Document ID: chunk:federal_register_of_legislation:F2023L00676:reg:7:p3
Version: federal_register_of_legislation:F2023L00676
Segment Type: reg
Provision Reference: reg 7 (pt 3/5)
Character Range: 33756–36474

To the extent that a life company has issued instruments of the following kind:
(a)          guarantees (including written put options serving as guarantees); or
(b)          letters of credit; or
(c)          any other credit substitute (other than insurance) in favour of another party,
the life company is exposed to the risk of having to make payment on these instruments should a default event occur that requires the life company to pay an amount under the instrument. The risk of such events occurring must be considered in the default stress. The default factors must be applied to the face value of each exposure. Where the credit substitute is supported by collateral or a guarantee, the provisions of paragraphs 32 to 44 of LPS 117 may be applied. .

Attachment B - Extended Licensed Entity
     1. In certain circumstances, a life company may choose to hold assets in an SPV or other related entity, rather than on its own balance sheet. Where a life company receives approval under paragraph 3 of this Attachment, the life company will be able to determine its Asset Risk Charge based on the individual assets and liabilities of the related entity, rather than simply on the life company's direct exposure to that entity. This treats the activities of the life company and the related entity as comprising an Extended Licensed Entity (ELE).
2.             The extent to which the risk of a life company's exposure to a related entity is commensurate with the underlying holdings of that entity, depends on the extent to which the life company has control over, or is integrated with the entity, as well as on the existence of material third party liabilities of the entity. The life company must consider any potential complications under a scenario where underlying asset holdings must be liquidated during financial stress.
3.             Subject to the specific requirements set out in paragraph 4 of this Attachment, a life company may apply to APRA to have one or more related entities approved as part of its ELE. Once approved, APRA will allow the life company to 'look-through' the legal structures involved, and to 'consolidate' the balance sheet of the related entity with its own, for the purpose of determining the Asset Risk Charge. In effect, this allows the life company to treat its own balance sheet and that of the approved related entity as a single entity for the purpose of calculating the Asset Risk Charge.
4.             In deciding whether to approve an entity as part of a life company's ELE, APRA will have regard to the following criteria in respect of the relationship between the life company and the related entity:
(a)          the related entity must be wholly owned and