Document ID: chunk:federal_register_of_legislation:F2017L01028:body:0:p16
Version: federal_register_of_legislation:F2017L01028
Segment Type: other
Provision Reference: 
Character Range: 42585–45668

considered as an indicator of where the final risk lies to the extent that is recognised as a risk mitigant under the Basel Committee on Banking Supervision's capital framework.

Similarly, 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.

In case of holdings of credit linked notes, collateral debt obligations and asset-backed securities a 'look-through' approach should be adopted. The country of ultimate risk is defined as the country where the debtor of the underlying credit, security or derivative contract resides.

It is recognised that this 'look-through' approach might not always be possible for practical reasons. Accordingly, reporting entities might only be able to provide estimates for the allocation of claims to the country where the debtor of the underlying risk resides or to allocate the claims to the country of the immediate borrower that is the country where the issuer of the securities resides.

The issuer (or protection buyer) of credit linked notes, collateral debt obligations and asset backed securities should regard the issuance of a security backed by financial claims, and sale to investors, as a cash collateral which extinguishes the exposure of the issuer to the underlying claim.

Claims on separately capitalised subsidiaries can only be considered as being guaranteed by the head office if the parent has provided an explicit guarantee. In contrast, any claims on non-incorporated branches should for the purposes of the consolidated statistics always be considered as guaranteed by the respective head office, even if there is no legal guarantee.

Unallocated sector refers to where the counterparty sector is unknown.

Attachment: Examples of reporting of risk transfers

Example 1
An Australian resident has granted a loan of AUD 10 million to a manufacturer in Hong Kong, which is guaranteed by a bank in Japan. The Australian resident bank should report the claim as an outward risk transfer from Hong Kong and an inward risk transfer to Japan. In ARF 731.3A, this example will look as follows:

           Immediate risk  Outward risk transfers  Inwards risk transfers  Net risk transfers
Hong Kong  10              10                                              -10
Japan                                              10                      10

Example 2
If in example 1, an Australian resident bank guarantees the claim instead, the claim should be reported as an outward risk transfer from Hong Kong and an inward risk transfer to Australia.

           Immediate risk  Outward risk transfers  Inwards risk transfers  Net risk transfers
Australia                                          10                      10
Hong Kong  10              10                                              -10

Example 3
If in example 1, the manufacturer were resident in Australia, the claim would have to be reported as an outward risk transfer