Ed Caf Std App Cr Risk
Ed Caf Std App Cr Risk
Ed Caf Std App Cr Risk
Applicable to:
1. Licensed banks
2. Licensed Islamic banks
3. Licensed investment banks
4. Financial holding companies
The Bank invites written feedback on the proposed regulatory requirements in this
ED, including suggestions for specific issues, areas to be clarified or elaborated
further and alternative proposals that the Bank should consider. The written
feedback should be constructive and be supported with clear rationale and
appropriate evidence, examples or illustrations, to facilitate the Bank’s assessment.
Where appropriate, please specify the applicable paragraph.
In addition to providing general feedback, all financial institutions are expected to:
• respond to the specific questions set out in this ED; and
• complete the Quantitative Impact Study (QIS) reporting template issued
concurrently with this ED. Please refer to the accompanying Excel file and the
reporting instructions provided in the Capital Adequacy Framework (Basel III –
Risk-Weighted Assets): Quantitative Impact Study (QIS) Instructions for the
Standardised Approach for Credit Risk.
In the course of preparing your feedback, you may direct any queries to the following
officers:
1. Rebecca Choong Shu Wen (rebecca@bnm.gov.my);
2. Syazwani binti Hamsani (wani@bnm.gov.my);
3. Janneni Suthakaran (janneni@bnm.gov.my); or
4. Nur Ili Nabilah binti Zaaba (nurilinabilah@bnm.gov.my).
TABLE OF CONTENTS
PART A OVERVIEW
1 Introduction
1.1 This policy document sets out the standards and guidance for computing capital
requirements for credit risk according to the Standardised Approach. The
standards and guidance in this document are based on the Basel Committee on
Banking Supervision’s (BCBS) Basel framework 1 and the Islamic Financial
Services Board’s (IFSB) standard 2 with the objective of promoting the safety and
soundness of financial institutions (FIs). Where necessary and appropriate, the
requirements from the BCBS Basel framework and IFSB standard have been
modified to take into account the unique characteristics of the Malaysian
economy and financial system.
1.2 The provisions on the applicability of this policy document, legal provisions
pursuant to which this policy document is issued and the terms and expressions
used in this policy document shall be the same as the following:
2 Level of application
S 2.1 A banking institution shall comply with the requirements in this policy document
at the following levels:
(a) entity level 3, which refers to the global operations of the banking institution
(i.e. including its overseas branch operations) on a stand-alone basis.
This includes its Labuan branch or banking subsidiary; and
(b) consolidated level, which includes entities covered under the entity level
requirement, and the consolidation 4 of all financial and non-financial
subsidiaries, except insurance/ takaful subsidiaries which shall be
deducted in the calculation of Common Equity Tier 1 Capital 5.
S 2.2 A financial holding company shall comply with the requirements in this policy
document at the consolidated level in accordance with paragraph 2.1(b).
S 2.3 Where a consolidation of the subsidiaries required under paragraphs 2.1(b) and
2.2 is not feasible 6 , an FI shall seek the Bank’s approval to deduct such
investments in accordance with paragraph 31 of the CAF CC PD or CAFIB CC
PD.
S 3.2 Exposures in the trading book shall be subject to the requirements under the
market risk component of Part D of the Capital Adequacy Framework (Basel II –
Risk-Weighted Assets) policy document issued on 3 May 2019 (CAF (RWA) PD)
and the Capital Adequacy Framework for Islamic Banks (Risk-Weighted Assets)
policy document issued on 3 May 2019 (CAFIB (RWA) PD).
S 3.3 For exposures emanating from Islamic banking contracts, the treatment for the
computation of the risk-weighted assets is provided in Part F on Exposures to
Assets under Shariah Contracts.
4 Recognition
S 4.1 For the purpose of this policy document, an FI shall only use the ratings from
ECAIs which the Bank determines as meeting the eligibility criteria stipulated in
Appendix 2.
S 5.1 While the requirements in Part E and Part G are based on the general rating
notations, an FI shall use the fully mapped rating notations from the ECAIs
provided in Appendix 1.
S 6.1 If there is only one rating by an ECAI chosen by an FI for a particular exposure,
that rating shall be used to determine the risk weight of the exposure.
S 6.2 If there are two ratings provided by ECAIs that attract different risk weights, the
higher risk weight shall apply.
S 6.3 If there are three or more ratings with different risk weights, an FI shall refer to
the two ratings that attract the lowest risk weights. The FI shall apply the higher
risk weight out of the referred two ratings.
S 7.1 Where an FI invests in a particular issuance that has an issue-specific rating, the
risk weight of the exposure shall be based on this rating. Where the FI’s exposure
is not an investment in a specific rated issue, the following general principles
shall apply:
(a) in circumstances where the issuer has a specific rating for an issued debt
but the FI’s exposure is not in this particular debt, the FI shall apply the
specific rating on the FI’s exposure if this exposure ranks in all respects,
pari passu or senior to the rated exposure. If not, the specific rating shall
not be used, and the exposure shall receive the risk weight for unrated
exposures;
(b) in circumstances where the issuer has an issuer-specific rating (i.e. an
entity rating), this rating typically applies to senior unsecured exposures
of that issuer. Consequently, if the issuer rating is high-quality, only the
senior unsecured exposures of the issuer will benefit from the high-quality
rating. This will similarly apply to a low-quality issuer rating; and
(c) in circumstances where the issuer has a specific high-quality rating (one
which maps into a lower risk weight) that only applies to a limited class of
liabilities (such as a deposit rating or a counterparty risk rating), this shall
only be used in respect of exposures that fall within that class.
S 7.2 Whether the FI intends to rely on an issuer or an issue-specific rating, the FI shall
ensure that the rating must take into account and reflect the entire amount of
credit risk exposure, i.e. all payments owed to the FI. For example, if an issuer
owes both principal and interest/profit to the FI, the rating must fully take into
account and reflect the credit risk associated with repayment of both the principal
and interest/profit.
S 7.3 In order to avoid any double counting of credit enhancement factors, FIs are not
allowed to recognise credit risk mitigation (CRM) techniques if the credit
enhancement is already reflected in the issue-specific rating (see paragraph
43.2(c)).
S 8.1 The risk-weights used for exposures shall be based on the rating of an equivalent
exposure to an issuer. Therefore, the general rule is that foreign currency ratings
shall be used to risk weight exposures in foreign currency. Domestic currency
ratings, if separate, shall only be used to risk weight exposures denominated in
the domestic currency.
S 9.1 Since short-term ratings are deemed to be issue specific, an FI shall only use
the ratings to derive risk weights for short-term rated exposures of banking
institutions and corporates as follows:
External
1 2 3 Others 11
rating 10
Risk weight 20% 50% 100% 150%
S 9.3 When an FI has exposures to a rated short-term facility of a particular issuer, the
FI shall ensure the following:
(a) if the rated short-term facility attracts a 50% risk weight, other unrated
short-term exposures to the issuer must not attract a risk weight lower
than 100%; or
(b) if the rated short-term facility attracts a 150% risk weight, all unrated
exposures, whether long-term or short-term, shall also receive a 150%
risk-weight, unless the FI uses recognised CRM techniques for such
exposures.
S 9.4 In cases where short-term ratings are available, an FI shall apply the following
interaction with the general preferential treatment for short-term exposures to
banking institutions as described in paragraph 16.3:
(a) the general preferential treatment for short-term exposures applies to all
exposures to banking institutions with an original maturity of up to three
months when there is no specific short-term rating;
(b) when there is a short-term rating and such rating maps into a risk-weight
that is more favourable (i.e. lower or identical to that derived from the
general preferential treatment), the short-term rating shall be used for the
specific exposure only. Other short-term exposures would be subject to
the general preferential treatment; and
(c) when a specific short-term rating maps into a less favourable (higher) risk-
weight, the general short-term preferential treatment for interbank
exposures shall not be used. The exposures shall apply the same risk
weight as that implied by the specific short-term rating.
S 10.1 External ratings for one entity within a corporate group shall not be used to
determine the risk weights of other entities within the same group. An FI shall
apply the risk-weights for exposures to the other entities within the same group
based on Part E of this policy document.
S 11.1 An FI shall only use solicited ratings from eligible ECAIs for purposes of the
capital adequacy computation under the standardised approach.
G 11.2 For internal risk management purposes, FIs may consider using unsolicited
ratings.
G
12 Due diligence
S 12.1 The FI shall ensure that the implementation of the due diligence requirements
as stipulated in Part D is consistent with the requirements in the Credit Risk
policy document issued on 27 September 2019.
S 12.2 When using external ratings, an FI must perform due diligence to ensure that it
has an adequate understanding at the origination and thereafter, on a regular
basis (at least annually), of the risk profile of their counterparties. The due
diligence conducted by the FI must ascertain the risk of the exposure and ensure
that the risk weight applied in computing the capital requirements commensurate
with the inherent risk of the exposure and is prudent.
S 12.3 An FI must take reasonable and adequate steps to assess the operating and
financial performance levels of each counterparty on a regular basis (at least
annually).
S 12.5 An FI shall have in place effective and clear governance and internal policies,
procedures, systems and controls to ensure that the due diligence exercises are
robust.
Question 1
The revised Standardised Approach for Credit Risk has introduced a new
requirement for FIs to assess whether the ratings provided by ECAIs are
sufficiently robust when used for capital computation. Some examples include
developing a mapping scheme which leverages scorecard information against
equivalent external credit rating, as well as mapping internally developed
models against equivalent external credit ratings.
(1) Where a counterparty has an external rating, does your internal credit
assessment rating consider the external rating in deriving the overall credit
rating of the counterparty?
(2) If yes, please describe the existing process and basis in which the external
rating is taken into account. Please also identify challenges your institution
may face when conducting such due diligence exercises.
S 13.2 Where another national supervisor has accorded a preferential risk weight (that
is 0% or 20%) for exposures to its sovereign (or central bank), an FI shall only
apply the preferential risk weight on these exposures provided these exposures
are denominated and funded in their domestic currency. Where an explicit
guarantee has been provided by these sovereigns (or central banks), the
preferential risk weight shall be applied.
S 13.3 Notwithstanding paragraph 13.2, in circumstances where the Bank deems the
preferential risk weight to be inappropriate, the Bank reserves the right to require
these sovereign exposures to be risk-weighted based on the sovereign’s
external rating. In such circumstances, the FI shall ensure that these sovereign
exposures must be risk-weighted based on the sovereign’s external rating.
S 13.4 For exposures to sovereigns (or central banks) not falling under paragraphs 13.1
and 13.2 14, an FI shall risk weight the exposures based on the external rating of
the sovereigns (or central banks) as follows:
Rating
1 2 3 4 5 Unrated
category 15
Risk weight 0% 20% 50% 100% 150% 100%
S 14.1 An FI shall apply a 20% risk weight to exposures to domestic PSEs that meet all
of the following criteria:
(a) the PSE has been established under its own statutory act;
(b) the PSE and its subsidiaries are not involved in any commercial
undertakings;
(c) the winding-up process against of the PSE is not possible; and
12 Including securities issued through special purpose vehicles established by the Bank e.g. Bank
Negara Malaysia Sukuk Ijarah and BNMNi-Murabahah issued through BNM Sukuk Berhad.
However, banking institutions shall apply the look-through approach as in Appendix 4 for BNM
Mudarabah certificate (BMC).
