Document ID: chunk:federal_register_of_legislation:F2023L00733:reg:7:p3
Version: federal_register_of_legislation:F2023L00733
Segment Type: reg
Provision Reference: reg 7 (pt 3/7)
Character Range: 31626–34577

applying the asset risk stresses may be reduced where the fund holds certain types of collateral against an asset, or where the asset has been guaranteed, as a means of reducing risk.
2.             For a private health insurer where the assets in question are reinsurance recoverables due from non-APRA-authorised reinsurers, different rules regarding treatment of collateral and guarantees apply (refer to paragraphs 6 to 9 of this Attachment).

Collateral
3.             Collateral held against an asset may be considered in place of the asset if this would reduce the Asset Risk Charge. Where the fair value of the collateral does not cover the full value of the asset, the collateral must only replace that part of the asset that is covered by the collateral.
4.             Collateral may be recognised in place of an asset only to the extent that it takes the form of a registered charge, registered mortgage or other legally enforceable security interest in, or over, an 'Eligible Collateral Item'. Eligible Collateral Items are cash, government securities, or debt obligations (i.e. loans, deposits, placements, interest rate securities and other receivables) where the counterparty has a counterparty grade of 1, 2 or 3. The Eligible Collateral Item must also be held for a period not less than that for which the asset is held.

Guarantees
5.             The stresses applied in the credit spreads and default stresses may be determined using the counterparty grade of a third-party guarantor if the guarantee is explicit, unconditional, irrevocable and legally enforceable for the remaining term to maturity of the related asset. The guarantor must have a counterparty grade (or for governments, a long-term foreign currency credit rating) of 1, 2 or 3. Guarantees provided by the private health insurer's parent or a related entity are not eligible for this treatment.

Collateral, guarantees and letters of credit in respect of reinsurance recoverables due from non-APRA-authorised reinsurers
6.             Where a private health insurer possesses recognised collateral in Australia against reinsurance recoverables due from a non-APRA-authorised reinsurer, it may, in the default stress, apply the default factor relevant to the collateral to the value of the reinsurance recoverables (instead of applying the default factor that would otherwise apply to the reinsurance recoverables). For the purposes of this paragraph, collateral is recognised only:
(a)           to the extent that it takes the form of:
(i)            assets held in Australia that form part of a trust fund maintained by a trustee resident in Australia for the benefit of the private health insurer;
(ii)         deposits held by the private health insurer in Australia, which are controlled by the private health insurer in Australia, made by the non-APRA-authorised reinsurer;
(iii)       a combination of the two forms of collateral specified in paragraphs (i)