PIB 4.13 PIB 4.13 Credit Risk Mitigation
PIB 4.13 Guidance
This section sets out the principles and methodologies for the recognition of
Credit Riskmitigation in the calculation of Credit RWA.
PIB 4.13.1 PIB 4.13.1(1) An
Authorised Firmmust not recognise the effects of Credit Riskmitigation unless:(a) all documentation relating to that mitigation is binding on all relevant parties and legally enforceable in all relevant jurisdictions; and(b) the Authorised Firmcomplies with the Rulesset out in this section, as applicable.(2) Where the calculation of Credit RWAal takes into account the Credit Riskmitigant, the provisions of this section do not apply.(3) An Authorised Firm must, where it uses a specific Credit Risk mitigation technique for the purposes of its Capital, use the same technique for Large Exposure reduction, where it is permitted and chooses to use mitigation under the requirements in PIB chapter 4.
PIB 4.13.1 Guidance
Authorised Firmshould conduct 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. The review should cover relevant jurisdictions such as the jurisdiction whose law governs the credit protection or Collateralagreement and the jurisdiction whose law governs the transaction subject to the credit protection or Collateralagreement. There should be sufficient written documentary evidence to adequately support the conclusion drawn and rebut any legal challenge. While an Authorised Firmmay use either in-house or external legal counsel, it should consider whether or not in-house counsel opinion is appropriate. The senior management of the Authorised Firmshould ensure that an officer of the Authorised Firmwho is legally qualified and independent of the parties originating the transaction reviews the legal opinion and confirms that he is satisfied that an adequate review has been completed and that he agrees with the conclusions drawn. A record of these reviews should be kept and made available at the request of the DFSA.
Authorised Firmuses multiple Credit Riskmitigation for a single Exposure, the Authorised Firmmust divide the Exposureinto portions covered by each mitigation and must calculate the Credit Risk-weighted Exposureamount of each portion separately. An Authorised Firmmust apply the same approach when recognising eligible credit protection by a single protection provider where the eligible credit protection has differing maturities.
PIB 4.13.3 PIB 4.13.3(1) An
Authorised Firmmust take all appropriate steps to ensure the effectiveness of the Credit Riskmitigation arrangements it employs and to address related risks.(2) Where an Authorised Firmreduces or transfers Credit Riskby the use of Credit Riskmitigation, an Authorised Firmmust employ appropriate and effective policies and procedures to identify and control other risks which arise as a consequence of the transfer.
PIB 4.13.3 Guidance1. The use of techniques to reduce or transfer
Credit Riskmay simultaneously increase other risks (residual risks) which include legal, operational, liquidity and Market Risks. The DFSAexpects an Authorised Firmto employ methods to identify and control these risks, including:a. strategy;b. consideration of the underlying credit;c. valuation;d. policies and procedures;e. systems;f. control of roll-off risks; andg. management of Concentration Riskarising from the use of Credit Riskmitigation and the interaction of such risk with the overall Credit Riskprofile of the Authorised Firm.2. In order to fulfil the above, an Authorised Firmshould ensure a clearly articulated strategy for the use of Credit Riskmitigation as an intrinsic part of the general credit strategy of an Authorised Firm.3. Where an Exposureis subject to Credit Riskmitigation, credit managers should continue to assess the Exposureon the basis of the obligor's creditworthiness. Credit managers should obtain and analyse sufficient financial information to determine the obligor's risk profile and its management and operational capabilities.4. Collateralshould be revalued frequently, and the unsecured Exposureshould also be monitored frequently. Frequent revaluation is prudent, and the revaluation of marketable securities should occur on at least a daily basis. Furthermore, measures of the potential unsecured Exposureunder collateralised transactions should be calculated under stressed and normal conditions. One such measure would take account of the time and cost involved if the obligor or Counterpartywere to default and the Collateralhad to be liquidated. Furthermore, the setting of limits for collateralised Counterpartiesshould take account of the potential unsecured Exposure. Stress tests and scenario analysis should be conducted to enable the Authorised Firmto understand the behaviour of its portfolio of Credit Riskmitigation arrangements under unusual market conditions. Any unusual or disproportionate risk identified should be managed and controlled.5. Clear policies and procedures