.
When a bank obtains credit protection that is denominated in a currency that differs from the currency in which the exposure is denominated, the amount of the exposure deemed to be protected shall be reduced by the application of the formula specified below, which formula is designed to recognise the effect of the currency mismatch. The formula is expressed as:
GA = G x (1 -HFX)
where:
| GA | is the relevant adjusted value of the protection |
| G | is the relevant nominal amount of the credit protection obtained |
| HFX | is the haircut relating to the currency mismatch between the credit protection and the underlying obligation. |
The haircut shall be based on a ten business day holding period and daily mark to market.
When a bank applies the standard haircuts, a haircut equal to 8 per cent shall apply.
A bank shall use the relevant square root of time formula specified in paragraph (b)(xiv) above to scale up a haircut percentage when the holding period or frequency of mark-to-market adjustment differs from the specified minimum requirements.
| (ix) | Robust risk-management process |
While credit-derivative instruments 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 credit-derivative instruments shall include the fundamental elements specified below:
(aa) Strategy
A duly articulated strategy for credit-derivative instruments 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 an exposure that is hedged by a credit-derivative instrument 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 risk management 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 its credit-derivative instruments.
| (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 into account purchased credit protection when assessing the potential concentrations in its credit portfolio, including when the bank determines its concentration risk in terms of section 73 of the Act.
A bank shall monitor general trends affecting its credit-protection sellers, in order to mitigate its concentration risk.
| (ee) | Roll-off risks |
When a bank obtains credit protection that differs 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 credit protection expires.
| (x) | As a minimum, the risk management systems of the reporting bank shall be adequate— |
| (aa) | to capture the credit risk relating to a reference asset, reference entity or underlying asset acquired through a credit-derivative contract and any counterparty risk arising from an unfunded over-the-counter credit-derivative contract within the normal credit approval and credit monitoring processes; |
| (bb) | to assess the probability of default correlation between the reference asset, reference entity or underlying asset and the protection provider; |
| (cc) | to provide valuation procedures, including assessment and monitoring of the liquidity of the credit-derivative instrument and the reference asset or underlying asset. This is particularly important for credit-derivative contracts when the reference asset or underlying asset is illiquid, for example, a loan, or when the derivative instrument has multiple reference assets, reference entities or underlying assets; |
| (dd) | to assess the impact on liquidity risk when the reporting bank has transferred a significant amount of credit risk through the use of funded credit-derivative instruments with a shorter maturity than the underlying credit exposure; |
| (ee) | to assess the impact on capital adequacy when the reporting bank has transferred a significant amount of credit risk through the use of unfunded credit-derivative instruments and when a replacement contract may not be available when the credit protection expires; |
| (ff) | to assess the change in the risk profile of the remaining credit exposures in terms of both the quality and the spread of the portfolio, when the reporting bank makes extensive use of credit-derivative instruments to transfer risk; |
| (gg) | to assess the basis risk between the reference asset exposure and the underlying asset exposure when these exposures are not the same; |
| (hh) | to monitor the legal and reputational risk associated with credit-derivative instruments; |
| (ii) | to monitor the credit risk on an ongoing basis. |
| (xi) | As a minimum, the credit events relating to non-sovereign debt, specified by the contracting parties shall include the respective events specified in sub-sub-items (aa) to (dd) below: |
| (aa) | Bankruptcy or insolvency. |
| (bb) | Any application for protection from creditors. |
| (cc) | Payment default, that is, failure to pay the principal amount or related interest amounts due. |
| (dd) | Any restructuring of the underlying obligation that results in a credit loss event such as a credit impairment or other similar debit being raised, including— |
| (i) | a reduction in the rate or amount of interest payable or the amount of scheduled interest accruals; |
| (ii) | a reduction in the amount of principal, fees or premium payable at maturity or at the scheduled redemption dates; |
