Document ID: chunk:federal_register_of_legislation:F2023L00690:reg:7:p3
Version: federal_register_of_legislation:F2023L00690
Segment Type: reg
Provision Reference: reg 7 (pt 3/9)
Character Range: 33993–36928

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 relevant paragraphs from Attachment B may be applied.

Surety bonds
    5.             A regulated institution that issues a surety bond which meets the definition set out in paragraph 6 of this Attachment may approach APRA for treatment in accordance with the approach set out in paragraph 7 of this Attachment, as an alternative to the treatment outlined in paragraph 4 of this Attachment.

    6.             For the purposes of paragraph 5 of this Attachment, a surety bond means an undertaking given by a regulated institution at the request of a person (Customer) pursuant to an agreement (Surety Agreement) between the regulated institution and the Customer made in the following circumstances:

       (a)          the Customer enters into the Surety Agreement in order to enable the Customer to meet a requirement of another agreement (Principal Agreement) between the Customer, or a person associated with the Customer, and a person other than the regulated institution (Principal);

       (b)          under the surety bond, the regulated institution undertakes to make a payment to, or perform an obligation for the benefit of, the Principal or another person nominated by the Principal (Beneficiary) in the circumstances specified in the surety bond;

       (c)          the surety bond is issued to the Principal or the Beneficiary in relation to, or in connection with, an obligation owed by the Customer, or a person associated with the Customer, to the Principal under the Principal Agreement being an obligation that:

           (i) is a performance obligation or contains an element of performance on the part of the Customer, or a person associated with the Customer; and

           (ii) does not relate solely to an obligation on the part of the Customer, or a person associated with the Customer, to pay a stipulated amount to the Principal in the event that a specified event occurs; and

       (d)          under the Surety Agreement, the Customer is liable to the regulated institution if the regulated institution makes a payment or incurs a liability to the Principal or the Beneficiary under the surety bond.

    7.             A regulated institution must seek written approval from APRA to treat any surety bonds the regulated institution has issued as if they were an insurance risk (for the purposes of meeting the requirements of the GI Prudential Standards only). This would require the regulated institution to include surety bond exposures within the insurer's assessment of insurance liabilities, as determined under GPS 340, and to apply the relevant capital factors specified in Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Charge. For the purposes of calculating