should be established in respect of Collateralmanagement, including:a. the terms of Collateralagreements;b. the types of Collateraland enforcement of Collateralterms (e.g. waivers of posting deadlines);c. the management of legal risks;d. the administration of agreement (e.g. detailed plans for determining default and liquidating Collateral); ande. the prompt resolution of disputes, such as valuation of Collateralor positions, acceptability of Collateral, fulfilment of legal obligations and the interpretation of contract terms.6. The policies and procedures referred to under Guidancenote 1(d) should be supported by Collateralmanagement systems capable of tracking the location and status of posted Collateral(including re-hypothecated Collateral), outstanding Collateralcalls and settlement problems.7. Where an Authorised Firmobtains credit protection that differs in maturity from the underlying credit Exposure, the Authorised Firmshould monitor and control its roll-off risks, i.e. the fact that the Authorised Firmwill be fully exposed when the protection expires, and the risk that it will be unable to purchase credit protection or ensure its capital adequacy when the credit protection expires.8. Taking as Collaterallarge quantities of instruments issued by one obligor creates Concentration Risk. An Authorised Firmshould have a clearly defined policy with respect to the amount of Concentration Riskit is prepared to run. Such a policy might, for example, include a cap on the amount of Collateralit would be prepared to take from a particular Issueror market. The Authorised Firmshould also take Collateraland purchased credit protection into account when assessing the potential concentrations in its overall credit profile.9. Notwithstanding the presence of Credit Riskmitigation considered for the purposes of calculating Credit RWAamounts, an Authorised Firmshould continue to undertake a full Credit Riskassessment of the underlying Exposure.
PIB 4.13.4(1) An
Authorised Firmmust be able to satisfy the DFSAthat it has systems in place to manage potential concentration of risk arising from its use of guarantees and Credit Derivatives.(2) An Authorised Firmmust be able to demonstrate how its strategy in respect of its use of Credit Riskmitigation techniques, and in particular use of Credit Derivativesand guarantees interacts with its management of its overall risk profile.
PIB 4.13.4 Guidance
In order to recognise the effects of
Credit Riskmitigation of the types of Collateralset out in Rules PIB 4.13.5 to PIB 4.13.7, an Authorised Firmmust ensure that the relevant requirements in PIB Rule 4.13.8 are complied with.
PIB 4.13.5 PIB 4.13.5(1) For an
Authorised Firmusing the FCSA, eligible financial Collateralcomprises:(a) cash (as well as certificates of deposit or other similar instruments issued by the Authorised Firm) on deposit with the Authorised Firm;(b) gold;(c) any debt security:(i) with an Original Maturityof one year or less that has a short-term Credit Quality Gradeof 3 or better as set out in PIB section 4.12; or(d) any debt security issued by a bank that does not have an external credit assessment by a recognised ECAIif it fulfils the following criteria:(i) any debt security which is listed on a regulated exchange;(ii) the debt security is classified as senior debt, not subordinated to any other debt obligations of its Issuer;(iii) all other rated debt securities issued by the same Issuerwhich rank equally with the mentioned debt security have a long term or short term (as applicable) Credit Quality Gradeby a recognised ECAIof "3" or better;(iv) the Authorised Firmis not aware of information to suggest that the issue would justify a Credit Quality Gradeof below "3" as indicated in (iii) above; and(v) the Authorised Firmcan demonstrate to the DFSAthat the market liquidity of the debt security is sufficient to enable the Authorised Firmto dispose the debt security at market price.(e) any equity security (including convertible bonds) that is included in a main index; or(f) any Unitin a Collective Investment Fundwhere:(i) a price for the units is publicly quoted daily; and(ii) at least 90% of the deposited property of the Fundis invested in instruments listed in this Rule.(2) Cash-funded credit-linked notesissued by an Authorised Firmagainst Exposuresin the Non-Trading Bookwhich fulfil the criteria for eligible Credit Derivativesmust be treated as cash collateralised transactions.(3) Cash, mentioned in (1)(a), includes cash on deposit, certificates of deposit or other similar instruments issued by the Authorised Firmthat are held as Collateralat a third-party bank in a non-custodial arrangement and that are pledged or assigned to the Authorised Firm. This is subject to the pledge or assignment being unconditional and irrevocable. Under the FCSA, the risk weight to be applied to the Exposurecovered by such Collateralmust be the risk weight of the third-party bank.