| (iii) | a change in the ranking in the priority of payment of any obligation, causing the subordination of such obligation; |
| (iv) | a postponement or other deferral of a date or dates for either the payment or accrual of interest or the payment of the principal amount or premium. |
Provided that, in the case of corporate exposure, when the credit derivative instrument does not include the restructuring of the underlying obligation as a credit event, but the other requirements specified in this sub-paragraph (xi) are met, the conditions specified in sub-sub-items (ee) and (ff) below shall apply, and when the requirements specified in sub-sub-items (ee) and (ff) are not met, the relevant conditions specified in sub-sub-item (gg) below shall apply;
| (ee) | a 100 per cent vote shall be required to amend maturity, principal, coupon, currency or seniority status of the underlying corporate exposure; |
| (ff) | the legal domicile in which the corporate exposure is governed shall have a well-established bankruptcy code that allows for a company to reorganise/restructure and shall provide for an orderly settlement of creditor claims; |
| (gg) | when the credit-derivative instrument does not include the restructuring of the underlying obligation as a credit event and the risk mitigation amount of the credit derivative— |
| (i) | is less than or equal to the amount of the underlying obligation, 60 per cent of the amount of the hedge derived from the credit derivative shall be regarded as eligible risk mitigation; |
| (ii) | is larger than that of the underlying obligation, the amount of the hedge derived from the credit derivative regarded as eligible risk mitigation shall be limited to 60 per cent of the amount of the relevant underlying obligation. |
[Regulation 23(9)(d)(xi)(B)(xi) substituted by section 2(ttt) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (xii) | As a minimum, the credit events relating to sovereign debt, specified by the contracting parties shall include: |
| (aa) | Any moratorium on the repayment of the principal amount or related interest amounts due. |
| (bb) | Repudiation. |
| (cc) | Payment default, that is, failure to pay the principal or related interest amounts due. |
| (dd) | Any restructuring of the underlying obligation that results in a credit loss event such as a credit impairment or other similar debit being raised, including— |
| (i) | a reduction in the rate or amount of interest payable or the amount of scheduled interest accruals; |
| (ii) | a reduction in the amount of principal, fees or premium payable at maturity or at the scheduled redemption dates; |
| (iii) | a postponement or other deferral of a date or dates for either the payment or accrual of interest or the payment of the principal amount or premium; |
Provided that, subject to such further conditions as may be specified in writing by the Authority, when the credit-derivative instrument does not include the restructuring of the underlying obligation as a credit event, it shall be deemed that the bank obtained protection equal to a maximum of sixty per cent of the amount covered in terms of the credit-derivative instrument.
[Regulation 23(9)(d)(xi)(B)(xii)(dd) substituted by section 2(uuu) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (xiii) | Contracts allowing for cash settlement will be recognised for risk-mitigation purposes, provided that a robust valuation process is in place in order to estimate loss reliably. There shall be a duly specified period for obtaining post credit-event valuations of the reference asset or underlying obligation, typically not more than 30 days. |
| (xiv) | The grace period specified in the credit-derivative contract shall not be longer than the relevant grace period provided for failure to pay in terms of the underlying obligation. |
| (xv) | The protection buyer shall have the right and ability to transfer the underlying obligation or reference asset to the protection seller, if such underlying obligation or reference asset is required for settlement. |
| (xvi) | The delivery of the underlying obligation or reference asset shall not contravene any term or condition relating to the underlying asset or reference asset, and consent shall be obtained when necessary. |
| (xvii) | The identity of the person(s) responsible for determining whether a credit event has occurred, and the sources to be used, shall be duly defined. This determination shall not be the sole responsibility of the protection seller. The protection buyer shall have the right and ability to inform the protection seller of the occurrence of a credit event. |
(xviii) Asset mismatch
When the reference asset and the underlying asset being hedged differ the protection buyer may suffer a loss on the underlying credit exposure that will not be fully compensated by an equivalent claim against the protection seller.
