Document ID: chunk:federal_register_of_legislation:F2023L00676:front:0:p5
Version: federal_register_of_legislation:F2023L00676
Segment Type: other
Provision Reference: 
Character Range: 10735–13480

of applying the asset risk stresses may be reduced where the life company holds certain types of collateral against an asset, or where the asset has been guaranteed. Collateral held against an asset may be considered in place of the asset if this would reduce the Asset Risk Charge. The stresses applied in the credit spreads and default stresses may be determined using the counterparty grade of a third-party guarantor. For a particular arrangement to be eligible for such treatment, it must be an arrangement of a kind that complies with the requirements of:
      (a)   paragraphs 32 to 39 of Prudential Standard LPS 117 Capital Adequacy: Asset Concentration Risk Charge (LPS 117) in the case of collateral; and

      (b)   paragraphs 40 to 42 of LPS 117 in the case of guarantees and letters of credit.

23.         Notwithstanding paragraph 22, the recognition of collateral, guarantees and letters of credit for the purposes of applying the asset risk stresses is subject to the limits specified in paragraphs 43 to 44 of LPS 117.
APRA may require a life company to apply a specified treatment to reinsurance assets supported by collateral, guarantees or letters of credit, rather than the treatment that would otherwise apply under paragraphs 22 and 23.

Treatment of specific asset classes
24.         Hybrid assets such as convertible notes must be split into their interest-bearing and equity/option exposures. A life company must consider the changes in value of the two exposures separately for each of the asset risk stresses.
25.         For assets of a life company held under a trust or in a controlled investment entity,[5] the life company may calculate the Asset Risk Charge by looking-through to the assets and liabilities of the trust. Alternatively, the investment may be treated as an equity asset (a listed equity asset if the investment is listed, or an unlisted equity asset if the investment is unlisted). Look-through must be used if the trust or controlled investment entity is both unlisted and geared.[6]
26.         A security that is the subject of a repurchase or securities lending agreement must be treated as if it were still owned by the lender of the security. Any counterparty risk that arises from the transaction must be recognised in the default stress.
27.         Term deposits issued by an authorised deposit-taking institution (ADI) must be treated in the same way as a corporate bond issued by the ADI. If the ADI guarantees a minimum amount on early redemption, the minimum amount may be recognised as a floor to the stressed value of the asset in each of the real interest rates and expected inflation stresses. In the credit spreads stress the minimum amount may be recognised as a floor to