The following collateral instruments are eligible for recognition in the simple approach:
(a) Cash (as well as certificates of deposit or comparable instruments issued by the lending bank) on deposit with the bank which is incurring the counterparty exposure;19,20
(b) Gold;
(c) Debt securities rated by a recognised external credit assessment institution where these are either:
(i) At least BB- when issued by sovereigns or PSEs that are treated as sovereigns by the CBB;
(ii) At least BBB- when issued by other entities (including banks and securities firms); or
(iii) At least A-3/P-3 for short-term debt instruments;
(d) Debt securities not rated by a recognised external credit assessment institution where these are:
(i) Issued by a bank;
(ii) Listed on a recognised exchange;
(iii) Classified as senior debt;
(iv) All rated issues of the same seniority by the issuing bank must be rated at least BBB- or A-3/P-3 by a recognised external credit assessment institution;
(v) The bank holding the securities as collateral has no information to suggest that the issue justifies a rating below BBB- or A-3/P-3 (as applicable);
(vi) The CBB is sufficiently confident about the market liquidity of the security;
(e) Equities (including convertible bonds) that are included in a main index;
(f) Undertakings for Collective Investments in Transferable Securities (UCITS) and mutual funds where:
(i) A price for the units is publicly quoted daily; and
(ii) The UCITS/mutual fund is limited to investing in the instruments listed in this paragraph21; and
(g) Re-securitisations (as defined in the securitisation framework), irrespective of any credit ratings, are not eligible financial collateral.
19 Cash funded credit linked notes issued by the bank against exposures in the banking book which fulfil the criteria for credit derivatives will be treated as cash collateralised transactions.
20 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, if they are openly pledged/assigned to the lending bank and if the pledge /assignment is unconditional and irrevocable, the exposure amount covered by the collateral (after any necessary haircuts for currency risk) will receive the risk weight of the third-party bank.
21 However, the use or potential use by a UCITS/mutual fund of derivative instruments solely to hedge investments listed in this paragraph and paragraph CA-4.3.2 shall not prevent units in that UCITS /mutual fund from being eligible financial collateral.
January 2015
