Document ID: chunk:federal_register_of_legislation:F2024L01073:reg:4:p2
Version: federal_register_of_legislation:F2024L01073
Segment Type: reg
Provision Reference: reg 4 (pt 2/21)
Character Range: 75742–78764

procedures for the timely liquidation of collateral to ensure that any legal conditions required for declaring the default of the counterparty and liquidating the received collateral are observed.
 3.              In the event of the counterparty's default, any requirement on the ADI to serve notice on the party lodging the received collateral must not unnecessarily impede the ADI's recourse to the received collateral.
 4.              Where posted or received collateral is held by a custodian or a third party, the ADI must take reasonable steps to ensure that the custodian or third party segregates the collateral from other assets.
 5.          Where the received collateral is lodged with an overseas branch of the ADI, the branch holding the collateral must be bound to act in accordance with the agreement between the ADI and the party lodging the received collateral.
 6.          Where the received collateral is lodged by a third party, that third party must indemnify or guarantee the performance of the counterparty's obligations (or those of the party on which a claim is held) to the ADI. The ADI must ensure that the indemnity or guarantee is legally enforceable (e.g. that it will not fail for lack of consideration).
 7.          An ADI must ensure that sufficient resources are devoted to the orderly operation of margin agreements with OTC derivative and securities-financing counterparties, as measured by the timeliness and accuracy of its outgoing calls and response time to incoming calls. An ADI must have collateral risk management policies in place to control, monitor and report:
         1.           the risk to which margin agreements expose it, such as the volatility and liquidity of the securities exchanged as collateral;
         2.           the concentration risk to particular types of collateral;
         3.           the re-use of collateral (both cash and non-cash) including the potential liquidity shortfalls resulting from the re-use of collateral received from counterparties; and
         4.           the surrender of rights on collateral posted to counterparties.

The simple approach
 1.          For received collateral to be recognised under the simple approach, it must be pledged for at least the life of the exposure (i.e. maturity mismatches are not permitted) and be marked-to-market and revalued with a minimum frequency of six months. The release of received collateral by the ADI must be conditional upon the repayment of the exposure. Received collateral may be reduced in proportion to the amount of the reduction in the exposure amount.

Eligible financial collateral under the simple approach
 1.          An ADI using the simple approach may only recognise the following items as eligible financial collateral:
         1.           cash collateral (cash, certificates of deposit and bank bills issued by the ADI) on deposit with the ADI;[19]
         2.           gold bullion;
         3.           debt securities rated by an ECAI that have a credit