Document ID: chunk:federal_register_of_legislation:F2024L01073:reg:4:p11
Version: federal_register_of_legislation:F2024L01073
Segment Type: reg
Provision Reference: reg 4 (pt 11/21)
Character Range: 105304–108290

than the counterparty:
         1.           sovereigns;
         2.           banks;
         3.           other entities that are externally rated, where credit protection is provided to a non-securitisation exposure. This includes guarantees provided by parent, subsidiary and affiliate companies where they have a lower risk weight than the borrower; and
         4.           where credit protection is provided to a securitisation exposure, other entities with a credit rating grade of three or better and that were externally rated two or better at the time the credit protection was provided. This also includes guarantees provided by parent, subsidiary and affiliated companies where they have a lower risk weight than the borrower.
 2.              A claim that is indirectly guaranteed by the Australian Government (i.e. the Commonwealth's guarantee of the entity that provides the guarantee) may be treated as guaranteed by the Australian Government provided that:
         1.           the indirect guarantee covers all credit risk elements of the claim;
         2.           both the original guarantee and the indirect guarantee meet all the requirements detailed in paragraph 2 of this Attachment, except that the indirect guarantee need not be direct and explicit to the original claim; and
         3.           the ADI is satisfied that the cover of the indirect guarantee is robust and there is no historical evidence to suggest that the coverage of the indirect guarantee is not equivalent to that of a direct guarantee of the Australian Government.
 3.              Letters of comfort do not qualify as eligible guarantees for CRM purposes.

Materiality thresholds
 1.              Where a guarantee provides for a materiality threshold on payments below which no payment will be made in the event of loss, it is equivalent to a retained first loss position and must be deducted from Common Equity Tier 1 Capital in accordance with APS 111. This deduction will be capped at the amount of capital the ADI would be required to hold against the full value of the underlying exposure.

Proportional and tranched cover
 1.              Where there is partial coverage of an exposure by a guarantee and the covered and uncovered portions are of equal seniority (i.e. the ADI and the guarantor share losses on a pro rata basis), capital relief will be afforded on a proportional basis. This means that the covered portion of the exposure will receive the treatment applicable to eligible guarantees with the remainder treated as uncovered.
 2.              Where there is partial coverage of an exposure by a guarantee and there is a difference in seniority between the covered and uncovered portions of the exposure, then the arrangement is considered to be a synthetic securitisation and is subject to the requirements set out in APS 120.

Currency mismatch
 1.              A currency mismatch exists where a guarantee is denominated in a different currency from that