PRU-EPRS 1.24 Instructional Guidelines

1. The residency of Counterparties on both an immediate borrower and ultimate risk basis is to be reported.
2. All claims and other Exposures are to be reported gross of any provisions for impairment. Accrued interest is to be excluded from all parts of the return. Exclude all gold and silver balances, foreign coin, foreign government or bank notes, net debit or credit items in transit vis-à-vis third parties and amounts reported as insurance-related assets and liabilities.
3. Claims, other Exposures, and liabilities are to be initially classified on a geographical basis according to the mailing address of the Counterparty, unless the Authorised Firm is aware that the residential status of the Counterparty is different from their mailing address.

Risk transfers

4. Information on claims on immediate borrowers that can be reallocated to the country sector where the final risk lies, i.e., the entity of ultimate risk, is to be reported by way of outward and inward risk transfers.
5. In line with the risk reallocation principle for measuring country Exposure recommended by the Basel Committee on Banking Supervision, the country of ultimate risk or where the final risk lies is defined as the country in which the guarantor of a financial claim resides or the country in which the head office of a legally dependent branch is located.
6. Claims on separately capitalized subsidiaries can only be considered as being guaranteed by the head office if the parent has provided an explicit guarantee. Collateral may be considered as an indicator of where the final risk lies to the extent that it is recognized as a risk mitigant under the Basel Capital Accord. The following is a list of eligible collateral:
a. cash on deposit with the lending bank including certificates of deposit or comparable instruments issued by the lending bank;
b. gold;
c. debt securities rated by a recognised external credit assessment institution where these are:
i. rated at least BB- when issued by sovereigns and public sector entities ("PSEs") that are treated as sovereigns by the national supervisor;
ii. rated at least BBB- when issued by other issuers (including banks and securities firms); or
iii. rated at least A2 / P3;
d. debt securities not rated by a recognised external credit assessment institution where these are:
i. issued by a bank;
ii. listed on a regulated exchange;
iii. qualify as senior debt;
iv. all other rated issues of the same seniority by the issuing bank are rated at least BBB- or A3 / P3 by a recognized external credit assessment institution;
v. the bank holding the securities as collateral has no information to suggest that the issue justifies a rating below BBB- or A3 / P3 (as applicable); and
vi. the supervisor is sufficiently confident about the market liquidity of the security;
e. equities that are included in a main index;
f. equities that are not included in a main index but are listed on a regulated exchange; and
g. Domestic or Foreign Funds where:
i. a price for the Units is publicly quoted daily; and
ii. the Fund is limited to investing in the instruments listed in this section.
7. If credit Derivatives are used to cover the Counterparty risk of financial claims in the banking book, the country of ultimate risk of these positions is defined as the country in which the Counterparty to the credit derivative contract resides. However, credit Derivatives, such as credit default swaps and total return swaps, that belong to the trading book of the protection buying reporting bank should only be reported under the "Derivatives" category, and all other credit Derivatives should be reported as "guarantees" by the protection seller (see guarantees and other unused credit commitments below).

Reporting of Credit Derivatives

Buy protection Sell protection
Banking book Risk transfers Guarantees
Trading book Derivatives Guarantees
8. In the case of security holdings, such as credit-linked notes and other collateralised debt obligations and asset-backed securities, a "look-through" approach should be adopted and the country of ultimate risk is defined as the country where the debtor of the underlying credit, security or Derivative contract resides.
9. Note that inward and outward risk transfers are used to report transfer of risk from one sector to another sector, even when the country of the immediate borrower and the country of ultimate risk are the same. Where banks are unable to allocate outward risk by country because the protection has been purchased to cover a group, e.g., an industry Exposure, banks are to use a reasonable weighted-average allocation formula, eg. weighted-average based on total claims of the group. Amounts involved in such allocations should be insignificant.

Example

10. The following example demonstrates a risk transfer. A borrower in country XXX borrows USD $1 million from a bank and the repayment of that loan is guaranteed by another entity in country YYY. For the purposes of risk transfer, this Transaction would be reported as follows:
Country Name Loans Outward Risk Transfer Inward Risk Transfer
XXX 1000 1000  
YYY     1000
11. The data in line 1 tell us that the bank has a $1 million claim on a borrower located in country XXX, and this claim is guaranteed by a resident of another country. Line 2 data tell us that the residents of country YYY have provided an unconditional credit commitment for the claims the bank has on the residents of another country. Note that the total of the "Outward Risk Transfer" column and the "Inward Risk Transfer" column (columns 3 and 4 in the above example) will be the same.
12. The following equation illustrates how to derive claims on an ultimate risk basis:

Total Claims (Immediate Borrower Basis) - Outward Risk Transfer + Inward Risk Transfer = Total Claims (Ultimate Risk Basis)