PIB 4.13.5 Guidance1. For the purposes of Rule PIB 4.13.5 and PIB 4.13.6, eligible financial
Collateralexcludes any T1 Capital instrument or T2 Capital instrument issued by any entity in the Financial Groupof the Authorised Firm, which is held by the Authorised Firmor any of its Financial Groupentities as Collateral.2. For an Authorised Firmusing Unitsof a Fundunder the FCSA approach, the use or potential use by that Fundof Derivativeinstruments solely to hedge investments listed in PIB Rule 4.13.5 should not preclude the Unitsin that Fundfrom being recognised as eligible financial Collateral.
Authorised Firmusing the FCCA, eligible financial Collateralcomprises:(a) any instrument listed in PIB Rule 4.13.5;(b) any equity Security(including a convertible bond) that is traded on a regulated exchange;(c) any Unitin a Collective Investment Fundwhich invests in equity securities referred to in (b), where:(i) a price for the Unitsis publicly quoted daily; and(ii) at least 90% of the deposited property of the Fundis invested in instruments listed in this Ruleand PIB Rule 4.13.5.
PIB 4.13.7 PIB 4.13.7
In the case of any
Counterparty Risk Exposuresin Rules PIB 4.13.5. and PIB 4.13.6 arising from an SFT which are included in the Trading Book, eligible financial Collateralincludes all instruments which an Authorised Firmmay include in its Trading Book.
PIB 4.13.7 Guidance
Authorised Firmusing Unitsof a Fundunder the FCSA approach, the use or potential use by that Fundof Derivativeinstruments solely to hedge investments listed in PIB Rule 4.13.5 should not preclude the Unitsin that Fundfrom being recognised as eligible financial Collateral.
Requirements for Recognition of Collateral
Authorised Firmmust ensure that the following requirements are complied with before it recognises the effects of Credit Riskmitigation of any Collateral:(a) the legal mechanism by which Collateralis pledged, assigned or transferred must confer on the Authorised Firmthe right to liquidate or take legal possession of the Collateral, in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the Counterparty(and, where applicable, of the custodian holding the Collateral);(b) the Authorised Firmhas taken all steps necessary to fulfil those requirements under the law applicable to the Authorised Firm'sinterest in the Collateralfor obtaining and maintaining an enforceable security interest by registering it with a registrar or for exercising a right to net or set off in relation to title transfer Collateral;(c) the credit quality of the Counterpartyand the value of the Collateraldo not have a material positive correlation;(d) securities issued by the Counterpartyor any Closely Related Counterpartyare not eligible;(e) the Authorised Firmhas implemented procedures for the timely liquidation of Collateralto ensure that any legal conditions required for declaring default of Counterpartyand liquidating the Collateralare observed, and that the Collateralcan be liquidated promptly; and(f) where the Collateralis held by a custodian, the Authorised Firmhas taken reasonable steps to ensure that the custodian segregates the Collateralfrom its own assets.
PIB 4.13.9 PIB 4.13.9(1) An
Authorised Firmmay recognise the effects of Credit Riskmitigation of a guarantee only if it is provided by any of the following entities:(a) central government or Central Bank;(b) MDB referred to in PIB Rule 4.12.8(c) International Organisations referred to in PIB Rule 4.12.9;(d) PSE;(e) banks and securities firms which qualify for inclusion in bank asset class; or(f) any other entity that has a Credit Quality Grade"3" or above.(2) An Authorised Firmmust not recognise the effects of Credit Riskmitigation of a guarantee unless all of the following requirements are complied with:(a) the guarantee is an explicitly documented obligation assumed by the guarantor;(b) the guarantee represents a direct claim on the guarantor;(c) the extent of the credit protection cover is clearly defined and incontrovertible;(d) other than in the event of non-payment by the Authorised Firmof money due in respect of the guarantee if applicable, there is an irrevocable obligation on the part of the guarantor to pay out a predetermined amount upon the occurrence of a credit event, as defined under the guarantee;(e) the guarantee does not contain any clause, the fulfilment of which is outside the direct control of the Authorised Firm, that:(i) would allow the guarantor to cancel the guarantee unilaterally;(ii) would increase the effective cost of the guarantee as a result of deteriorating credit quality of the underlying Exposure;(iii) could prevent the guarantor from being obliged to pay out in a timely manner in the event that the underlying obligor fails to make any payment due; or(iv) could allow the maturity of the guarantee agreed ex-ante to be reduced ex-post by the guarantor;(f) the Authorised Firmis able in a timely manner to pursue the guarantor for any monies outstanding under the documentation governing the transaction on the default of, or non-payment by, the underlying obligor without first having to take legal action to pursue the underlying obligor for payment; and(g) the guarantee covers all types of payments that the underlying obligor is expected to make under the documentation governing the transaction, except in the case of accrued interest, accrued expenses or fees outstanding, where these are deemed immaterial.