13 This means that the banking institution has corresponding liabilities denominated in RM.
14 Such as bonds/sukuk denominated in USD that are issued and/or guaranteed by Federal
Government of Malaysia.
15 Please refer to Appendix 1 for the details of the rating categories.
(d) the PSE is mostly funded by the Federal Government of Malaysia and any
financing facilities obtained by the PSE are subjected to strict internal
financing rules by the PSE.
Exposures to PSE that do not fulfil all of the above criteria shall be risk- weighted
as corporate exposures as per paragraph 18.
Question 2
Please provide your banking institution’s list of PSEs that currently qualify for
the 20% risk weight and a brief explanation on how these PSEs meet each
qualifying criteria as prescribed in paragraph 14.1.
S 14.2 In cases where other national supervisors have accorded a preferential risk
weight to their PSEs (i.e. to be treated as exposures to sovereign), an FI shall
only apply the preferential risk weight on their exposures to these foreign PSEs
provided these exposures are denominated and funded in their domestic
currency.
S 14.3 Notwithstanding paragraph 14.2, where the preferential risk weight to a foreign
PSE is deemed inappropriate, the Bank reserves the right to require exposures
to the PSE to be risk-weighted based on its external rating. In such
circumstances, the exposures to the PSE must be risk-weighted based on its
external rating.
S 15.2 For exposures to other MDBs, an FI shall risk weight the exposures based on
the MDB’s external ratings as follows:
S 16.2 An FI shall risk weight its exposures to banking institutions according to their
external ratings as follows:
Rating
1 2 3 4 5 Unrated
category15
Risk
20% 30% 50% 100% 150% 50%
weight
Risk
weight for
20% 20% 20% 50% 150% 20%
short term
exposures
S 16.3 For the purpose of paragraph 16.2, short-term exposures are defined as –
(a) exposures to banking institutions with an original maturity of 3 months or
less; or
(b) exposures to banking institutions that arise from the movement of goods
across national borders with an original maturity of 6 months or less 17.
S 16.4 An FI must ensure that the ratings used in paragraph 16.2 do not incorporate
assumptions of implicit government support unless the rating is accorded to a
banking institution whose shares are fully and directly owned by the government.
Implicit government support refers to the notion that the government would
voluntarily (and not by legal requirement), step in to fulfil the obligation of the
banking institution to its creditors in the event the banking institution is in distress
and is unable to do so.
16 Prescribed DFIs refer to specialised financial institutions established by the Government as part of
an overall strategy to develop and promote specific strategic sectors, such as agriculture, small and
medium enterprises (SMEs), infrastructure development, shipping and capital-intensive and high-
technology industries for the social and economic development of the country. This is in line with
the definition of “development financial institution” and “prescribed institution” under Section 3 of the
Development Financial Institutions Act 2002 (DFIA 2002). In Malaysia, prescribed DFIs refer to
development financial institutions prescribed by the Minister under the DFIA 2002.
17 This includes trade-related financing that are self-liquidating.
Question 3
In line with BCBS’s new requirement to remove assumptions of implicit
government support from the rating of banking institutions, international
rating agencies such as S&P, Moody’s, and Fitch have started to disclose
standalone credit ratings excluding implicit government support.
(2) What are the potential challenges faced by your institution to meet this
requirement, including operational challenges in obtaining the external
ratings without implicit government support?
S 16.5 Where the external ratings of FIs include the implicit government support as
referred to in paragraph 16.4, an FI shall only use these ratings for a period of
up to 5 years from the effective date of this policy document. Thereafter, the
external ratings must be adjusted to exclude the implicit government support.
S 16.6 In line with the due diligence requirement in paragraph 12, an FI must ensure
that the external ratings appropriately reflect the creditworthiness of the
counterparties. If the due diligence analysis shows higher risk characteristics
than that implied by the external rating bucket of the exposure, the FI must assign
a risk weight of at least one bucket higher than the risk weight determined by the
external rating. The due diligence analysis must not result in the exposure being
accorded a lower risk weight than that determined by the external rating.
S 16.7 Specifically for unrated banking institutions, where the due diligence analysis
shows higher risk characteristics than that implied by the 50% risk weight, the FI
must assign a risk weight of at least one bucket higher than the risk weight for
banking institutions rated BBB-.
Question 4
The Bank is proposing to apply a flat risk weight for unrated banking
institutions’ exposures instead of applying the Standardised Credit Risk
Assessment (SCRA) Approach under the Basel III framework. Application of
a flat risk weight is similar to the approach used in the Basel II requirements
and reduces additional complexity in the implementation. This however
should be complemented by robust due diligence policies and practices by
banking institutions.
(1) Please clarify how your institution plans to apply the credit assessment
and due diligence process for unrated exposures.
(2) Would your institution prefer to apply the SCRA approach on unrated
banking institutions’ exposures? Please refer to paragraphs 20.21 to
20.32 under the section “CRE20: Standardised approach – individual
exposures” for additional information. Please provide the reasons and
rationale to support this approach, and the measures that will be taken
by your institution to adopt SCRA for unrated banking institutions’
exposures.
S 17.1 An FI shall treat exposures to insurers and takaful operators 18, securities firms,
unit trust companies and other asset management companies as exposures to
corporates.
S 17.2 An FI shall apply a risk weight of 20% on exposures to local stock exchanges 19
and clearing houses exposures.
18 Exposures to corporates
S 18.2 An FI shall classify its corporate exposures based on the following categories:
(a) corporate small and medium-sized enterprises (SMEs);
(b) general corporates; or
(c) specialised financing.
S 18.3 An FI shall classify as corporate SMEs, corporate exposures where the reported
annual sales for the consolidated group of which the corporate is a part of, is
less than or equal to RM 250 million for the most recent financial year. An FI
shall apply a risk weight of 85% to corporate SME exposures.
Question 5
The Bank is exploring a suitable threshold for corporate SMEs in Malaysia,
having regard to the current definition of SMEs by SME Corporation Malaysia
and thresholds for firm-size adjustment under the IRB framework.
(1) Please specify the categories and the corresponding qualifying criteria
used by your institution to differentiate exposures to SMEs and
corporates (e.g. retail banking: turnover RM 50 million, corporate banking:
turnover RM 250 million) for underwriting and risk management purposes.
18The treatment of ITOs will be reviewed once the revised Risk-Based Framework for Insurers and
Risk-Based Framework for Takaful Operators have been finalised.
19 Refers to Bursa Malaysia Securities Berhad and Labuan Financial Exchange.
S 18.4 For the avoidance of doubt, where a corporate SME is rated, the treatment
specified under paragraph 18.5 shall continue to apply.
S 18.5 An FI shall assign risk weights to its general corporate exposures according to
their external ratings as follows:
Rating
1 2 3 4 5 Unrated
category15
Risk
20% 50% 75% 100% 150% 100%
weight
S 18.6 Based on the due diligence analysis as required in paragraph 12, an FI must
ensure that the external ratings appropriately reflect the creditworthiness of the
counterparties. If the due diligence analysis shows higher risk characteristics
than that implied by the external rating bucket of the exposure, the FI must assign
a risk weight that is at least one bucket higher than the risk weight determined
by the external rating. The due diligence analysis must not result in the
counterparty being accorded a lower risk weight than that determined by the
external rating.
S 18.8 An FI shall classify the exposures described in paragraph 18.7 into one of the
following three subcategories of specialised financing:
(a) project finance, which refers to the method of funding in which the FI
considers primarily to the revenues generated by a single project, both as
the source of repayment and as security for the exposure. This type of
financing is usually for large, complex, and expensive investments such
as power plants, chemical processing plants, mines, transportation
infrastructure, environment, media, and telecommunication infrastructure.
Project finance may take the form of financing the construction of a new
capital installation or refinancing of an existing installation, with or without
improvements;
(b) object finance, which refers to the method of funding to acquire assets
(e.g. ships, aircraft, satellites, railcars, and fleets) where the repayment of
the exposure is dependent on the cash flows generated by the specific
assets that have been financed and pledged or assigned to the FI; or
(c) commodities finance, which refers to short-term financing to finance
reserves, inventories, or receivables of exchange-traded commodities
(e.g. crude oil, metals, or crops), where the exposure will be repaid from
the proceeds of the sale of the commodity and the obligor has no
independent capacity to repay the exposure.
S 18.9 An FI shall assign the risk weights for specialised financing determined by the
issue-specific external ratings as follows:
Rating
1 2 3 4 5
category15
Risk weight 20% 50% 75% 100% 150%
S 18.10 An FI shall not use the issuer ratings for the purpose of paragraph 18.9.
S 18.11 For exposures that do not have an issue-specific external rating as prescribed in
paragraph 18.9, an FI shall apply the following risk weights:
(a) for object and commodities finance exposures, apply 100%;
(b) for project finance, apply –
(i) 130% during the pre-operational phase;
(ii) 100% during the operational phase as defined in paragraph 18.12;
or
(iii) 80% during operational phase if the exposure is deemed to be a
high-quality project finance exposure, as defined in paragraph
18.13.
S 18.12 For the purpose of paragraph 18.11, an FI shall construe “operational phase” as
the phase in which the entity that was specifically created to finance a project
has a positive net cash flow that is sufficient to cover any remaining contractual
obligation and a declining long-term debt.
Question 6
The Bank is assessing the appropriateness of the criteria stipulated under
paragraph 18.13 on high-quality project finance exposures in the Malaysian
context.
(1) Please identify any projects (current/past) that would qualify based on the
criteria in paragraph 18.13
(2) Please provide feedback on the nine criteria for high quality project
finance and state whether there are aspects of the criteria that require
further clarification or customisation to the Malaysian environment.
20 This means that once construction is completed, the project finance entity is entitled to payments
from its contractual counterparties as long as the contract conditions are fulfilled. Availability
payments are sized to cover operating and maintenance costs, debt service costs and equity returns
as the project finance entity operates the project. Availability payments are not subject to swings in
demand, such as traffic levels, and are adjusted typically only for the lack of performance or lack of
availability of the asset to the public.
21 For certain obligations that require or permit settlement by issuance of a variable number of the
issuer’s equity shares, the change in the monetary value of the obligation is equal to the change in
the fair value of a fixed number of equity shares multiplied by a specified factor. Those obligations
meet the conditions of item (c) if both the factor and the referenced number of shares are fixed. For
example, an issuer may be required to settle an obligation by issuing shares with a value equal to
three times the appreciation in the fair value of 1,000 equity shares. That obligation is considered
to be the same as an obligation that requires settlement by issuance of shares equal to the
appreciation in the fair value of 3,000 equity shares.
Question 7
With respect to paragraph 19.2, does your institution have exposures that
meet the requirements in paragraph 19.2(b)(iv)?
If so, please indicate whether your institution is able to decompose the debt
and equity risks for these exposures, for regulatory purposes.
S 19.4 An FI must risk weight exposures to subordinated debt, equity and other
regulatory capital instruments issued by corporates or FIs that are not deducted
from regulatory capital, as follows:
22 Equities that are recorded as a financing but arise from a debt/equity swap made as part of the
orderly realisation or restructuring of the debt are included in the definition of equity holdings.
However, these instruments may not attract a lower capital charge than would apply if the holdings
remained in the debt portfolio.
23 This includes liabilities from which the return is linked to that of equities. The Bank may elect not to
require that such liabilities be included where they are directly hedged by an equity holding, such
that the net position does not involve material risk.
