Document ID: chunk:federal_register_of_legislation:F2024L01073:reg:4:p10
Version: federal_register_of_legislation:F2024L01073
Segment Type: reg
Provision Reference: reg 4 (pt 10/21)
Character Range: 102600–105639

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, it must not recognise the netting agreement for Regulatory Capital purposes regardless of any legal opinion obtained by the ADI.

Attachment I – Guarantees
 1.              Where an ADI's exposure to a counterparty is covered by a guarantee from an eligible guarantor, an ADI may substitute the risk weight of the counterparty for the risk weight of the guarantor for the covered portion of the exposure.[30] The uncovered portion of the exposure must be risk-weighted according to the risk weight applicable to the original counterparty.

Minimum requirements
 1.              To be recognised as eligible CRM, a guarantee must:
         1.           represent a direct claim on an eligible guarantor;
         2.           be an explicitly documented obligation assumed by the guarantor;
         3.           be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible;
         4.           be irrevocable, except in the case of non-payment by a protection purchaser of money due in respect of the credit protection contract. The guarantee must not contain any clauses that would allow the guarantor to unilaterally cancel the cover of the guarantee, or that would increase the effective cost of cover as a result of deteriorating credit quality in the guaranteed exposure;[31]
         5.           be unconditional. The guarantee must not include any clauses that are outside the direct control of the ADI, or that could prevent the guarantor from being obliged to pay out in a timely manner in the event that the underlying counterparty fails to make the payment(s) due;
         6.            on the default or non-payment of the counterparty, allow the ADI to pursue, in a timely manner, the guarantor for any monies outstanding under the documentation governing the transaction. The ADI must have the right to receive payment from the guarantor without first having to take legal action in order to pursue the counterparty for payment; and
         7.           cover all types of payments the underlying borrower is expected to make under the documentation governing the transaction. Where a guarantee covers payment of principal only, interest and other amounts not covered by the guarantee must be treated as uncovered.

Eligible guarantors
 1.              An ADI must only recognise guarantees provided by the following entities when they have a lower risk weight than the counterparty:
         1.           sovereigns;
         2.           banks;
         3.           other entities that are externally rated, where credit protection is provided to a non-securitisation exposure. This includes guarantees provided by parent, subsidiary and affiliate companies where they have a lower risk weight