PIB 4.13.9 Guidance1. PIB Rule 4.13.9(2)(e) does not include any guarantee with a cancellation clause where it is provided that any obligation incurred or transaction entered into prior to any cancellation, unilateral or otherwise, continues to be guaranteed by the guarantor.2. The guarantee payments may be in the form of the guarantor making a lump sum payment of all monies to the
Authorised Firmor the guarantor assuming the future payment obligations of the Counterpartycovered by the guarantee, as specified in the relevant documentation governing the guarantee.
In addition to the requirements in PIB Rule 4.13.9, where an
Authorised Firmhas an Exposurethat is protected by a guarantee or that is counter-guaranteed by a central government or Central Bank, a regional government or local authority or a PSE claims on which are treated as claims on the central government in whose jurisdiction they are established, a MDB or an international organisation to which a 0% risk weight is assigned under PIB section 4.12, an Authorised Firmmay treat the Exposureas being protected by a direct guarantee from the central government or Central Bankin question, provided the following requirements are complied with:(a) the counter-guarantee covers all Credit Riskelements of the Exposure;(b) both the original guarantee and the counter-guarantee comply with all the requirements for guarantees set out in this section, except that the counter-guarantee need not be direct and explicit with respect to the original Exposure; and(c) the Authorised Firmis able to satisfy the DFSAthat the cover is robust and that nothing in the historical evidence suggests that the coverage of the counter-guarantee is less than effectively equivalent to that of a direct guarantee by the entity in question.
PIB 4.13.11(1) An
Authorised Firmmay recognise the effects of Credit Riskmitigation of a Credit Derivativeonly if it is provided by any of the following entities:(a) central government or Central Bank;(c) International Organisations referred to in PIB Rule 4.12.9;(d) PSE;(e) banks and securities firms which qualify for inclusion in bank asset class; or(f) any other entity that has a Credit Quality Grade"3" or better.(2) An Authorised Firmmay recognise the effects of Credit Riskmitigation of only the following types of Credit Derivatives:(a) credit default swaps;(b) total return swaps;(c) credit linked noteswhich are cash funded; and(d) instruments that are composed of, or are similar in economic substance, to one or more of the Credit Derivativesin (a) to (c).
PIB 4.13.12 PIB 4.13.12
Authorised Firmmust not recognise the effects of Credit Riskmitigation of any Credit Derivativeunless all of the following requirements are complied with:(a) the terms and conditions of any credit protection obtained via a Credit Derivativemust be set out in writing by both the Authorised Firmand the provider of credit protection;(b) the Credit Derivativemust represent a direct claim on the provider of credit protection;(c) the extent of the credit protection cover is clearly defined and incontrovertible;(d) other than in the event of non-payment by the Authorised Firmof money due in respect of the Credit Derivative, there is an irrevocable obligation on the part of the provider of the credit protection to pay out a pre-determined amount upon the occurrence of a credit event, as defined under the Credit Derivativecontract;(e) the Credit Derivativecontract must not contain any clause, the fulfilment of which is outside the direct control of the Authorised Firm, that:(i) would allow the provider of credit protection to cancel the credit protection cover unilaterally;(ii) would increase the effective cost of the credit protection cover as a result of deteriorating credit quality of the underlying Exposure;(iii) could prevent the provider of credit protection from being obliged to pay out in a timely manner in the event that the underlying obligor fails to make any payment due; or(iv) could allow the maturity of the credit protection agreed ex-ante to be reduced ex-post by the provider of credit protection;(f) the credit events specified by the contracting parties must at a minimum cover:(i) failure to pay the amounts due under terms of the underlying Exposurethat are in effect at the time of such failure (with a grace period, if any, that is closely in line with the grace period in the underlying Exposure);(ii) bankruptcy, insolvency or inability of the underlying obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and(iii) restructuring of the underlying Exposureinvolving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. charge-off, specific provision or other similar debit to the profit and loss account);(g) the Credit Derivativemust not terminate prior to the maturity of the underlying Exposureor expiration of any grace period required for a default on the underlying Exposureto occur as a result of a failure to pay;(h) a robust valuation process to estimate loss reliably must be in place in order to estimate loss reliably for any Credit Derivativethat allows for cash settlement. There must be a clearly specified period for obtaining post-credit event valuations of the underlying obligation;(i) where the right or ability of the Authorised Firmto transfer the underlying Exposureto the credit protection provider is required for settlement, the terms of the underlying Exposuremust provide that any required consent to such transfer may not be unreasonably withheld;(j) the identity of the parties responsible for determining whether a credit event has occurred must be clearly defined. This determination must not be the sole responsibility of the credit protection provider. The Authorised Firmmust have the right or ability to inform the credit protection provider of the occurrence of a credit event; and(k) the underlying obligation and the reference obligation specified in the Credit Derivativecontract for the purpose of determining the cash settlement value or the deliverable obligation or for the purpose of determining whether a credit event has occurred may be different only if:(i) the reference obligation ranks pari passu with or is junior to the underlying obligation; and(ii) the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.