24 Nonetheless, the Bank reserves the right to re-categorise debt holdings as equity for regulatory
purposes to ensure a consistent and appropriate treatment.
25 Total loss-absorption capacity requirements that are imposed on global systemically important
banks (G-SIBs).
26 Equity investment in unlisted companies that are invested for short-term resale purposes or are
Question 8
The Bank is exploring a differentiated capital treatment for certain types of
equity exposures where the risk profile of the equity investment may be more
similar to direct financing exposures.
(1) Does your institution have (or plan to have) any existing alternative
financing exposures? For the purpose of this question, alternative financing
is defined as any form of funding that is not debt-based. Examples include
direct equity investment in businesses including in venture capital and
blended finance. If yes, kindly provide the type of alternative
finance/instrument and the amount of these exposures.
(2) Please provide feedback on the types of equity exposures that should be
carved out, appropriate capital charges or treatment based on the
exposures listed in paragraph 19.4, particularly if the exposure has a
certain risk mitigation process in place (e.g. collateral, risk transfer
mechanism, etc).
considered venture capital or similar investments which are subject to price volatility and are
acquired in anticipation of significant future capital gains.
20 Retail exposures
S 20.2 An FI shall classify exposures to an individual and other persons including SMEs
as regulatory retail exposures if the exposures meet all of following criteria:
(a) product criterion – The exposure takes the form of any of the following:
(i) revolving credits and lines of credit (including credit cards, charge
cards and overdrafts);
(ii) personal term financing and leases (e.g. instalment financing, auto-
financing and leases, student and educational financing and
personal financing); and
(iii) small business facilities and commitments.
Mortgage financing, derivatives and other securities (such as
bonds/sukuk and equities), whether listed or not, are excluded from this
paragraph;
(b) low value individual exposures – The maximum aggregated exposure to
one counterparty shall not exceed an absolute threshold of RM 5 million 28;
and
(c) granularity criterion – No aggregated exposure 29 to one counterparty 30
can exceed 0.2% 31 of the overall regulatory retail portfolio 32.
27 Retail exposures that do not meet the criteria for regulatory retail exposures.
28 For this assessment, aggregate exposure means gross amount (inclusive of defaulted exposures)
but without considering CRM of all forms of debt exposures (including off-balance sheet exposures)
that individually satisfy the product and granularity criteria.
29 Aggregated exposure means gross amount (i.e. not taking any CRM into account) of all forms of
retail exposures, excluding residential real estate exposures. In case of off-balance sheet claims,
the gross amount would be calculated after applying credit conversion factors.
30 “To one counterparty” means one or several entities that may be considered as a single beneficiary
as defined under the Single Counterparty Exposure Limit policy document issued on 9 July 2014.
31 To apply the 0.2% threshold of the granularity criterion, an FI must undertake a one-off computation
by taking the following actions –
• first, identify the full set of exposures in the retail exposure class;
• second, identify the subset of exposures that meet the product criterion and do not exceed the
threshold for the value of aggregated exposures to one counterparty; and
• third, exclude any exposures that have a value greater than 0.2% of the subset before
exclusions.
FIs may update the computation on an annual basis to ensure compliance with the requirement.
32 For granularity criterion assessment, an FI shall exclude the defaulted exposures from the overall
regulatory retail portfolio.
S 20.3 For the purpose of paragraph 20.2, exposures to SMEs 33 refer to exposures to
corporates that are registered with the Companies Commission of Malaysia
(SSM) and fulfil the following criteria:
(a) for the manufacturing sector, firms with sales turnover not exceeding RM
50 million or firms which have a maximum of 200 full-time employees; and
(b) for the services sector and other sectors, firms with sales turnover not
exceeding RM 20 million or firms which have a maximum of 75 full-time
employees.
S 20.6 Notwithstanding paragraph 20.5, an FI shall apply a risk weight of 100% to any
term financing for personal use with an original maturity of more than 5 years.
33 SMEs shall exclude entities that are public-listed on the main board and subsidiaries of: (i) publicly-
listed companies on the main board; (ii) multinational companies; (iii) government-linked
companies; (iv) Syarikat Menteri Kewangan Diperbadankan; and (v) state-owned enterprises.
S 21.3 An FI shall ensure a financing complies with the following criteria before it can
be considered as a regulatory real estate exposure and in such a case, comply
with the requirements in paragraphs 21.12 to 21.15:
(a) finished property – the financing must be secured by a fully completed
immovable property, except for exposures secured by forest and
agricultural land;
(b) legal enforceability – any claim on the property must be legally
enforceable in all relevant jurisdictions. The collateral agreement and the
legal process underpinning it must provide the FI the legal powers and
avenues to realise the value of the property within a reasonable time
frame;
(c) claims over the property – the financing is a claim over the property where
the FI holds a first lien over the property, or holds the first lien and any
sequentially lower ranking lien(s) (i.e. there is no intermediate lien from
another bank) over the same property;
(d) ability of the obligor to repay the financing – the obligor must meet the FI’s
underwriting policies which are subject to minimum requirements in
paragraph 21.4;
(e) prudent value of property – the property must be valued according to the
criteria in paragraphs 21.6 and 21.7 for determining the value in the
financing-to-value ratio (FTV). Moreover, the value of the property must
not depend materially on the performance of the obligor; and
(f) required documentation – all the information required at financing
origination and for monitoring purposes must be properly documented,
including information on the ability of the obligor to repay the financing
and on the valuation of the property.
34 Real estate includes land or any property that is attached to the land, in particular buildings.
S 21.4 Consistent with the requirements in the Responsible Financing policy document
issued on 6 May 2019 and Credit Risk policy document issued on 27 September
2019, an FI must put in place prudent underwriting policies in the granting of
mortgage financing that includes the assessment of the ability of the obligor to
repay financing.
S 21.6 The value of property used in measuring FTV referred to in paragraph 21.3 must
be maintained at the value at origination unless any of the following
circumstances 35 are satisfied:
(a) an extraordinary, idiosyncratic event 36 occurs resulting in a permanent
reduction of the property value;
(b) modifications made to the property unequivocally increase its value; or
(c) the Bank requires the FI to revise the property value downwards.
Question 9
The Bank intends to adopt the requirement to maintain the value of a property
at origination when calculating the FTV for all new financing which originated
after the effective implementation date of the policy document. For all other
exposures, the Bank requires FIs to freeze the value of the property based on
its most recent valuation date.
Please share your institution’s views on the proposal. Please also share your
institution’s experience on the types of modifications made to the property
resulting in either an unequivocal change (increase or decrease) in value that
has resulted in a corresponding (upward or downward) adjustment of the
property valuation.
S 21.7 An FI must calculate the FTV prudently in accordance with the following
requirements:
(a) the amount of the financing shall include the outstanding exposure
amount and any undrawn amount of the mortgage financing. The
exposure amount must be calculated gross of any provisions and other
risk mitigants, except where the conditions for on-balance sheet netting in
Part G have been met; and
35 If the value has been adjusted downwards, a subsequent upwards adjustment can be made but not
to a higher value than the value at origination.
36 Examples include but are not limited to natural disasters.
S 21.9 An FI must determine whether the repayments for the regulatory real estate
exposure would be materially dependent on cash flows generated by the
property securing the financing rather than the capacity of the obligor to service
the debt from other sources. An FI shall consider a regulatory real estate
exposure is materially dependent on cash flows generated by the property when
the primary source of the cash flows are lease or rental payments from the
property, or from the sale of the property.
Question 10
The Bank is considering providing additional operational clarification, in
addition to the income guidance, on exposures that would be considered as
materially dependent on cash flows generated by the property. Please provide
feedback on the following possible approaches –
37 The valuation must be done independently from the bank’s mortgage acquisition, financing
processing and financing decision process.
38 Where the residential mortgage loan is protected by Cagamas SRP Berhad (under Cagamas MGP,
Skim Rumah Pertamaku, and Skim Perumahan Belia), a risk weight of 20% shall apply on the
protected portion.
S 21.11 An FI shall exclude the following exposures from being classified as “materially
dependent on cash flows generated by the property”:
(a) an exposure secured by a property that is the obligor’s primary residence;
(b) an exposure secured by an income-producing residential housing unit, to
an individual who has 2 or less mortgages;
(c) an exposure secured by residential real estate property to associations or
cooperatives of individuals that are regulated under national law, where
the property is used solely by its members as a primary residence; and
(d) an exposure secured by residential real estate property to public housing
companies, agencies and not-for-profit associations regulated under
national law to serve social objectives and offer tenants long-term
housing.
Question 11
The Bank is exploring the need to specify the entities referenced in paragraph
21.11(d) for clarity and consistency.
(2) Are there other entities that should qualify for the treatment in paragraph
21.11(d)? If yes, please list down these entities accordingly.
S 21.12 An FI shall risk weight its exposures to residential real estate that are not
materially dependent on cash flows generated by the property as follows:
S 21.13 An FI shall risk weight its exposures to residential real estate that are materially
dependent on cash flows generated by the property as follows:
S 21.14 An FI shall risk weight its exposures to commercial real estate that are not
materially dependent on cash flows generated by the property as follows:
S 21.15 An FI shall risk weight its exposures to commercial real estate that are materially
dependent on cash flows generated by the property as follows:
S 21.16 An FI shall treat financing to companies or SPVs for land acquisition for
development and construction purposes, or development and construction of
any residential or commercial property as ADC exposures.
Question 12
BCBS allows a 100% risk weight for ADC exposures to residential real
estate that meet two criteria relating to pre-sale contracts 39 and equity
contribution 40 by the obligor.
39 Minimum sales achievement to be met by the buyer of the real estate asset (or obligor) prior to
release of the loan, as stipulated in the disbursement conditions between the bank and the obligor.
The minimum sales achievement must be supported by confirmation from the solicitors that the
sales and purchase agreement has been signed between the property developer and the end-
buyer.
40 Also known as equity at risk, this is the commitment provided by an obligor using its internal funds,
towards securing the real estate asset.
(3) Are there any risk mitigating conditions that your institution imposes on
financing to residential ADC (e.g. applying a low limit on the size of the
exposure, higher pricing or shorter grace period)?
S 21.19 An FI shall risk weight its other real estate exposures as follows:
S 22.1 An FI shall apply a multiplier of 1.5 to risk weights (up to a ceiling of 150%)
applied to unhedged retail and residential real estate exposures to individuals
specified under paragraphs 20 and 21 where the financing currency is different
from the currency of the obligor’s source of income.
Question 13
The Bank is exploring the appropriateness of this requirement in the
context of Malaysia. Please provide feedback on the following –
(1) risk profile and impairment rate of unhedged retail and real estate
exposures to individuals; and
23 Defaulted exposures
S 23.2 With the exception of residential real estate exposures where repayments for the
financing do not materially depend on cash flows generated by the property, an
FI shall risk weight the unsecured or unguaranteed portion 41 of its defaulted
exposures, net of specific provisions 42 and partial write-offs, as follows:
S 23.3 For defaulted residential real estate exposures where repayments for the
financing do not materially depend on cash flows generated by the property, an
FI shall risk weight the exposures at 100%, net of specific provisions and partial
write-offs.
41 For the purpose of defining the secured or guaranteed portion of the defaulted exposure, eligible
collateral and guarantees will be the same as for credit risk mitigation purposes in Part G.
