Recognition of Credit Risk Mitigations
(1) For the purposes of this section, an
Authorised Firmmay reduce the value of its Exposures, at its discretion, by any one or more of the following:(a) the amount of any specific provision made, where the provision relates to the risk of a credit loss occurring on that Exposureand is not held as part of a general provision or reserve against its Credit Risks;(b) Nettingits claims on and liabilities to a Counterparty, provided that the conditions in PIB section 4.13 of Credit Riskmitigation are met;(c) the amount of Collateralheld against its Exposures, where that Collateralis of a type listed based on the FCSA and FCCA approaches and meeting the requirements under PIB section 4.13, provided that supervisory haircuts are used for valuing that Collateral under the FCCA;(e) the value of a Credit Derivative, where the Credit Derivativeis an instrument included in PIB Rule 4.13.11 and the transaction meets the conditions set out in that section; and(f) the effects of transactions transferring Credit Risksfrom the Authorised Firmto another party through securitisation, provided that the conditions in PIB section 4.14 are met.
(2) Where Credit Risk mitigation is used against an Exposure, an Authorised Firm must reduce the value of the original Exposure and recognise an equal Exposure to the Credit Risk mitigation provider, except where:(a) a credit default swap is used; and(b) neither the reference entity, nor the credit default swap provider, is a Financial Institution,
(3) For the purposes of Exposure shifting under (2), the amount subject to shifting is:(a) the value of the protected portion for an unfunded credit protection;(b) where the FCSA is used, the market value of the collateral; and(c) where the FCCA is used, the market value of the collateral adjusted by applying the standard supervisory haircuts to the FCCA.
Authorised Firmintending to utilise any of the provisions contained in PIB section 4.13 ( Credit Riskmitigation) for the purposes of reducing Exposurevalues should have in place policies and procedures addressing the following:(a) risks arising from maturity mismatches between Exposuresand any credit protection on those Exposures;(b) the Concentration Riskarising from the application of Credit Riskmitigation techniques, including indirect Large Exposures— for example to a single Issuerof Securitiestaken as Collateral; and(c) the conduct of stress testing on Credit Riskmitigation taken as Collateral.
Authorised Firmhas availed itself of the reductions to Exposurevalues as set out in PIB A4.11 the Authorised Firmmust calculate the Exposureas a percentage of its Tier 1 Capital on both a gross and net basis.
Authorised Firmthat avails itself of the reduction in its Exposurevalue through the application of PIB Rule A4.11 must conduct periodic stress tests on its Exposuresagainst the realisable value of any Collateralconsidered under with the FCSA or FCCA.
PIB 4.15.16 PIB 4.15.16
Where the value of the
Collateralunder the stress scenario is lower than the value applied under PIB Rule 4.15.12 the lower value should be used when determining the Exposurevalue for the purposes of this section.
PIB 4.15.16 Guidance
Such stress tests should include market value changes of underlying
Collateral, risks relating to liquidity and realisation of such Collateralin stress scenarios. An assessment of the impact of any such changes on the Exposurevalue and the capital position of the Authorised Firmshould be conducted. Stress testing of these positions should be conducted at least once a year.
PIB 4.15.17 PIB 4.15.17
Authorised Firmmust document its policy for the use of any of the exclusions in PIB Rule 4.15.12.
PIB 4.15.17 Guidance
Such policy should include risks such as maturity mismatches, stress testing of
Collateralvalues, indirect Exposuresarising from Credit Riskmitigation, such as mitigation provided on Exposuresby the same Counterparty.