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.