Back Custom print Link Text Only Rich Text Print

  • CM-5.3 CM-5.3 The measure of exposure

    • CM-5.3.1

      For large exposure(s) purposes, the measure of exposure should reflect the maximum loss that will arise should a counterparty fail or the loss that may arise due to the realisation of any lending assets, shareholdings or other exposures or off-balance sheet positions. In certain cases (particularly derivatives), the measure of a large exposure may be larger than that used in published accounts. Consistent with this, the exposure should include the amount at risk arising from a bank's:

      (a) Claims on a counterparty including actual claims, and potential claims which would arise from the drawing down in full of undrawn advised facilities (whether revocable or irrevocable, conditional or unconditional) which the bank has committed itself to provide, and claims which the bank has committed itself to purchase or underwrite. In the case of undrawn (overdraft) facilities, the advised limit must be included in the measure of exposure (after deduction of any provisions). In the case of loans, the net outstanding balance as shown in the books of the bank should be included in the measure of exposure after deduction of any provisions;
      (b) Contingent liabilities arising in the normal course of business, and those contingent liabilities which would arise from the drawing down in full of undrawn advised facilities (whether revocable or irrevocable, conditional or unconditional) which the bank has committed itself to provide. In the case of undrawn L/C or similar facilities, the advised limit must be included in the measure of exposure;
      (c) Holdings of equity capital, bonds, bills or other financial instruments. In the case of equity exposures, the current fair value as shown in the books of the bank should be included in the measure of exposure.
      (d) Other assets which constitute a claim for the bank and which are not included in (a), (b) or (c) above.

    • CM-5.3.2

      As a general rule, exposures should be reported on a gross basis (i.e. no offset). However, debit balances on accounts may be offset against credit balances on other accounts with the bank if:

      (a) a legally enforceable right of set off exists in all cases (as confirmed by a legal opinion addressed to the bank) in respect of the recognised amounts;
      (b) the debit and credit balances relate to the same customer or to customers in the same group; and
      (c) the bank intends either to settle on a net basis, or to realise the debit balances and settle the credit balances simultaneously.

      For a group facility, a full cross guarantee structure must also exist before debit balances on accounts may be offset.

    • CM-5.3.3

      Large exposures are calculated using the sum of the nominal amounts before the application of risk weighting and credit conversion factors for:

      (a) on-balance sheet claims;
      (b) guarantees and other contingent claims; and
      (c) potential claims in the case of undrawn facilities.

      The amount at risk from derivative contracts is taken to be the credit equivalent amount calculated based on the guidelines for the prudential returns (see Module CA).

    • CM-5.3.4

      A bank's exposure arising from securities' trading operations is calculated as its net long position in a particular security (a short position in one security issue may not be offset against a long position in another issue made by the same issuer). A bank's "net long position" in a security refers to its commitment to buy that security together with its current holdings of the same security, less its commitment to sell such securities.