Derivatives

13. Authorised Firms are to provide data on financial claims (i.e., positive market values) resulting from Derivative contracts, independent of whether they are booked as on- or off-balance sheet items. The data should be reported on an ultimate risk basis, i.e., the positions should be allocated to the country where the final risk lies. The data would, therefore, mainly comprise forwards, swaps and options relating to foreign exchange, interest rate, equity, commodity and credit Derivative contracts. As previously indicated, credit Derivatives that are used to cover for the Counterparty risk of financial claims in the banking book should be reported as "risk transfers" and not as Derivatives.
14. The following items are common OTC Derivative instruments:

Forward contracts

15. Forward contracts represent agreements for delayed delivery of financial instruments or commodities in which the buyer agrees to purchase and the seller agrees to deliver, at a specified future date, a specified instrument or commodity at a specified price or yield. Forward contracts are not traded on organised exchanges and their contractual terms are not standardised. Forward contracts that are to be reported are those that have been entered into by the reporting bank and are outstanding (i.e., open contracts) as at the reporting date. Contracts are outstanding (i.e., open) until they have been cancelled by acquisition or delivery of the underlying financial instrument or commodity or settled in cash.

Swaps

16. Swaps are Transactions in which two parties agree to exchange payment streams based on a specified notional amount for a specified period.

OTC options

17. Option contracts convey either the right or the obligation, depending upon whether the reporting institution is the purchaser or the writer, respectively, to buy or sell a financial instrument or commodity at a specified price up to a specified future date. OTC option contracts include all option contracts not traded on an organized exchange. These include: swaptions, i.e., options to enter into a swap contract, and contracts known as caps, floors, collars, and corridors. Options such as call features embedded in loan, securities and other on-balance-sheet assets are not to be included. Sold options are not considered a financial claim and therefore are not to be included under Derivatives.

Guarantees and Other Unused Credit Commitments

18. Data should be supplied on Exposures to the reporting bank via guarantees and unused credit commitments other than guarantees. These are to be reported on an ultimate risk basis, i.e., the positions allocated to the country where the final risk lies. Both types of data should be reported to the extent that they represent the unutilised portion of both binding contractual obligations and any other irrevocable commitments. Performance bonds and other forms of guarantee should only be reported if, in the event of the contingency occurring, the resulting claims would have an impact on total balance sheet claims.
19. "Guarantees" are contingent liabilities arising from an irrevocable obligation to pay to a third-party beneficiary when a Client fails to perform some contractual obligation. They include secured, bid and performance bonds, warranties and indemnities, confirmed documentary credits, irrevocable and standby letters of credit, acceptances and endorsements. Guarantees also include the contingent liabilities of the protection seller of credit Derivative contracts.
20. "Other unused credit commitments" are arrangements that irrevocably obligate an institution, at a Client's request, to extend credit in the form of loans, participation in loans, lease financing receivables, mortgages, overdrafts or other loan substitutes or commitments to extend credit in the form of the purchase of loans, securities or other assets. Normally commitments involve a written contract or agreement and some form of consideration, such as a commitment fee.

Specific Guidance

First linked form — Part I — Claims — Immediate Borrower Basis

Item Instructional Guidelines
Country Code For the relevant Exposure, enter the country code found on the List of Country Codes.
Deposits Report Deposits with banks or official monetary institutions according to the location of the office where the Deposit is held.
Securities Report short term and long term securities and equities. Short term securities are those with an initial term of less than 1 year.
Loans Report loans at book value gross of provisions for impairment.
Distribution of claims by residual term to maturity The maturity should reflect amortisation periods or final maturity dates rather than interest adjustments or rollover dates. Instalment loans should be allocated to the periods in which instalment payments are made. Demand loans should be classified as claims with a maturity of less than one year. Equities should be reported as unallocated.

Second linked form — Part II — Other

Item Instructional Guidelines
Outward Risk Transfer Report the amounts which are guaranteed or assured through some type of commitment by a party in another country or by another sector in the same country.
Inward Risk Transfer Report the amount of any guarantees and other types of credit commitments made by residents of other countries or by another sector in the same country.
Total Claims ultimate risk basis Report the total "claims — immediate borrower basis" less "outward risk transfers" plus "inward risk transfers".
Other Exposures ultimate risk basis Report separate amounts for guarantees, Derivatives and other as previously defined.

Third linked form — Part III — Liabilities

Item Instructional Guidelines
Official Monetary Institutions Report Deposits payable to official monetary institutions.
Other Banks Report Deposits payable to other banks.
Other Liabilities Report any other liabilities.
Derived from GM5/2007 (Made 16th December 2007). [VER1/12-07]
[Amended] [VER2/04-13]