Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p48
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 130834–133797

framework establishing the ADI's legal ownership of the leased asset and its ability to exercise its rights as owner in a timely manner; and
        3.           the difference between the rate of depreciation of the leased asset and the rate of amortisation of the lease payments must not be so large as to overstate the credit risk mitigation effect of the leased asset.

Recognition of guarantees and credit derivatives
 1.          In order to recognise the use of CRM techniques to reduce Regulatory Capital requirements, all documentation that supports the use of the CRM technique must be binding on all parties and legally enforceable in all relevant jurisdictions. An ADI must have undertaken sufficient legal review to be satisfied of the legal enforceability of the CRM technique, and must undertake periodic reviews to confirm its ongoing enforceability.
 2.          All recognised guarantors and credit protection providers must be assigned a borrower rating at the outset and on an ongoing basis. An ADI must follow the minimum requirements for assigning borrower ratings as set out in Attachment D to this Prudential Standard. The ADI must undertake regular monitoring of the financial condition of the guarantor or credit protection provider, and its ability and willingness to honour its obligations.
 3.          An ADI must have documented criteria for adjusting PD or LGD estimates to reflect the impact of guarantees and credit derivatives under the substitution approaches. These criteria must:
        1.           be consistent with the requirements for assigning exposures to borrower or facility grades or pools as set out in paragraphs 19 to 23 of Attachment D to this Prudential Standard;
        2.           be plausible and intuitive, and address the guarantor or credit protection provider's ability and willingness to perform under the guarantee or credit derivative;
        3.           address the likely timing of any payments and the degree to which the guarantor or credit protection provider's ability to perform under the guarantee or credit derivative is correlated with the borrower's ability to repay; and
        4.           consider the extent to which residual risks remain.
 4.          The criteria used for adjusting PD or LGD estimates for exposures covered by credit derivatives must also:
        1.           require that the asset on which the protection is based (the reference asset) not be different from the underlying asset unless the conditions detailed in paragraphs 10 and 11 of Attachment J to APS 112 are met; and
        2.           address the payout structure of the credit derivative and conservatively assess the impact this has on the level and timing of recoveries.
    Where a credit derivative does not cover the restructuring of the underlying asset, partial recognition is allowed as detailed in paragraph 9 of Attachment J to APS 112.
 1.          In adjusting PD or LGD estimates to