42 Specific provisions refer to loss allowance measured at an amount equal to lifetime expected credit
losses for credit-impaired exposures as defined under the Malaysian Financial Reporting Standards
9. These provisions are commonly known as Stage 3 provisions.
S 24.1 An FI shall convert off-balance sheet items into credit exposure equivalents
using credit conversion factors (CCF).
S 24.2 An FI shall treat any contractual arrangement to extend credit, purchase assets
or issue credit substitutes, that has been offered by the FI and accepted by the
obligor, as commitments. This includes any such arrangement that can be
unconditionally cancelled by the FI at any time without prior notice to the obligor.
It also includes any such arrangement that can be cancelled by the FI if the
obligor fails to meet the conditions set out in the facility documentation, including
conditions that must be met by the obligor prior to any initial or subsequent
drawdown under the arrangement.
S 24.3 For commitments, an FI shall multiply the CCF with the committed but undrawn
amount of the exposure.
S 24.4 An FI shall apply the CCF for its off-balance sheet items as follows:
43 Any reference to repurchase agreement or repo in this document shall include all Shariah-compliant
alternatives to repo such as Sell and Buy Back Agreement and Collateralised Murabahah
instruments.
44 The exposures shall be risk-weighted according to the type of asset (e.g. home financing) and not
according to the counterparty (e.g. Cagamas) with whom the transaction has been entered into.
45 An FI shall also apply the risk weighting treatment for counterparty credit risk in addition to the credit
risk charge on the securities or posted collateral, where the credit risk of the securities posted as
collateral remains with the bank. This does not apply to posted collateral related to derivative
transactions that is treated in accordance with the counterparty credit risk standards.
S 24.5 An FI shall apply the lower of two applicable CCFs when there is an undertaking
to provide a commitment on an off-balance sheet item 48.
S 25.1 An FI shall use the following methods to compute the exposure amount of the
relevant transactions:
(a) methods from Appendix VIII (Current Exposure Method) of the CAF
(RWA) PD or Appendix VI (Counterparty Credit Risk and Current
Exposure Method) of the CAFIB (RWA) PD for over-the-counter (OTC)
derivatives transactions; and
(b) CRM from Part G of this policy document for exchange-traded derivatives,
long settlement transactions and securities financing transactions.
S 26.2 An FI shall apply the requirements in paragraph 26.1(b) respectively for the nth-
to-default credit derivatives, for which the n-1 assets with the lowest risk-
weighted amounts can be excluded from the calculation.
S 28.1 An FI shall apply the requirements in Part F Securitisation Framework of the CAF
(RWA) PD or CAFIB (RWA) PD for all securitisation exposures.
S 29.1 An FI shall apply the requirements in the Capital Adequacy Framework (Basel III
– Risk-Weighted Assets): Exposures to Central Counterparties policy
document 49 for all exposures to central counterparties.
49 An ED was issued on 16 December 2022. FIs should comply with the PD when it comes into effect.
31 Other assets
S 31.1 For other assets not specified above, an FI shall risk weight the exposures as
follows:
32 General requirements
S 32.1 This part outlines the credit risk capital treatment for Shariah contracts used by an
FI carrying on Islamic banking business. While Islamic banking products offered
by FIs may differ in terms of their names and the manner in which their underlying
Shariah contracts are being structured, an FI is required to consider the inherent
risks of the transactions involving such products and the relevant Shariah contracts
to ensure that the capital provided is commensurate with the underlying risks borne
by the FI.
S 32.2 The requirements in this policy document must be read together with the relevant
Shariah contracts policy documents issued by the Bank.
S 32.3 For Shariah contracts involving two embedded transactions, such as in tawarruq
and lease and lease-back contracts, an FI shall determine the capital treatment
based on the inherent risks embedded within these transactions. FIs must not net
off the two legs of the transactions unless these transactions meet the
requirements in paragraph 48 for on-balance sheet netting arrangements.
33 Murabahah
S 33.1 An FI shall be subject to capital requirements for the credit risk on a murabahah
transaction upon the sale of an asset while the capital requirement for a
murabahah with wa’d (murabahah to the purchase orderer) transaction shall apply
upon the acquisition of the specified asset under the contract.
S 33.2 An FI shall apply the capital treatment specified in the following table for
murabahah and murabahah with wa’d transactions:
34 Salam
G 34.1 In a salam contract, an FI purchases and pays for an asset which is to be delivered
to a customer on a specified future date based on certain specifications. The FI
may also enter into a parallel salam contract to sell the asset purchased in the
initial salam contract to another customer. The FI is exposed to credit risk from the
potential failure of the seller to deliver the asset as per the agreed terms.
S 34.2 In both salam and parallel salam transactions, an FI shall apply capital
requirements for credit risk upon the execution of the salam or initial salam contract
and payment of the purchase price, as follows:
50
The treatment for bai’ bithaman ajil (BBA) and bai’ inah contracts shall follow the treatment for MPO.
35 Istisna’
S 35.1 An FI is required to apply capital requirements for the credit risk on an istisna’
transaction as the manufacturer/contractor must account for the potential failure of
the customer to pay the selling price for the asset based on pre-agreed payment
terms during the manufacturing/construction stage, or upon full completion of the
manufacturing/construction of the asset.
S 35.2 In a parallel istisna’ contract where the FI engages another party to manufacture
or construct the asset, an FI remains accountable for the failure of that party to
deliver the specified asset. As such, an FI is also required to apply a capital charge
for credit risk on the assets that are due but not delivered by the
manufacturer/contractor.
S 35.3 An FI shall apply the capital treatment specified in the following table for istisna’
and parallel istisna’ transactions:
36 Ijarah
S 36.1 An FI is required to apply capital requirements for the credit risk of ijarah
transactions without wa`d to lease the asset from the customer starting from the
execution of the lease agreement. In the case of ijarah muntahiyah bi tamlik
transactions (including al-ijarah thumma al-bai’ (AITAB)) with wa`d to lease the
asset and wa`d to purchase in an event of default by the customer, an FI is required
to apply a credit risk capital charge from the acquisition of the asset.
S 36.2 An FI shall apply the capital treatment specified in the following table for ijarah and
ijarah muntahiyah bi tamlik transactions:
Ijarah (without Upon execution of lease agreement and Risk weight based
wa`d) when lease payment is due. on the counterparty
(lessee) as per Part
Note: Exposure is based on outstanding E Individual
rental amount Exposures
37 Musyarakah
S 37.1 An FI shall apply the capital treatment for the credit risk of musyarakah venture
involving provision of capital and musyarakah financing for asset acquisition
(including musyarakah mutanaqisah) as specified in the following table:
38 Mudarabah
S 38.1 An FI shall apply the capital treatment for the credit risk of an investment in
investment account structured using mudarabah contract and mudarabah venture
involving the provision of capital as specified in the following table:
39 Tawarruq
S 39.1 An FI shall apply the capital treatment for the credit risk of a tawarruq financing
and a tawarruq financing with wa`d as specified in following table:
40 Sukuk 51
S 40.1 An FI shall classify Sukuk held in the banking book as the following:
(a) asset-based Sukuk, where the risks and rewards are dependent on the
obligor that originates/issues the instrument. The economic substance or
actual risk profile of such Sukuk resembles that of the originator/issuer 52.
For these exposures, the risk weight is determined as per Part E Individual
Exposures for rated Sukuk. For unrated Sukuk, the risk weight is
determined based on the underlying contract of the Sukuk; and
(b) asset-backed Sukuk, where the risks and rewards are dependent on the
underlying asset. For these exposures, the capital treatment is subject to
the requirements in Part F Securitisation Framework of the CAF (RWA) PD
and CAFIB (RWA) PD.
51 Sukuk contracts are certificates that represent the holder’s proportionate ownership in an undivided
part of an underlying asset where the holder assumes all rights and responsibilities to such assets.
52 Although sukuk represents the holder’s proportionate ownership in an underlying asset which
enables the generation of cash flow, there are clauses within the terms and conditions of the Sukuk
that causes the risk and rewards to ultimately depend on the originator.
S 40.2 An FI shall assess the characteristics of the Sukuk, including the underlying
Shariah contract used and transaction structure in order to determine whether the
Sukuk is asset-based or asset-backed and the consequential regulatory capital
requirements.
G 40.3 The assessment in paragraph 40.2 may include an assessment of the actual
source of cash flow, the ability of investors to have recourse to the originator, as
well as the existence of repurchase terms.
G 40.4 Examples of asset-based and asset-backed Sukuk are set out in Appendix 9.
41 Qard
S 41.1 An FI must apply capital requirements for the credit risk from qard transactions
upon the execution of a qard contract based on the financing amount provided.
The risk weight is determined based on the counterparty as Part E Individual
Exposures.
42 Wakalah bi al-istithmar
S 42.1 An FI is required to apply capital requirements for credit risk where the FI invests
in a fund or instrument which is structured based on a wakalah bi al-istithmar
contract, or acts as an agent to manage investment funds placed by a customer,
as follows:
43 General requirements
G 43.1 This part outlines the requirements for the use of CRM, with respect to the
following types of CRM:
(a) collateralised transactions;
(b) on-balance sheet netting; and
(c) guarantee and credit derivatives.
S 43.2 In order to obtain capital relief from the use of CRM instruments, an FI must
ensure the following:
(a) the capital requirement for transactions in which CRM is used is not higher
than an otherwise identical transaction with no CRM;
(b) full compliance with the Pillar 3 requirements 53 to obtain capital relief in
respect of any CRM;
(c) the effects of CRM are not double-counted (i.e. there shall not be additional
recognition of CRM for regulatory capital purposes where the risk weight
applied on the asset already reflects the CRM);
(d) principal only-ratings 54 are not recognised;
(e) any residual risks from using the CRM, including legal, operational, liquidity
and market risks, are controlled using robust procedures and processes 55.
Where these risks are not adequately controlled in the Bank’s view, the
Bank may impose additional capital charges under Pillar 2 56;
(f) the credit quality of the counterparty 57 must not have a material positive
correlation with the employed CRM or with the resulting residual risks; and
(g) when there are multiple CRM covering a single exposure, an FI shall
subdivide the exposure into portions covered by each CRM and the risk-
weighted assets of each portion must be calculated separately. When
credit protection provided by a single protection provider has differing
maturities, the exposures must be subdivided into separate portions as
well.
S 43.3 Where an FI applies a CRM on Islamic exposures to obtain capital relief, the
collateral used in the CRM must be fully Shariah-compliant.
53 Please refer to Guidelines on Risk-Weighted Capital Adequacy Framework (Basel II) – Disclosure
Requirements (Pillar 3) issued on 7 August 2010 and Capital Adequacy Framework for Islamic
Banks (CAFIB) – Disclosure Requirements (Pillar 3) issued on 7 August 2010.
54 A principal only-rating is a rating that only reflects the credit risk exposure for the principal amount
owed. This rating does not account or reflect the entire amount of credit risk associated with an
exposure, which includes the credit risk associated with the repayment of the interest/profit.
55 This includes strategy; consideration of the underlying credit; valuation; policies and procedures;
systems; control of roll-off risks; and management of concentration risk arising from the FI’s use of
CRM techniques and its interaction with the FI’s overall credit risk profile.