When there is an asset mismatch between the underlying exposure and the reference asset the protection buyer will be allowed to reduce the credit exposure provided that—
| (aa) | the reference asset and the underlying exposure relate to the same obligor, that is, the same legal entity; |
| (bb) | the reference asset ranks pari passu with or more junior than the underlying asset in the event of bankruptcy; |
| (cc) | legally effective cross-default clauses, for example, crossdefault or cross-acceleration clauses apply; and |
| (dd) | the terms and conditions of the credit-derivative contract do not contravene the terms and conditions of the underlying asset or reference asset. |
| (e) | Maturity mismatches |
| (i) | A maturity mismatch occurs when the residual maturity of the credit protection obtained in the form of eligible collateral, guarantees or credit-derivative instruments, or in terms of a netting agreement, is less than the residual maturity of the relevant underlying credit exposure, that is, when the residual maturity of the credit protection is— |
| (A) | less than the residual maturity of the underlying credit exposure a maturity mismatch exists, and the bank shall treat the relevant positions in accordance with the relevant requirements specified in this paragraph (e); |
| (B) | longer than the residual maturity of the underlying credit exposure, the position shall for purposes of these Regulations be regarded as fully protected. |
[Regulation 23(9)(e)(i) substituted by section 2(vvv) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (ii) | A bank shall conservatively define the maturity of the underlying exposure and the maturity of the relevant credit protection, that is, the effective maturity of— |
| (A) | the relevant underlying exposure shall be the longest possible remaining time before the obligor is scheduled to fulfil its obligation, duly taking into account any relevant grace period that may apply or may be granted; |
| (B) | the credit protection shall be determined so that the bank applies the shortest possible effective maturity. For example, |
| (i) | the bank shall take an embedded option that may reduce the term of the credit protection into account when the bank determines the effective maturity of the credit protection, so that the shortest possible effective maturity is used; and |
| (ii) | the bank shall determine the effective maturity of credit protection with step-up and call features based upon the remaining time to the first call. |
[Regulation 23(9)(e)(ii) substituted by section 2(www) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (iii) | In the case of maturity mismatched credit protection in respect of which the original maturity of the relevant credit protection is less than one year such credit protection shall not be recognised for credit-risk mitigation purposes in terms of these Regulations unless the said credit protection has a matching maturity with the underlying credit exposure(s), that is, credit protection with an original maturity of less than one year shall be recognised only when— |
| (A) | the maturity of the protection and the maturity of the exposure is matched; or |
| (B) | the residual maturity of the protection is longer than the residual maturity of the exposure, |
provided that in the calculation of its minimum required amount of capital and reserve funds a bank shall in no case recognise credit protection obtained when the residual maturity of such credit protection is less than or equal to three months.
| (iv) | When a bank obtained eligible protection, which bank adopted— |
| (A) | the simple approach for the recognition of risk mitigation relating to collateral, a reduction in the risk exposure of the bank shall be allowed only when the maturity of the collateral and the maturity of the exposure is matched, that is, 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; |
| (B) | the comprehensive approach for the recognition of risk mitigation relating to netting, collateral, guarantees or credit-derivative instruments, the bank shall recognise the effect of mismatches between the maturity of the bank’s underlying exposure and the protection obtained through the application of the formula specified below, which formula is designed to recognise the effect of the maturity mismatch, as follows: |
where:
Pa is the relevant value of the credit protection obtained, adjusted for the maturity mismatch
| P | is the relevant amount of credit protection obtained, adjusted for any relevant haircuts |
| t | is min (T, residual maturity of the credit protection arrangement), expressed in years |
| T | is min (5, residual maturity of the exposure), expressed in years |
[Regulation 23(9)(e)(iv)(B) substituted by section 2(xxx) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (v) | When a bank obtains protection that differs 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 protection expires. |
The bank may be unable to obtain further protection or to maintain its capital adequacy when the protection expires.
| (vi) | When a bank synthetically securitise exposures held on their balance sheet by purchasing tranched credit protection and as a result the effective maturity of the tranches of the synthetic securitisation differ from the underlying exposures, the bank must treat such maturity mismatches in the following manner: |
| (A) | for securitisation exposures that are assigned a risk weight of 1250%, maturity mismatches should not be taken into account; |
| (B) | for all other securitisation exposures, the bank must apply the maturity mismatch treatment set out in this sub-regulation 23(9)(e), where if the exposure being hedged have different maturities, the longest maturity should be used. |
[Regulation 23(9)(e)(vi) inserted by section 2(p) of Notice No. 2561, GG46996, dated 30 September 2022 - effective 1 October 2022]
| (f) | Treatment of pools of risk mitigation instruments |
| (i) | When a bank obtains— |
| (A) | multiple risk mitigation instruments to protect a single exposure, that is, the bank has obtained, for example, collateral, a guarantee and a credit-derivative instrument partially protecting an exposure; or |
| (B) | protection with differing maturities, |
the bank shall subdivide the exposure into the relevant portions covered by the relevant types of risk mitigation instruments.
