Document ID: chunk:federal_register_of_legislation:F2023L00690:reg:7:p5
Version: federal_register_of_legislation:F2023L00690
Segment Type: reg
Provision Reference: reg 7 (pt 5/9)
Character Range: 39372–42348

1, 2 or 3. Guarantees provided by the regulated institution's parent or a related entity are not eligible for this treatment.

Collateral, guarantees and letters of credit in respect of reinsurance recoverables due from non-APRA authorised reinsurers[11]
    6.             Where a regulated institution possesses recognised collateral in Australia against reinsurance recoverables due from a non-APRA-authorised reinsurer, it may, in the default stress, apply the default factor relevant to the collateral to the value of the reinsurance recoverables (instead of applying the default factor that would otherwise apply to the reinsurance recoverables). For the purposes of this paragraph, collateral is recognised only:
       (a)           to the extent that it takes the form of:

           (i) assets held in Australia that form part of a trust fund maintained by a trustee resident in Australia for the benefit of the insurer;
           (ii)  deposits held by the insurer in Australia, which are controlled by the insurer in Australia, made by the non-APRA-authorised reinsurer;
           (iii)  a combination of the two forms of collateral specified in paragraphs (i) and (ii); or
           (iv)  any other form of collateral as may be approved by APRA in writing in a particular case; and
       (b)          if it provides effective security against liabilities arising under the reinsurance contract; and
       (c)          if it is not available for distribution to creditors of the reinsurer other than the insurer in the event of the insolvency of the reinsurer.
    7.             Where the fair value of the collateral does not cover the full value of the reinsurance recoverables, only that part of the value of the reinsurance recoverables that is covered by collateral may be assigned the default factor applicable to the collateral.

    8.             Where a regulated institution possesses a guarantee or letter of credit in respect of the reinsurance recoverables due from a non-APRA-authorised reinsurer, the default factor to be used is that applicable to the guarantor or the issuer of the letter of credit, as the case may be. This paragraph applies only if each of the following conditions is satisfied:

       (a)          the guarantor or issuer of the letter of credit is an ADI or, in the case of a Category E insurer, its parent entity or other related entity, provided the entity has a counterparty grade of 1, 2 or 3;

       (b)          the guarantee or letter of credit is explicit, unconditional and irrevocable;

       (c)          the guarantor or issuer of the letter of credit is obliged to pay the insurer in Australia; and

       (d)          the obligation of the guarantor or issuer of the letter of credit to pay the insurer is specifically linked to performance of the reinsurance contract or contracts under which the reinsurance recoverables arise.

    9.             Except in the case of a Category E insurer,