56 Please refer to Risk-Weighted Capital Adequacy Framework (Basel II) – Internal Capital Adequacy
Assessment Process (Pillar 2) issued on 2 December 2011 and Capital Adequacy Framework for
Islamic Banks – Internal Capital Adequacy Assessment Process (Pillar 2) issued on 31 March 2013.
57 In Part G, “counterparty” is used to denote a party to whom an FI has an on- or off-balance sheet
credit exposure.
S 43.4 For purposes of this Part G, repo-style transactions mentioned in paragraphs 47.6,
47.12, 47.18 - 47.19 and 47.37 - 47.49 are not applicable to IFIs.
44 Legal requirements
S 44.1 An FI must comply with the following legal requirements in order to obtain capital
relief for any use of CRM:
(a) all documentation used in collateralised transactions, on-balance sheet
netting agreements, guarantees and credit derivatives must be binding on
all parties and legally enforceable in all relevant jurisdictions;
(b) sufficient assurance from the FI’s legal counsel must be obtained with
respect to the legal enforceability of the documentation; and
(c) periodic review must be undertaken to confirm the ongoing enforceability
of the documentation.
45 Maturity mismatches
S 45.2 An FI shall not recognise financial collateral with maturity mismatch under the
simple approach as specified in paragraph 47.14 of this policy document.
S 45.3 Under the other approaches, an FI shall only recognise CRM with maturity
mismatch if the original maturity of the arrangement is greater than or equal to
one year, and its residual maturity is greater than or equal to three months. In
such cases, an FI shall partially recognise the applicability of the CRM in
accordance with paragraph 45.4.
S 45.4 An FI shall apply the following adjustment when there is a maturity mismatch with
the recognised CRM:
t - 0.25
Pa = P ×
T - 0.25
Where -
Pa = Value of the credit protection adjusted for maturity mismatch
S 45.5 An FI must define the maturity of the underlying exposure and the maturity of the
hedge conservatively by considering the following:
(a) for the underlying exposure, the effective maturity must be gauged as the
longest possible remaining time before the counterparty is scheduled to
fulfil its obligation, taking into account any applicable grace period; and
(b) for the hedge, (embedded) options that may reduce the term of the hedge
must be taken into account so that the shortest possible effective maturity 58
is used.
46 Currency mismatches
S 46.1 For the purpose of calculating the risk-weighted asset, an FI shall classify
arrangements where the underlying exposure and credit protection arrangement
are denominated in different currencies, as a currency mismatch.
S 46.2 Where an FI intends to recognise CRM where there are currency mismatches
under the comprehensive approach for collateral, guarantees or credit derivatives,
the FI shall apply the specific adjustment for currency mismatches as prescribed
in paragraphs 47.33 and 49.15 to 49.16, respectively.
G 46.3 Under the simple approach for collateral, there is no specific treatment for
currency mismatches as the minimum risk weight of 20% (floor) is generally
applied.
47 Collateralised transactions
Overview
S 47.2 An FI shall only reduce its regulatory capital requirements through the application
of CRM when it accepts eligible financial collateral, subject to the requirements
under paragraph 47.3.
58 For example, in the case of a credit derivative, the protection seller has a call option, the maturity is
the first call date. Likewise, if the protection buyer owns the call option and has a strong incentive
to call the transaction at the first call date (e.g. because of a step-up in cost from this date on), the
effective maturity is the remaining time to the first call date.
S 47.4 Under paragraph 47.3, an FI may recognise partial collateralisation in both the
simple or comprehensive approaches.
S 47.5 With respect to paragraph 47.3, an FI must comply with the following –
(a) for exposures in the banking book, an FI must apply either the simple or
comprehensive approach, but not both approaches. The approach
selected under paragraph 47.3 must subsequently be applied consistently
within the banking book. However, this is not applicable for Islamic
exposures, where an FI may use the simple approach for recognition of
non-physical asset collaterals and the comprehensive approach for
physical asset collaterals concurrently; and
(b) For exposures in the trading book, an FI shall only use the comprehensive
approach.
S 47.6 An FI shall use requirements in paragraph 47.50 and Appendix VIII (Current
Exposure Method) of the CAF (RWA) PD or Appendix VI (Counterparty Credit
Risk and Current Exposure Method) of the CAFIB (RWA) PD to compute the
exposure amount for collateralised OTC derivatives.
S 47.7 An FI must indicate upfront to the Bank, which approach it intends to adopt for
CRM purposes. Any subsequent migration to a different approach shall also be
communicated to the Bank.
General requirements
S 47.8 An FI that lends securities or posts collateral must calculate capital requirements
for the following:
(a) credit risk or market risk of the securities, if such risks remain with the FI;
and
(b) counterparty credit risk (CCR) arising from the risk that the obligor of the
securities may default.
(b) the FI takes all steps necessary to fulfil the legal requirements in order to
obtain and maintain an enforceable interest 59 over the collateral; and
(c) the FI has clear and robust procedures for a timely liquidation of the
collateral to ensure that any legal conditions required for declaring the
default of the counterparty and liquidating the collateral are observed, and
the collateral can be liquidated promptly.
S 47.10 An FI must ensure that it has sufficient resources to manage the orderly
operation of margin agreements with OTC derivative and securities-financing
counterparties, as measured by the timeliness and accuracy of its outgoing
margin calls and response time to incoming margin calls. These include having
robust collateral risk management policies in place to control, monitor and report
(a) the risk exposures arising from margin agreements 60 (such as the
volatility and liquidity of the securities exchanged as collateral);
(b) the concentration risk to particular types of collateral;
(c) the reuse of collateral (both cash and non-cash) including the potential
liquidity shortfalls resulting from the reuse of collateral received from
counterparties; and
(d) the surrender of rights on collateral posted to counterparties.
S 47.11 Where the collateral is held by a custodian, the FI shall take reasonable steps to
ensure that the custodian segregates the collateral from its own assets.
S 47.12 The FI must apply capital requirements on both sides of a transaction 61. Where
the FI in acting as an agent, arranges a repo-style transaction between a
customer and a third party and provides a guarantee to the customer that the
third party will perform its obligations, the risk to the FI is deemed to be the same
as if the FI had entered into the transaction as a principal. In such circumstances,
the FI must calculate the capital requirements as if it was the principal.
S 47.13 Under this approach, an FI shall replace the risk weight of a counterparty with
the risk weight of the collateral instrument and treat the collateralised and
unsecured portion of the exposure as follows:
59 For example, by registering it with a registrar, or for exercising a right to net or set off in relation to
the title transfer of the collateral.
60 Margin agreement is a contractual agreement or provisions to an agreement under which one
counterparty must supply variation margin to a second counterparty when an exposure of that
second counterparty to the first counterparty exceeds a specified level.
61 For example, both repurchase and reverse repurchase agreements will be subject to capital
requirements. Likewise, both sides of a securities financing transaction will be subject to explicit
capital charges, as will the posting of securities in connection with derivatives exposures or with any
other financing transaction. However, sale and buyback agreement (SBBA) and reverse SBBA
transactions will not be deemed as collateralised transactions given that they involve outright
purchase and sale transactions. Please refer to Appendix 6 for the capital treatment for these
transactions.
(a) collateralised portion – apply the risk weight applicable to the collateral
instrument subject to a floor of 20%, except under the conditions specified
in paragraphs 47.18 to 47.20; and
(b) unsecured portion – apply the risk weight applicable to the counterparty.
S 47.14 An FI shall only recognise a collateral under this approach when it is pledged for
a duration of at least the life of the exposure, is marked-to-market and revalued
with a minimum frequency of six months 62.
S 47.15 For collateral denominated in local currency, the FI must use the risk weight
linked to domestic currency ratings. For collateral denominated in foreign
currency, the FI must use the risk weight linked to foreign currency ratings.
S 47.16 An FI shall recognise the following as financial collateral under this approach:
(a) investment account or cash 63 on deposit 64 (including certificate of
deposits or comparable instruments issued by the financing FI) with the
FI which is incurring the counterparty exposure 65, 66;
(b) gold;
(c) debt securities/sukuk rated by ECAIs where the risk weight attached to
the debt securities/sukuk is lower than that of the obligor and is rated–
(i) at least BB when issued by sovereigns or PSEs that are treated as
sovereigns;
(ii) at least BBB– when issued by other entities; or
(iii) at least A-3/P-3 for short-term debt instruments;
(d) debt securities/sukuk unrated by a recognised ECAI, but fulfil the following
conditions:
(i) issued by an FI;
(ii) listed on a recognised exchange;
(iii) classified as a senior debt;
(iv) all other rated issues of the same seniority that are issued by the
issuing FI are rated at least BBB-, A-3/P-3 or any equivalent rating;
and
(v) the FI is sufficiently confident about the market liquidity of the debt
securities/sukuk;
62 As stipulated in paragraph 45.2, a credit protection arrangement with a maturity mismatch is not
recognised under this approach.
63 Cash pledged includes `urbūn (or earnest money held after a contract is established as collateral
to guarantee contract performance) and hamish jiddiyyah (or security deposit held as collateral) in
Islamic banking contracts (for example, Ijarah).
64 Structured deposits and Restricted Investment Accounts would not qualify as eligible financial
collateral.
65 Cash funded credit linked notes issued by the FI against exposures in the banking book which fulfil
the criteria for credit derivatives will be treated as cash collateralised transactions.
66 When cash on deposit, certificates of deposit or comparable instruments issued by the financing
bank are held as collateral at a third-party bank in a non-custodial arrangement, if they are openly
pledged/assigned to the financing bank and if the pledge/assignment is unconditional and
irrevocable, the exposure amount covered by the collateral (after any necessary haircuts for
currency risk) receives the risk weight of the third-party bank.
(e) equities (including convertible bonds/sukuk) that are included in the main
index listed in Appendix 7; or
(f) funds (e.g. collective investment schemes, unit trust funds, mutual funds
etc.) where –
(i) the price of the units are publicly quoted on a daily basis; and
(ii) the unit trust fund/mutual fund 67 is limited to investing in listed
financial instruments under paragraph 47.16.
S 47.18 An FI shall only exempt a repo-style transaction from the risk weight floor if it
meets the following conditions:
(a) both the exposure and the collateral are in the form of cash, sovereign
security or PSE security qualifying for a 0% risk weight under the
standardised approach;
(b) both the exposure and the collateral are denominated in the same
currency;
(c) either the transaction occurs overnight or both the exposure and the
collateral are marked-to-market daily and are subject to daily re-
margining;
(d) following a counterparty’s failure to re-margin, the time that is required
between the last mark-to-market before the failure to re-margin and the
liquidation of the collateral is no more than 4 business days;
(e) the transaction is settled across a settlement system meant for that type
of transaction;
(f) the documentation covering the agreement is standard market
documentation for repo-style transactions in the securities concerned;
(g) the transaction is governed by documentation, specifying that if the
counterparty fails to satisfy an obligation to deliver cash or securities, fails
to deliver margin or otherwise defaults, then the transaction is immediately
terminable by the FI; and
(h) upon any default event, regardless of whether the counterparty is
insolvent or bankrupt, the FI has unfettered and legally enforceable rights
to immediately seize and liquidate the collateral.
S 47.19 An FI shall only apply a 10% risk weight to a repo-style transaction that fulfils the
conditions in paragraph 47.18. In addition, a 0% risk weight shall only be applied
if the counterparty to the transaction is a core market participant, such as –
(a) the Federal Government of Malaysia;
(b) the Bank; and
(c) licensed banking institutions in Malaysia.