PIB 4.13.12 Guidance1. An
Authorised Firmshould not recognise the effects of Credit Riskmitigation of a total return swap if it purchases credit protection through a total return swap and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the underlying asset that is protected (either through reductions in its marked-to-market value or by an addition to reserves).2. The DFSAwould generally consider the requirements in (f) to have been complied with even if the requirements are not specifically set out so long as the obligations of the credit protection provider under the Credit Derivativecontract would include those requirements.3. The DFSAwould generally consider the cash settlement methodology provided in the ISDA Credit DerivativesDefinitions as satisfying the requirement for obtaining post-credit event valuations of the underlying obligation.
PIB 4.13.13(1) In the case where there is a currency mismatch between the credit protection and the underlying
Exposure, an Authorised Firmmust reduce the amount of the Exposuredeemed to be protected by applying a haircut, as follows:
Protected portion GA = G (1 - HFX)where:(a) G = notional amount of the credit protection; and(b) HFX = haircut appropriate for currency mismatch between the credit protection and underlying obligation
Exposurebased on a ten-business day holding period, assuming daily mark-to-market.(2) An Authorised Firmmust determine HFX in the following manner:(a) if the Authorised Firmuses standard supervisory haircuts, HFX is 8%; and(3) If the credit protection is not marked-to-market daily, HFX must be scaled in accordance with PIB Rule A4.3.25.
Authorised Firmmay recognise the effects of Credit Riskmitigation for an Exposurewhere there is a maturity mismatch only if the Credit Riskmitigant has an Original Maturityof at least one year and a residual maturity of more than three months. For the purposes of calculating Credit RWA, a maturity mismatch occurs when the residual maturity of the Credit Riskmitigant is less than that of the underlying Exposure.
PIB 4.13.15(1) An
Authorised Firmmust determine the maturity of the underlying Exposureand the maturity of the Credit Riskmitigant conservatively. The residual maturity of the underlying Exposuremust be gauged as the longest possible remaining time before the Counterpartyis scheduled to fulfil its obligation, taking into account any applicable grace period.(2) In the case of Credit Riskmitigant, embedded options which may reduce the term of the credit protection must be taken into account so that the shortest possible residual maturity is used. Where a call is at the discretion of the protection seller, the residual maturity will be at the first call date. If the call is at the discretion of the Authorised Firmbut the terms of the arrangement at origination of the Credit Derivativecontain a positive incentive for the Authorised Firmto call the transaction before contractual maturity, the remaining time to the first call date will be deemed to be the residual maturity.
PIB 4.13.16 PIB 4.13.16(1) An
Authorised Firmmust calculate the value of the Credit Riskmitigation adjusted for any maturity mismatch (referred to as "PA"), using the following formula:
PA = P(t-0.25)/(T-0.25)where —(a) P = value of the credit protection (e.g.
Collateralamount, guarantee amount) adjusted for any haircuts;(b) t = min (T, residual maturity of the Credit Riskmitigant) expressed in years; and(c) T = min (5, residual maturity of the Exposure) expressed in years.(2) For residual maturity of the Exposurein the case of a basket of Exposureswith different maturities, an Authorised Firmmust use the longest maturity of any of the Exposuresas the maturity of all the Exposuresbeing hedged.