[Regulation 23(9)(f)(i) substituted by section 2(yyy) of Notice 6342, GG52907, dated 26 June 2025, shall come into operation on 1 July 2025]
| (ii) | A bank shall separately calculate its risk-weighted exposure relating to each relevant portion envisaged in subparagraph (i) above. |
| (g) | Risk mitigation in respect of a securitisation exposure |
When a bank that adopted the standardised approach for the measurement of the bank's exposure to credit risk obtains protection in respect of a securitisation exposure the bank shall calculate its risk weighted exposure in respect of the said exposure in accordance with the relevant requirements specified in subregulation (7)(e) read with the relevant requirements specified in this subregulation (9).
| (h) | Tranched cover |
| (i) | In the case of tranched credit protection, that is when a bank transfers to a protection seller or sellers a portion of the risk arising from an exposure in one or more tranches whilst the said bank retains some level of risk, and the risk transferred and the risk retained are of different seniority, the original securitisation tranche will be decomposed into protected and unprotected sub-tranches and subject to the following: |
| (A) | The protection provider must calculate its capital requirement— |
| (i) | as if it is directly exposed to the particular sub-tranche of the securitisation exposure on which it is providing the protection; and |
| (ii) | as determined by the hierarchy of approaches for securitisation exposures and according to subregulation (ii), (iii) and (iv) below. |
| (B) | Provided that the conditions set out in subregulation (g) are met, the protection buyer may recognise tranched protection on the securitisation exposure and in doing so, it must calculate capital requirements for each sub-tranche separately and as follows: |
| (i) | for the resulting unprotected exposure(s), capital requirements will be calculated as determined by the hierarchy of approaches for securitisation exposures and according to subregulation (ii), (iii) and (iv) below; and |
| (ii) | for the guaranteed/protected portion, capital requirements will be calculated according to the applicable credit risk management framework as set out in these Regulations (and in accordance with the definition of tranche maturity given in subregulation (6)(h)(xiii). |
| (ii) | If, according to the hierarchy of approaches determined by subregulation (6)(h)(i) the bank must use the SEC-IRBA or SEC-SA, the parameters A and D should be calculated separately for each of the sub-tranches as if it has been directly issued as separate tranches at the inception of the transaction. The value for KIRB or KSA respectively, will be computed on the underlying portfolio of the original transaction. |
| (iii) | If, according to the hierarchy of approaches determined by subregulation (6)(h)(i), the bank must use the SEC-ERBA for the original securitisation exposure, the relevant risk weights for the different sub-tranches will be calculated subject to the following: |
| (A) | For the sub-tranche of highest priority (describing the relative priority of the decomposed tranche), the bank will use the risk weight of the original securitisation exposure. |
| (B) | For a sub-tranche of lower priority: |
| (i) | banks must infer a rating from one of the subordinated tranches in the original transaction. The risk weight of the sub-tranche of lower priority will then be determined by applying the inferred rating to the SECERBA. Thickness input T will be computed for the subtranche of lower priority only; |
| (ii) | in the event that it is not be possible to infer a rating, the risk weight for this sub-tranche will be obtained as the greater of: |
| (aa) | the risk weight determined through the application of the SEC-SA with the adjusted A, D points as described in (ii) above; and |
| (bb) | the SEC-ERBA risk weight of the original securitisation exposure prior to recognition of protection. |
| (iv) | For (ii) and (iii) above, a lower-priority sub-tranche must be treated as a non-senior securitisation exposure even if the original securitisation exposure prior to protection qualifies as senior as defined in subregulation (6)(h)(iii). |
[Regulation 23(9)(h) substituted by section 2(q) of Notice No. 2561, GG46996, dated 30 September 2022 - effective 1 October 2022]