67 The use or potential use by a fund of derivative instruments solely to hedge investments listed in
this paragraph shall not prevent units in that fund from qualifying as an eligible financial collateral.
68 A resecuritisation exposure is a securitisation exposure in which the risk associated with an
underlying pool of exposures is tranched and at least one of the underlying exposures is a
securitisation exposure. In addition, an exposure to one or more resecuritisation exposures is a
resecuritisation exposure.
S 47.22 An FI shall apply haircuts to the CRM instrument depending on the prescribed
holding period for the transaction. For the purposes of the CRM, an FI shall treat
the holding period as the period of time during which the exposure or collateral
values are assumed to fluctuate before the FI can close out the transaction. The
supervisory prescribed minimum holding period is used as the basis for the
calculation of the supervisory haircuts.
S 47.23 An FI shall comply with to the requirements in paragraph 47.33 to determine the
individual haircuts.
G 47.24 For example, repo-style transactions subject to daily mark-to-market and daily
re-margining will receive a haircut based on a 5-business day holding period,
while secured lending transactions that are subject to daily mark-to-market and
do not have re-margining clauses will receive a haircut based on a 20-business
day holding period.
69 Exposure value may also vary under a certain arrangement such as lending of security.
S 47.27 An FI shall only recognise the effect of master netting agreements covering
securities financing transactions (SFTs) 70 in the calculation of capital
requirements if they meet the conditions and requirements in paragraphs 47.44
and 47.48. However, if the FI chooses not to recognise the effect of the master
netting agreement, each transaction shall be subjected to a capital charge
without being based on a master agreement.
Eligible collateral
S 47.28 An FI shall recognise the following as financial collateral under this approach:
(a) all instruments in paragraph 47.16;
(b) equities (including convertible bonds/sukuk) which are not included in a
main index i.e. Composite Index of Bursa Malaysia, but are listed on a
recognised exchange (refer to Appendix 7); and
(c) funds (e.g. collective investment schemes, unit trust funds, mutual funds
etc.) which include equities that are not included in a main index i.e.
Composite Index of Bursa Malaysia, but are listed on a recognised
exchange (refer to Appendix 7).
S 47.29 Under certain Islamic transactions such as Murabahah, Salam, Istisna’ and
Ijarah, the underlying physical assets, namely commercial and residential real
estate 71 as well as plant and machinery are recognised as collateral or risk
mitigants. For these physical assets to be recognised as eligible collateral, they
must fulfil the minimum requirements specified under the comprehensive
approach as well as the additional criteria specified in Appendix 8.
S 47.30 An FI shall calculate the adjusted exposure value after risk mitigation as follows:
Where ‒
E* = Exposure value after risk mitigation
Hfx = Haircut appropriate for currency mismatch between the collateral and
exposure
S 47.31 An FI shall adjust the current value of the collateral received (C) when there are
maturity mismatches in accordance with paragraphs 45.4 and 45.5.
S 47.32 An FI shall multiply the exposure value after risk mitigation (E*) with the risk
weight of the counterparty to obtain the risk-weighted asset amount for the
collateralised transaction.
S 47.33 An FI shall apply the supervisory haircuts 72 in the table below to the collateral
(Hc) and to the exposure (He) -
72 Assuming daily mark-to-market, daily re-margining and a 10-business day holding period.
Where –
(a) “Sovereign” includes PSEs that are treated as sovereigns by the national
supervisor, as well as multilateral development banks receiving a 0% risk
weight;
(b) “Other issuer” includes PSEs that are not treated as sovereigns by the
national supervisor;
(c) “Securitisation exposure” refers to exposures that meet the definition set
forth in the Securitisation Framework in the CAF (RWA) PD or CAFIB
(RWA) PD; and
(d) “Cash in the same currency” refers to eligible cash collateral specified in
paragraph 47.16(a).
S 47.34 An FI with Islamic banking exposures shall apply a haircut of 30% for
CRE/RRE/other physical collaterals 73.
S 47.35 For SFTs and secured financing transactions, an FI shall apply the haircut
adjustment in accordance with paragraphs 47.37 to 47.41. Meanwhile, for SFTs
in which the FI posts non-eligible instruments as collateral, the haircut on the
exposure is 30%. For transactions in which the FI accepts non-eligible
instruments, CRM shall not be applied.
S 47.36 Where the collateral is a basket of assets, an FI shall calculate the haircut (H)
on the basket as follows:
H = � ai Hi
i
Where ‒
H = Haircut of the collateral
Question 14
The Bank intends to adopt the revised supervisory haircuts for the
comprehensive approach as prescribed by the BCBS.
(2) If so, do the revisions affect certain exposure classes more than others?
73 While the Bank has provided a minimum 30% haircut on other types of physical collateral, FIs shall
exercise conservatism in applying haircuts on physical assets’ values used as CRM for capital
requirement purposes. In this regard, FIs may use a more stringent haircut should their internal
historical data reveals loss amounts (which reflect a haircut of higher than 30%) when the physical
assets are disposed. Please refer to Appendix 8 for additional requirements for recognition of other
physical collateral.
(3) Please provide the RWA impact given the revisions on the supervisory
haircuts.
S 47.37 For some transactions, depending on the nature and frequency of the re-
evaluation and re-margining provisions, an FI must apply different holding
periods and thus different haircuts. The framework for collateral haircuts
distinguishes between repo-style transactions (i.e. repo/reverse repos and
securities financing), “other capital market-driven transactions” (i.e. OTC
derivatives transactions and margin financing) and secured financing. In capital-
market-driven transactions and repo-style transactions, the documentation
contains re-margining clauses, while for secured financing transactions, the
documentation generally does not.
S 47.38 An FI shall refer to the following table for the minimum holding period for various
products:
S 47.39 If a netting set 74 includes both repo-style and other capital market transactions,
an FI must use a minimum holding period of 10 business days.
S 47.40 In addition to paragraphs 47.38 and 47.39, an FI shall adopt a higher minimum
holding period in the following cases:
(a) when a netting set has a number of trades exceeding 5,000 at any point
during a quarter, the FI must use a minimum holding period of 20 business
days for the following quarter;
(b) when a netting set has one or more trades involving illiquid collateral, the
FI must use a minimum holding period of 20 business days 75; and
74 Netting set is a group of transactions with a single counterparty that are subject to a legally
enforceable bilateral netting arrangement under Appendix VIII (Current Exposure Method) of the
CAF (RWA) PD or Appendix VI (Counterparty Credit Risk and Current Exposure Method) of the
CAFIB (RWA) PD.
75 “Illiquid collateral” must be determined in the context of stressed market conditions and will be
characterised by the absence of continuously active markets where a counterparty would, within
two or fewer days, obtain multiple price quotations that would not move the market or represent a
price reflecting a market discount. Examples of situations where trades are deemed illiquid for this
purpose include, but are not limited to, trades that are not marked daily and trades that are subject
to specific accounting treatment for valuation purposes (e.g. repo-style transactions referencing
securities whose fair value is determined by models with inputs that are not observed in the market).
(c) when the FI has experienced more than two margin call disputes on a
particular netting set over the previous two quarters that have lasted
longer than the FI’s estimate of the margin period of risk 76, the FI must
use a minimum holding period that is twice the level that would apply.
However, this sub-paragraph would not apply for the subsequent two
quarters.
S 47.41 An FI must adjust the haircut of a transaction when the frequency of re-margining
or revaluation is higher than the minimum as outlined in paragraphs 47.38 to
47.40. Where the haircut of a transaction is different from the default haircuts of
10 business days as provided in paragraph 47.33, these haircuts must be scaled
up or down using the following formula:
NR + (TM − 1)
H =H10 �
10
Where ‒
H = Haircut
S 47.42 An FI shall only apply a haircut of zero for repo-style transactions with core
market participants as defined in paragraph 47.19 if such transactions satisfy the
conditions in paragraph 47.18.
S 47.43 FIs shall only apply the treatment under paragraph 47.42 where other national
supervisors have accorded a similar treatment to core market participants within
their jurisdictions, unless the Bank requires otherwise, in view of changes to
domestic conditions.
76 Margin period of risk is the time period from the last exchange of collateral covering a netting set of
transactions with a defaulting counterparty until that counterparty is closed out and the resulting
market risk is re-hedged.
S 47.44 An FI shall recognise the effect of bilateral netting agreements covering SFT on
a counterparty-by-counterparty basis if the agreements –
(a) are legally enforceable in each relevant jurisdiction upon the occurrence
of an event of default, regardless of whether the counterparty is insolvent
or bankrupt;
(b) provide the non-defaulting party the right to terminate and close out all
transactions under the agreement in a timely manner upon the occurrence
of a default event, including the event of insolvency or bankruptcy of the
counterparty;
(c) provide for the netting of gains and losses on transactions (including the
value of any collateral) terminated and closed out so that a single net
amount is owed by one party to the other;
(d) allow for the prompt liquidation or set-off of collateral upon the event of
default; and
(e) together with the rights arising from the provisions required in (a) to (d)
above, are legally enforceable in each relevant jurisdiction upon the
occurrence of an event of default and regardless of the counterparty’s
insolvency or bankruptcy.
S 47.45 In addition, an FI must ensure that the SFT is subject to the Global Master
Repurchase Agreement (GMRA) with its relevant annexes that specify all terms
of the transaction, duties and obligations of the parties concerned. An FI must
also ensure that other requirements specified under the Bank’s current
guidelines on repo-style transactions 77 have also been met.
S 47.46 An FI shall only recognise netting across positions in the banking and trading
books if it meets the following requirements –
(a) all transactions are marked-to-market daily 78; and
(b) the collateral instruments used in the transactions are recognised as
eligible financial collateral in the banking book.
S 47.47 An FI shall use the formula in paragraph 47.48 to compute the counterparty credit
risk capital requirements for SFTs with netting agreements. This formula
includes the current exposure, an amount for systematic exposure of the
securities based on the net exposure, an amount for the idiosyncratic exposure
of the securities based on the gross exposure, and an amount for currency
mismatch. All other rules regarding the calculation of haircuts under the
comprehensive approach stated in paragraph 47.21 to 47.22 must be complied
with, by FIs using bilateral netting agreements for SFTs.
S 47.48 An FI shall use the formula below to calculate the exposure amount to account
for the impact of SFTs under master netting agreements:
gross exposure
E* =max{0; ∑i Ei - ∑i Cj +0.4 × net exposure + 0.6× + ∑fx(Efx ×Hfx ) }
√N
Where ‒
E* = Exposure value of the netting set after risk mitigation
net
exposure= �� Es Hs �
s
gross � Es |Hs |
exposure=
s
Es = Net current value of each security issuance under the netting set
(always a positive value)
S 47.49 An FI shall comply with the requirements in Appendix 10 for the treatment of non-
centrally cleared SFTs with certain counterparties.
S 47.50 An FI shall use the formula below to compute the counterparty credit risk charge
for an individual contract as per Appendix VIII (Current Exposure Method) of the
CAF (RWA) PD or Appendix VI (Counterparty Credit Risk and Current Exposure
Method) of the CAFIB (RWA) PD–
Where ‒
RC = The replacement cost
S 47.51 When effective bilateral netting contracts are in place, RC shall be the net
replacement cost and the add-on will be ANet calculated according to Appendix
VIII (Current Exposure Method) of the CAF (RWA) PD or Appendix VI
(Counterparty Credit Risk and Current Exposure Method) of the CAFIB (RWA)
PD. The haircut for currency risk (Hfx) shall be applied when there is a mismatch
between the collateral currency and the settlement currency. Even in the case
where there are more than two currencies involved in the exposure, collateral
and settlement currency, a single haircut assuming a 10-business day holding
period scaled up as necessary depending on the frequency of mark-to-market
must be applied.
