Appendix F Bilateral Netting Agreements23
1. Exposures to the same counterparties arising out of a range of Shari'a-compliant hedging contracts, could be subject to a netting treatment according to the following requirements.
2. Accordingly, for the NSFR purposes:
a. Banks may net transactions subject to novation under which any obligation between a bank and its counterparty to deliver a given currency, on a given value date, is automatically amalgamated with all other obligations for the same currency and value date, legally substituting one single amount for the previous gross obligations;
b. Banks may also net transactions subject to any legally valid form of bilateral netting not covered in (a), including other forms of novation; and
c. In both cases (a) and (b), a bank will need to satisfy the CBB that it has:
i. A netting contract or agreement with the counterparty which creates a single legal obligation, covering all included transactions, so that the bank would have either a claim to receive, or an obligation to pay, only the net sum of the positive and negative mark-to-market values of included individual transactions in the event a counterparty fails to perform due to any of the following; default, bankruptcy, liquidation or similar circumstances;
ii. Written and reasoned legal opinions that, in the event of a legal challenge, the relevant courts and administrative authorities would find the bank's exposure to be such a net amount under:
a) The law of the jurisdiction in which the counterparty is chartered and the branch that conducted the netting;
b) The law that governs the individual transactions;
c) The law that governs any contract or agreement necessary to effect the netting;
iii. In this context, the banks may use the following applicable market accepted standard agreements:
• International Swaps and Derivatives Association ('ISDA') Master Agreement (English law or New York law, as applicable);
• International Foreign Exchange Master Agreement('IFEMA') for FX transactions
• FX Net Agreements for FX transactions;
• Worldwide Foreign Exchange Netting and Close-Out Agreement for FX transactions;
• Global Foreign Exchange Netting and Close-Out Agreement ('FXNET "Non-User" Agreement') for FX transactions;
• International Currency Option Master Agreement ('ICOM');
iv. Banks are only permitted to avail the benefit of Master Netting Agreements in jurisdictions where such agreements are legally enforceable (i.e. where legal precedence exists). The use of such netting should also be supported by the positive opinion of the licensed bank's Legal department; and
v. Banks intending to use any Master Netting Agreements other than those listed in previous paragraph should seek the explicit approval of the CBB to do so.
3. Procedures are in place to ensure that the legal characteristics of netting arrangements are kept under review, in the light of possible changes that may be applicable to these type of agreements at a later stage;
4. In certain arrangements (such as contracts including 'walk away clauses') where the counterparty terminates the contract, this event is not taken into consideration for the purposes of calculating the NSFR. Thus, the exposure is calculated without taking into account the Netting Agreement;
5. Exposure on bilaterally-netted Shari'a-compliant hedging contract transactions will be calculated as the sum of the net mark-to-market replacement cost, if positive, plus an add-on based on the notional underlying principal. The add-on for netted transactions ('ANet') will equal the weighted average of the gross add-on ('AGross')24 and the gross add-on adjusted by the ratio of net current replacement cost to gross current replacement cost ('NGR'). This is expressed through the following formula:
ANet=0.4*AGross+0.6*NGR*AGross
Where:
NGR=level of net replacement cost/level of gross replacement cost for transactions subject to legally enforceable netting agreements.25
ANet=0.4*AGross+0.6*NGR*AGross
Where:
NGR=level of net replacement cost/level of gross replacement cost for transactions subject to legally enforceable netting agreements.25
6. The scale of the gross add-ons to apply in this formula will be the same as those for non-netted transactions, as set out in the CBB's Capital Adequacy Ratio Guidelines. The CBB will continue to review the scale of add-ons to make sure they are appropriate; and
7. For purposes of calculating potential future credit exposure to a netting counterparty for forward foreign exchange contracts and other similar contracts, in which notional principal is equivalent to cash flows, notional principal is defined as the net receipts falling due on each value date in each currency.
23 Based on the Capital Adequacy Ratio—Basel III Guidelines
24 AGross equals the sum of individual add-on amounts (calculated by multiplying the notional principal amount by the appropriate add-on factors set out in the CBB Capital Adequacy Ratio Guidelines) of all transactions subject to legally-enforceable netting agreements with one counterparty
25 The CBB permits a choice of calculating the NGR on a counterparty by counterparty or on an aggregate basis level for all transactions subject to legally enforceable netting agreements. However, the method chosen by a licensed bank is to be used consistently. Under the aggregate approach, net negative current exposures to individual counterparties cannot be used to offset net positive current exposures of another counterparty, i.e. for each counterparty the net current exposure used in calculating the NGR is the maximum of the net replacement cost or zero. Note that under the aggregate approach, the NGR is to be applied individually to each legally enforceable netting agreement.
August 2018