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  • CA-4.1 CA-4.1 Overarching Issues

    • Introduction

      • CA-4.1.1

        Banks use a number of techniques to mitigate the credit risks to which they are exposed. For example, exposures may be collateralised by first priority claims, in whole or in part with cash or securities, a loan exposure may be guaranteed by a third party, or a bank may buy a credit derivative to offset various forms of credit risk. Additionally banks may agree to net loans owed to them against deposits from the same counterparty. Off-balance sheet items will first be converted into on-balance sheet equivalents prior to the CRM being applied.

        January 2015

    • General Remarks

      • CA-4.1.2

        The framework set out in this sub-section of "General remarks" is applicable to all banking book exposures.

        January 2015

      • CA-4.1.3

        The comprehensive approach for the treatment of collateral (see Paragraphs CA-4.2.12 to CA-4.2.20 and CA-4.3.1 to CA-4.3.32) will also be applied to calculate the counterparty risk charges for OTC derivatives and repo-style transactions booked in the trading book.

        January 2015

      • CA-4.1.4

        No transaction in which CRM techniques are used should receive a higher capital requirement than an otherwise identical transaction where such techniques are not used.

        January 2015

      • CA-4.1.5

        The effects of CRM will not be double counted. Therefore, no additional recognition of CRM for regulatory capital purposes will be applicable on claims for which an issue-specific rating is used that already reflects that CRM. As stated in Paragraph CA-3.4.8, principal-only ratings will also not be allowed within the framework of CRM.

        January 2015

      • CA-4.1.6

        Conventional bank licensees must employ robust procedures and processes to control residual risks (see Paragraph CA-4.1.6A), including strategy; consideration of the underlying credit; valuation; policies and procedures; systems; control of roll-off risks; and management of concentration risk arising from the conventional bank licensee's use of CRM techniques and its interaction with the conventional bank licensee's overall credit risk profile.

        January 2015

      • CA-4.1.6A

        While the use of CRM techniques reduces or transfers credit risk, it simultaneously may increase other risks (residual risks). Residual risks include legal, operational, liquidity and market risks.

        January 2015

      • CA-4.1.6B

        Where residual risks are not adequately controlled, the CBB may impose additional capital charges or take supervisory actions.

        January 2015

      • CA-4.1.6C

        Conventional bank licensees must ensure that sufficient resources are devoted to the orderly operation of margin agreements with OTC derivative and securities-financing counterparties, as measured by the timeliness and accuracy of its outgoing calls and response time to incoming calls. Conventional bank licensees must have collateral management policies in place to control, monitor and report:

        (a) The risk to which margin agreements exposes them (such as the volatility and liquidity of the securities exchanged as collateral);
        (b) The concentration risk to particular types of collateral;
        (c) The reuse of collateral (both cash and non-cash) including the potential liquidity shortfalls resulting from the reuse of collateral received from counterparties; and
        (d) The surrender of rights on collateral posted to counterparties.
        January 2015

      • CA-4.1.7

        Public Disclosure Requirements (see Module PD) relating to the use of collateral must also be observed for conventional bank licensees to obtain capital relief in respect of any CRM techniques.

        January 2015

    • Legal Certainty

      • CA-4.1.8

        In order for conventional bank licensees to obtain capital relief for any use of CRM techniques, the minimum standards for legal documentation outlined in Paragraph CA-4.1.9 must be met.

        January 2015

      • CA-4.1.9

        All documentation used in collateralised transactions and for documenting on-balance sheet netting, guarantees and credit derivatives must be binding on all parties and legally enforceable in all relevant jurisdictions. Conventional bank licensees must have conducted sufficient legal review to verify this and have a well founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability.

        January 2015