Document ID: chunk:federal_register_of_legislation:F2024L01073:reg:4:p9
Version: federal_register_of_legislation:F2024L01073
Segment Type: reg
Provision Reference: reg 4 (pt 9/21)
Character Range: 99833–102841

may net loans and deposits to calculate RWA by applying the relevant requirements under either the simple or comprehensive approach as set out in Attachment G to this Prudential Standard. For this purpose, loans must be treated as exposures and deposits must be treated as eligible financial collateral.

Eligible bilateral netting agreement
 1.              An eligible bilateral netting agreement, which includes a master netting agreement, is a netting agreement with a counterparty which:
         1.           provides the non-defaulting party the right to terminate and close out, in a timely manner, all transactions under the netting agreement upon an event of default, including in the event of insolvency or bankruptcy of the counterparty;[28]
         2.           provides for the netting of gains and losses on transactions (including the value of any collateral) terminated and closed out under it, so that only a single net amount is owed by one party to the other;[29]
         3.           allows for the prompt liquidation or set-off of collateral upon the event of default;
         4.           is legally enforceable in each relevant jurisdiction regardless of whether the counterparty is insolvent or bankrupt; and
         5.           does not include a walkaway clause (i.e. any clause which, in the event of default of a counterparty, permits a non-defaulting counterparty to make limited payments only, or no payments at all, to a defaulting party, even if the defaulting party is a net creditor).

Legal enforceability
 1.          To ensure the legal enforceability of a netting agreement, an ADI must:
         1.           obtain a written and reasoned legal opinion that concludes that in the event of default, liquidation, bankruptcy or other similar circumstances of a party to the netting agreement, the relevant courts and authorities would find the ADI's exposure is limited to the single net sum determined in the netting agreement under:
                 1.             the law of the jurisdiction in which the counterparty is incorporated, formed or resides (in the case of a natural person), and if a foreign branch of the counterparty is involved, the law of the jurisdiction in which the branch is located;
                 2.          the law that governs the individual transactions involved; and
                 3.        the law that governs any contract or agreement necessary to give effect to the netting; and
         2.           have policies and procedures in place to ensure that the legal enforceability of netting agreements is kept under review in response to possible changes in relevant laws.
 2.          An ADI must not recognise a netting agreement for Regulatory Capital purposes if there is any doubt as to its legal enforceability. Where an ADI becomes aware that a regulator or supervisor of a counterparty has given notice that it is not satisfied that netting is enforceable under the laws of the regulator's or supervisor's home country,