S 48.1 An FI shall only use the net exposure of financing and deposit/investment
account 79 as the basis of calculating its capital adequacy when the following
conditions are complied with:
(a) the FI has a well-founded legal basis to justify that the netting or offsetting
agreement is enforceable in each relevant jurisdiction regardless of
whether the counterparty is insolvent or bankrupt;
(b) the FI is able to at any time, determine those assets and liabilities with the
same counterparty that are subject to the netting agreement;
(c) the FI monitors and controls its roll-off risks 80; and
(d) the FI monitors and controls the relevant exposures on a net basis.
S 48.2 When calculating the net exposure for paragraph 48.1, an FI shall use the
formula in paragraph 47.30, in applying the following conditions:
(a) assets (financing) are treated as exposure and liabilities (deposits) as
collateral;
(b) a zero haircut is applied unless there is a currency mismatch;
(c) a 10-business day holding period is applied when there is daily mark-to-
market; and
(d) requirements in paragraphs 45, 47.33, and 47.41 are applied accordingly.
S 48.3 The net exposure amount shall be multiplied by the risk weight of the
counterparty to obtain risk-weighted assets for the exposure following the on-
balance sheet netting.
79 Structured deposits and Restricted Investment Account would not be recognised for on-balance
sheet netting.
80 Roll-off risks relate to the sudden increases in exposure which can happen when short dated
obligations (for example deposits) used to net long dated claims (for example financing) mature.
Operational requirement
S 49.1 An FI must ensure that a guarantee or credit derivative meets the following
requirements before it is recognised accordingly in the calculation of capital
requirements:
(a) it represents a direct claim on the protection provider;
(b) the extent of the cover is clearly defined and incontrovertible with explicit
reference to specific exposures or a pool of exposures;
(c) the protection contract is irrevocable except when there is a non-payment
by a protection purchaser;
(d) there is no clause in the contract that would allow the protection provider
to unilaterally cancel the credit cover, change the maturity agreed ex post,
or increase the effective cost of cover as a result of deteriorating credit
quality in the hedged exposure;
(e) it is unconditional. The protection contract must not have any clause which
is outside the direct control of the FI that could prevent the protection
provider from being obliged to fulfil its obligation in a timely manner in the
event of a default by the counterparty; and
(f) if the credit protection has maturity mismatches, an FI must adjust the
amount of protection in accordance with paragraph 45.
(c) obtain a legal opinion 81 confirming that the policy or takaful certificate is
unconditional 82 and irrevocable 83 as required for CRM recognition under
this policy document; and
(d) establish and implement, at minimum, the following:
(i) a process to determine and verify the completeness and
appropriateness of documentation, and information required for
submission to the licensed ITO;
(ii) a mechanism to monitor specified deadlines and credit standing of
obligors (i.e. the buyer of trade goods); and
(iii) a process for timely and regular communication between the FI and
the licensed ITO.
81 FIs may rely on in-house legal expertise or obtain opinion from an external legal firm.
82 The conditions for a policy or takaful certificate to qualify as “unconditional” are stipulated in
paragraph 49.1(e). Exclusionary clauses relating to fraudulent, criminal acts, and insolvency of
banking institutions and losses caused by nuclear or harmful substance contamination and war
between major countries would not cause the trade credit insurance or trade credit takaful to be
deemed as conditional.
83 The conditions for a policy or takaful certificate to qualify as “irrevocable” are stipulated in paragraph
49.1(c).
84 When hedging corporate exposures, this particular credit event is not required to be specified
provided that: (1) a 100% vote is needed to amend the maturity, principal, coupon, currency or
seniority status of the underlying corporate exposure; and (2) the legal domicile in which the
corporate exposure is governed has a well-established bankruptcy code that allows for a company
to reorganise/restructure and provides for an orderly settlement of creditor claims. If these
conditions are not met, then the treatment in paragraph 49.5 may be eligible.
S 49.5 When the restructuring of the underlying obligation is not covered by the credit
derivative, but the other requirements in paragraph 49.4 are met, an FI shall
partially recognise the credit derivative as CRM only if it meets the following
conditions:
(a) if the amount of the credit derivative is less than or equal to the amount of
the underlying obligation, 60% of the amount of the hedge can be
recognised as CRM; or
(b) if the amount of the credit derivative is larger than that of the underlying
obligation, then the amount of eligible hedge is capped at 60% of the
amount of the underlying obligation.
S 49.6 An FI shall recognise the credit protection of the following entities, provided they
have a lower risk weight than the counterparty:
(a) sovereign entities 85 , PSEs, banking institutions, qualifying central
counterparties as well as securities firms with a lower risk weight than the
counterparty; and
(b) other entities than those listed in paragraph (a), which fulfil the following:
(i) externally rated, except when credit protection is provided to a
securitisation exposure. This would include credit protection
provided by a parent, subsidiary and affiliate companies which
qualify for a lower risk weight than the obligor; or
(ii) externally rated BBB– or better and that were externally rated A–
or better at the time the credit protection was provided, where such
credit protection is provided to a securitisation exposure. This
would include credit protection provided by parent, subsidiary and
affiliate companies which qualify for a lower risk weight than the
obligor.
S 49.7 For trade credit insurance or trade credit takaful, an FI shall only recognise the
trade credit insurance or trade credit takaful as CRM if it is obtained from a
licensed ITO or a prescribed DFI with a minimum rating of BBB-.
S 49.8 For trade credit insurance or trade credit takaful ceded to a licensed professional
reinsurer or retakaful operator, an FI shall only recognise these as CRM if the
licensed professional reinsurer or retakaful operator is rated at least BBB-, and
the reinsurance or retakaful contract –
(a) fulfils the requirements of a guarantee in this policy document;
(b) provides an equally robust level of protection as the trade credit policy or
takaful certificate between the FI, licensed ITO or prescribed DFI; and
(c) includes a specific clause in the legal documentation that enables the FI
to pursue claim payments directly from the licensed professional reinsurer
or retakaful operator when there is a default in payment of claims by the
licensed ITO or prescribed DFI.
S 49.9 An FI shall only recognise credit default swaps and total return swaps as CRM
where they provide credit protection equivalent to guarantees. However, where
an FI buys credit protection through a total return swap and records the net
payments received on the swap as net income but does not record any offsetting
deterioration in the value of the asset that is protected (either through reductions
in fair value or by an addition to reserves), the credit protection will not be
recognised.
85
This includes the Bank for International Settlements, the International Monetary Fund, the European
Central Bank, the European Union, the European Stability Mechanism and the European Financial
Stability Facility, as well as MDBs eligible for a 0% risk weight.
S 49.10 An FI shall not recognise as CRM, first-to-default and all other nth-to-default
credit derivatives (i.e. by which a bank obtains credit protection for a basket of
reference names and where the first or nth–to-default among the reference
names trigger the credit protection and terminates the contract).
S 49.11 An FI shall apply the following general risk weight treatment for transactions in
which eligible credit protection is provided –
(a) the protected portion is assigned the risk weight of the protection provider;
(b) the uncovered portion of the exposure is assigned the risk weight of the
underlying counterparty; and
(c) where there are materiality thresholds which exempt the protection
provider from making good payments below these thresholds in a default
event, such positions are deemed as first-loss positions. The portion of
the exposure that is below the materiality threshold must be assigned a
risk weight of 1250% by the banking institution purchasing the credit
protection.
S 49.12 Where losses are shared pari passu on a pro-rated basis between the FI and the
guarantor, an FI shall apply capital relief on a proportional basis (i.e. the
protected portion of the exposure receives the treatment applicable to eligible
guarantees/credit derivatives) with the remainder treated as unsecured
exposure.
G 49.13 Where an FI transfers a portion of the risk of an exposure in one or more tranches
to a protection seller or sellers and retains some level of the risk, and the risk
transferred and the risk retained are of different seniority, the FI may obtain credit
protection for either the senior tranches (e.g. the second-loss portion) or the
junior tranche (e.g. the first-loss portion).
S 49.14 In order to recognise the credit protection under paragraph 49.13, an FI shall
apply the rules as set out in the securitisation standard in section F.3
Standardised Approach for Securitisation Standards in the CAF (RWA) PD and
CAFIB (RWA) PD.
Currency mismatch
GA = G (1 – HFX)
Where ‒
G = Nominal amount of the credit protection
S 49.16 An FI shall apply a currency mismatch haircut for a 10-business day holding
period (assuming daily marking-to-market) of 8%. However, this haircut must be
scaled up using the square root of time formula, depending on the frequency of
revaluation of the credit protection as described in paragraph 47.41.
S 49.17 As specified in paragraph 13.1 and 13.2, an FI shall apply a lower risk weight to
exposures to a sovereign or central bank where the FI is incorporated and where
the exposure is denominated and funded in the domestic currency. This
treatment is also extended to portions of exposures guaranteed by the sovereign
or central bank, where the guarantee is denominated and funded in the domestic
currency.
S 50.1 For an FI with Islamic banking operations, the RWA for exposures collateralised
by physical assets shall be the higher of –
(a) the RWA calculated using the CRM method; or
(b) 50% risk weight applied on the gross exposure amount (i.e. before any
CRM effects).
Question 15
(1) Are there any other potential CRM instruments for which the treatment
should be clarified in the CRM framework, such as cash collateral pledged
under life insurance or credit insurance? Please provide justifications to
support your comment.
51 Transitional arrangements
S 51.1 An FI shall subject the risk weight treatment described in paragraph 19.4,
excluding equity holdings risks weighted at 100%, to a five-year linear phase-in
arrangement specified in paragraphs 51.2 and 51.3 from the effective
implementation date of this policy document.
S 51.2 For speculative unlisted equity exposures, the applicable risk weight will start at
100% and increase by 60 percentage points at the end of each year until the end
of Year 5.
S 51.3 For all other equity holdings, the applicable risk weight will start at 100% and
increase by 30 percentage points at the end of each year until the end of Year
5.
Question 16
A key feature of the Basel III reforms is the introduction of an output floor which
limits the amount of capital benefit an FI can obtain from its use of internal
models, relative to using the standardised approaches.
The Bank is planning to adopt the output floor of 72.5%, of the standardised
RWA as well as the corresponding transitional arrangements as stipulated
under the section "RBC90: Risk-based capital requirements - Transitional
arrangements". If your institution is applying the Internal Ratings-Based
Approach for Credit Risk, please provide your feedback on the BCBS-
prescribed phase-in arrangements, and whether this provides sufficient time
for your institution to fully adopt the output floor.
APPENDICES
Banking Institution
Malaysian
RAM
Rating
Rating
Rating Corporati
S&P Moody’s Fitch R&I Services
Category on
Berhad
Berhad
(RAM)
(MARC)
86 External credit assessments produced by Rating and Investment Information, Inc. on Islamic debt
securities are not recognised by the Bank in determining the risk weights for exposures to the asset
classes listed in this Appendix.
