Entire section Custom print Link Text Only Rich Text Print

CM-5.3.1

For large exposure(s) purposes, the measure of exposure reflects 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, or losses experienced due to non-repayment of facilities granted. In certain cases (particularly derivatives), the measure of a large exposure may be larger than that used in published financial statements. Consistent with this, an exposure encompasses 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 must be included in the measure of exposure after deduction of any provisions. Such claims would include but are not limited to:
(i) Loans and other credit facilities (including overdrafts) whether or not drawn;
(ii) Exposures arising through lease agreements;
(iii) Margin held with exchanges or counterparties;
(iv) Claims under derivative contracts such as futures, forwards, options, swaps and similar contracts on interest rates, foreign currencies, equities, securities, commodities or indexes;
(v) Claims arising in the course of settlement of securities transactions;
(vi) Receivables such as fees or commissions;
(vii) Claims arising in the case of forward sales and purchases of financial instruments in the trading or banking books;
(viii) Amounts outstanding under sale and repurchase agreements, forward asset purchase agreements, buyback agreements, stock borrowing/lending or similar transactions;
(ix) Bonds, bills or other non-equity financial instruments; and
(x) Underwritingexposures for bonds, bills, or other non-equity financial instruments.
(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 overdraft, L/C or similar facilities, the advised limit must be included in the measure of exposure. Such liabilities may include:
(i) Direct credit substitutes (including guarantees, standby letters of credit, bills accepted but not held by the reporting bank, and endorsements creating payable obligations);
(ii) Claims sold with recourse (i.e. where the credit risk remains with the reporting bank);
(iii) Transaction related contingents not having the character of direct credit substitutes (e.g. performance bonds, bid bonds, transaction-related L/Cs etc);
(iv) Undrawn documentary letters of credit issued or confirmed; and
(v) Credit derivatives sold (where the bank is providing credit protection);
(c) Any other assets or transactions whose value depends wholly or mainly on a counterparty performing its obligations, or whose value depends upon that counterparty's financial soundness but which do not represent a claim on the counterparty. Such assets or transactions include:
(i) Equities and other capital instruments (including significant investments in commercial entities—see CM-5.5.1.E for definition);
(ii) Equity warrants, options, or equity derivatives where the reporting bank is obtaining credit protection; and
(iii) Underwriting or purchase commitments for equities; and
(d) Any other assets, receivables or transactions which constitute a claim for the bank which are not included in (a), (b) or (c) above. Such items could include funds or assets provided to a fund/asset manager. Banks must regard assets placed with third parties under management as exposures. Under no circumstances may a bank place funds with fund managers (or mudaribs or trustees) that also act as custodian.
Amended: January 2015
Amended: July 2011
Amended: April 2011
Amended: January 2011
October 2007