PIB 4.13.16 Guidance
The positive incentive for an
Authorised Firmto call the transaction before contractual maturity as referred in PIB Rule 4.13.15 would be, for example, a situation wherein there is a step-up in cost in conjunction with a call feature or where the effective cost of cover remains the same even if credit quality remains the same or increases.
On-balance Sheet Netting
PIB 4.13.17(1) An
Authorised Firmmay recognise as eligible the Nettingof an on-balance sheet Exposureagainst an offsetting on-balance sheet item if the related Nettingagreement meets the condition in PIB Rule 4.13.19.(2) Eligibility for Nettingis limited to reciprocal cash balances between the Authorised Firmand its Counterparty. Only loans and deposits of the Authorised Firmmay be subject to a modification of their Credit RWAsas a result of an on-balance sheet Nettingagreement.
PIB 4.13.18(1) Assets (loans) and liabilities (deposits) subject to recognised on-balance sheet
Nettingare to be treated as cash Collateralusing the formula in PIB A4.3.6, under which an Authorised Firmmay use zero haircuts for Exposureand Collateral.(2) When a currency mismatch exists, an Authorised Firmmust apply the standard supervisory haircut of 8% for currency mismatch.(3) When a maturity mismatch exists between the off-setting items, an Authorised Firmmust apply the Rules PIB 4.13.14 to PIB 4.13.16 to address the maturity mismatch.(4) Netcredit Exposure, after taking into account recognised Netting, will be subject to the applicable CRW for the Counterparty.
PIB 4.13.19 PIB 4.13.19
Authorised Firmto recognise an on-balance sheet Nettingagreement for the purposes of PIB Rule 4.13.17, all of the following conditions must be satisfied:(1)(a) both the on-balance sheet Exposure(asset) and the offsetting on-balance sheet item (liability) are owing between the Authorised Firmand the same Counterparty;(b) the Authorised Firmnets the on-balance sheet Exposure(asset) and the offsetting on-balance sheet item (liability) in a way that is consistent with its legal rights against the Counterparty;(c) a legal right of set-off exists;(d) the agreement between the Authorised Firmand the Counterpartydoes not contain a Walkaway Clause;(e) the Nettingprovided for in the agreement between the Authorised Firmand the Counterpartyis effective and enforceable in the event of default, bankruptcy, liquidation or other similar circumstances affecting either the Counterpartyor the Authorised Firm;(f) the on-balance sheet Exposure(asset) and the offsetting on-balance sheet item (liability) are monitored, controlled and managed on a net basis; and(g) the potential for roll-off Exposureis monitored and controlled where there is a maturity mismatch; and(2) it has, in respect of each relevant jurisdiction, a written and reasoned legal opinion which:(a) has been provided by an external source of legal advice of appropriate professional standing;(b) confirms that the requirements of (1)(a)-(e) are met for all relevant jurisdictions; and(c) is kept under review to ensure that it remains correct and up to date in the event of changes to the relevant laws.
PIB 4.13.19 Guidance1. An
Authorised Firmshould assess whether any qualifications, assumptions or reservations contained in the legal opinion cast doubt upon the enforceability of the Nettingagreement. If, as a result of the qualifications, assumptions or reservations, there is material doubt about the enforceability of the agreement, the Authorised Firmshould assume that the requirements for Nettinghave not been met.2. An Authorised Firmusing a standard form Nettingagreement and a supporting legal opinion should ensure that the relevant requirements in Rules PIB 4.13.17 to PIB 4.13.19 are met. A standard form Nettingagreement is a form of agreement which is prepared by a reputable, internationally recognised industry association and is supported by its own legal opinion. Where additional clauses are added to a standard form Nettingagreement, the Authorised Firmshould satisfy itself that the amended Nettingagreement continues to meet the legal and contractual requirements in Rules PIB 4.13.17 to PIB 4.13.19. For instance, in such cases, an Authorised Firmmay wish to obtain a second legal opinion to confirm that the relevant requirements in Rules PIB 4.13.17 to PIB 4.13.19 are still satisfied.3. PIB App4 sets out the calculation of the PFCE arising from OTC derivative contracts, on a net basis.