Document ID: chunk:federal_register_of_legislation:F2024L01073:reg:4:p1
Version: federal_register_of_legislation:F2024L01073
Segment Type: reg
Provision Reference: reg 4 (pt 1/21)
Character Range: 72995–76022

4                    Others              Others   Others

Attachment G – Collateralised transactions
 1.              This Attachment specifies how an ADI:
         1.           may apply credit risk mitigation to transactions secured by received collateral, to reduce its exposure amount for the purpose of calculating its Regulatory Capital requirement; and
         2.           must determine the EAD for SFTs or, for ADIs that use the simple approach, the risk weights.
 1.              In this Attachment:
         1.           'received collateral' refers to eligible financial collateral (as defined in paragraphs 14 or 22 of this Attachment) that an ADI receives from the counterparty in a transaction, including where the counterparty has lent those securities to the ADI, or the transaction is a reverse repurchase agreement from the ADI's perspective; and
         2.           'posted collateral' refers to collateral that an ADI posts to the counterparty in a transaction, including where the ADI has lent those securities to the counterparty, or the transaction is a repurchase agreement from the ADI's perspective.
 2.              An ADI must select either the simple approach or the comprehensive approach and apply that approach consistently to all of its banking book exposures for which it has received collateral. An ADI that is approved to use the internal ratings-based approach to credit risk is not permitted to use the simple approach.
 3.              For trading book exposures, an ADI must use the comprehensive approach where it has received collateral from the counterparty.
 4.              Where an ADI acting as an agent in a SFT provides a guarantee that its principal will perform its obligations, the risk to the ADI is the same as if the ADI had entered into the transaction as the principal. In such circumstances, the ADI must calculate a Regulatory Capital requirement as if it were the principal.

Minimum conditions for collateralised transactions
 1.              There must be a contract between the ADI and the party lodging received collateral which establishes the ADI's direct, explicit, irrevocable and unconditional recourse to the received collateral. In the case of cash collateral, this may include a contractual right of set-off on credit balances, but a common law right of set-off is insufficient on its own to satisfy this condition.
 2.              An ADI must take all steps necessary to obtain and maintain an enforceable security interest in the received collateral. The legal mechanism by which collateral is pledged or transferred must allow the ADI the right to liquidate or take legal possession of the received collateral in a timely manner. An ADI must have clear and robust 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