Rating
S&P Moody’s Fitch R&I RAM MARC
Category
1. The methodology used by the ECAI for assigning external ratings must be
rigorous, systematic, and subject to validation based on historical experience.
Moreover, external ratings must be subject to ongoing reviews and responsive
to changes in the financial condition, operating environment and business
models of the rated entity. The rating methodology for each market segment
must have been established for a minimum of one year 87, and must be subject
to rigorous back testing.
3. The individual ratings, key elements underpinning the rating assessments and
involvement of the rated entity in the rating process shall be publicly disclosed
on a non-selective basis, unless they are private ratings, which should be at
least available to both domestic and foreign institutions are made available only
to the issuer or parties with legitimate interest and on equivalent terms. In
addition, the ECAI’s general procedures, methodologies and assumptions for
deriving the ratings shall be publicly available.
Criterion 4: Disclosure
4. An ECAI shall disclose the following information: its code of conduct; the
general nature of its compensation arrangements with rated entities; any
conflict of interest, its internal compensation arrangements, its rating
assessment methodologies (including the definition of default, the time horizon,
and the definition of each rating); the actual default rates of the rated entities
experienced in each assessment category; and the transition of the ratings,
e.g. the likelihood of AA ratings becoming A over time. A rating shall be
disclosed as soon as practicable after issuance. When disclosing a rating, the
information shall be provided in plain language, indicating the nature and
limitation of credit ratings and the risk of unduly relying on them to make
investments.
87 While the minimum requirement is 1 year, ideally the methodology should preferably be established
for at least 3 years.
Criterion 5: Resources
Criterion 6: Credibility
8. An ECAI may derive credibility from complying with the criteria in paragraphs
1 to 7, 9 and 10. In addition, the reliance on an ECAI’s external ratings by
independent parties (for example, investors, insurers, takaful operators and
trading partners) is evidence of the credibility of the ratings of the ECAI. The
9. An ECAI must not use unsolicited ratings to put pressure on entities to obtain
solicited ratings. The Bank shall consider whether to continue recognising an
ECAI as eligible for capital adequacy purposes, if such behaviour is identified.
10. An ECAI shall notify the Bank of significant changes to their methodologies and
submit to the Bank, upon the Bank’s request, external ratings and other
relevant data in order to support their initial and continued eligibility as ECAIs.
88 i.e. reduction in the principal amount of the financing or reduction in the accrued interest/ profit
3. For retail exposures, an FI can apply the definition of default at the level of a
particular credit obligation, rather than at the level of the obligor. As such,
default by an obligor on one credit obligation does not require an FI to treat all
other credit obligations to the same obligor as defaulted. For example, an
obligor may default on a credit card obligation but not on other retail obligations.
Nevertheless, an FI shall remain vigilant and consider cross-default of facilities
of an obligor if it is evident that the obligor is unable to meet its other credit
obligations.
4. A default by a corporate obligor shall trigger a default on all of its other credit
obligations.
An FI must apply one of the following three approaches 89 to measure the risk weighted
assets of its equity investments in funds 90.
1. This is the most granular and risk sensitive approach. It must be used when –
(a) there is sufficient and frequent information provided to the FI regarding
the underlying exposures of the fund. The frequency of financial
reporting of the fund must be the same as, or more frequent than that of
the FI’s and the granularity of the financial information must be sufficient
to calculate the corresponding risk weights; and
(b) the information on the underlying exposures is verified by an
independent third party, such as the depository of the custodian bank or
where applicable, the management company 91.
2. Under this approach, an FI shall risk weight all the underlying exposures of a
fund as if the exposures were held directly by the FI. This includes any
underlying exposure arising from the fund’s derivative activities for situations in
which the underlying exposures receive a risk weighting treatment under the
computation of credit or market risk, and the associated counterparty credit risk
(CCR) exposure.
89 This Appendix presently excludes the requirements on Credit Valuation Adjustment. These
requirements will be incorporated into this Appendix once the capital framework on Credit Valuation
Adjustment has been finalised.
90 Equity investments in funds include investment accounts managed by Islamic banking institutions.
An Islamic banking institution shall refer to this Appendix in computing the credit risk exposure
under the standardised approach arising from placement in investment accounts instead of the CAF
(RWA) PD and the CAFIB (RWA) PD.
91 An external audit is not required for the verification. Specifically for investment accounts, this
condition is deemed met if a review of the financial statements is conducted by external auditors.
92 For example, any exposure that is subject to a 20% risk weight under the Standardised Approach
would be weighted at 24% (1.2 × 20%) when the look through is performed by a third party.
4. This approach is applicable when the conditions for applying the LTA are not
met.
6. An FI must ensure that all underlying risks are taken into account (including
CCR) and that the MBA renders capital requirements no less than the LTA. In
this regard, an FI must calculate the risk-weighted asset as the sum of the
following:
(a) balance sheet exposures (i.e. the fund’s assets) are risk weighted
assuming the underlying portfolios are invested to the maximum extent
allowed under the fund's mandate in assets attracting the highest capital
requirements, and then progressively in other assets attracting lower
capital requirements. If more than one risk weight can be applied to a
given exposure, the maximum risk weight must be used;
(b) whenever the underlying risk of a derivative exposure or an off-balance
sheet item receives a risk weighting treatment under this policy
document, the notional amount of the derivative position or of the off-
balance sheet exposure is risk weighted accordingly 93; and
(c) the CCR associated with the fund's derivative exposures is calculated
using the approach in Appendix VIII (Current Exposure Method) of the
CAF (RWA) PD or Appendix VI (Counterparty Credit Risk and Current
Exposure Method) of the CAFIB (RWA) PD. The risk weight associated
with the counterparty is applied to the CCR exposure as follows:
(i) when the replacement cost is unknown, the exposure measure for
CCR will be calculated in a conservative manner using the sum of
the notional amounts of the derivatives in the netting set as a
proxy for the replacement cost, and the multiplier used in the
calculation of the potential future exposure will be equal to 1; and
(ii) when the potential future exposure is unknown, the exposure
measure for CCR will be calculated as 15% of the sum of the
notional values of the derivatives in the netting set93F94.
7. Where neither the LTA nor the MBA are feasible, an FI is required to apply the
FBA.
8. Under this approach, an FI applies a 1250% risk weight to the FI’s equity
investment in the fund.
93 If the underlying is unknown, the full notional amount of derivative positions must be used for the
calculation. If the notional amount of derivatives is unknown, it will be estimated conservatively
using the maximum notional amount of derivatives allowed under the mandate.
94 For example, if both the replacement cost and add-on components are unknown, the CCR exposure
will be calculated as: 1.4 × (sum of notionals in netting set +0.15×sum of notionals in netting set).
Available approaches
FI
LTA/MBA/FBA
Fund A
LTA MBA/FBA
Fund B
LTA FBA
Fund C
10. An FI may use a combination of the three approaches when determining the
capital requirements for an equity investment in an individual fund, provided
that the conditions set out in paragraphs 1 to 11 in this Appendix are met.
11. An FI shall exclude equity holdings in entities whose debt obligations qualify for
a zero-risk weight from the LTA, MBA and FBA approaches.
Leverage adjustment
12. An FI shall apply a leverage adjustment when using the LTA or MBA as follows:
Application of the LTA and MBA to FIs using the Internal Ratings Based (IRB)
approach 95
13. An FI applying the IRB approach to credit risk shall treat equity investments in
funds that are held in the banking book in a consistent manner based on
paragraphs 1 to 12 of this Appendix, as adjusted by paragraphs 14 and 15
below.
95 For the avoidance of doubt, paragraphs 13 and 14 of this Appendix will not be applicable to an FI
using the Standardised Approach for Credit Risk.
(c) may rely on third-party calculations for determining the risk weights
associated with their equity investments in funds (i.e. the underlying risk
weights of the exposures of the fund) if they do not have adequate data
or information to perform the calculations themselves. In this case, the
third party must use the methods set out in paragraph 15 in this
Appendix, with the applicable risk weight set 1.2 times higher than the
applicable risk weight if the exposure were held directly by the FI.
15. In cases when the IRB calculation is not feasible (as highlighted in paragraph
14(b) in this Appendix), a third party is performing the calculation of risk weights
(as highlighted in paragraph 14(c) in this Appendix) or when the FI is using the
MBA, the following methods must be used to determine the risk weights
associated with the fund’s underlying exposures:
(a) for equity exposures, the simple risk weight method set out in paragraph
19.4;
(b) for securitisation exposures, the method specified in section F.3
Standardised Approach for Securitisation Standards in the CAF (RWA)
PD and the CAFIB (RWA) PD; and
(c) the standardised approach for all other exposures.
16. Consider a fund that replicates an equity index, and assume the following:
(a) the FI uses the standardised approach for credit risk when calculating its
capital requirements for credit risk. For determining CCR exposures, it
uses the Current Exposure Method;
(b) the FI owns 20% of the shares of the fund;
(c) the fund holds forward contracts on listed equities that are cleared
through a qualifying CCP (with a notional amount of RM 100); and
(d) the fund presents the following balance sheet:
Assets
Cash RM 20
Government bonds/sukuk (AAA-rated) RM 30
Variation Margin receivable (ie collateral RM 50
posted by the bank to the CCP in respect of
the forward contracts)
Liabilities
Notes payable RM 5
Equity
Shares, retained earnings and other reserves RM 95
(c) the RWA for the exposures to the listed equities underlying the forward
contracts (RWAunderlying) is calculated by multiplying the following three
amounts: (1) the Standardised Approach credit conversion factor of
100% that is applicable to forward purchases; (2) the exposure to the
notional of RM 100; and (3) the applicable risk weight for listed equities
under the Standardised Approach which is 100%. Thus, RWAunderlying =
100% × RM 100 × 100% = RM 100; and
(d) the forward purchase equities expose the bank to counterparty credit risk
in respect of the market value of the forward purchase equities and the
collateral posted that is not held by the CCP on a bankruptcy remote
basis. For the sake of simplicity, this example assumes the application
of Current Exposure Method results in an exposure value of RM 56. The
RWA for the CCR (RWACCR) is determined by multiplying the exposure
amount by the relevant risk weight for trade exposures to CCPs, which
is 2% in this case (see Capital Adequacy Framework (Basel III – Risk-
Weighted Assets): Exposures to Central Counterparties policy
document 96 for the capital requirements for bank exposures to CCPs).
Thus, RWACCR = RM 56 × 2% = RM 1.12.
18. The total RWA of the fund is therefore RM 101.12 = (RM 0 + RM 0 + RM 100 +
RM 1.12).
19. The leverage of a fund under the LTA is calculated as the ratio of the fund’s
total assets to its total equity, which in this example is 100/95.
20. Therefore, the RWA for the FI’s equity investment in the fund is calculated as
the product of the average risk weight of the fund, the fund’s leverage and the
size of the bank’s equity investment. That is:
RWAfund
RWA = × Leverage × Equity investment
Total Assetsfund
101.12 100
= × × (95 × 20%) = RM 20.2
100 95
21. Consider a fund with assets of RM 100, where it is stated in the mandate that
the fund replicates an equity index. In addition to being permitted to invest its
assets in either cash or equities, the mandate allows the fund to take long
positions in equity index futures up to a maximum nominal amount equivalent
to the size of the fund’s balance sheet (RM 100). This means that the total on
balance sheet and off-balance sheet exposures of the fund can reach RM 200.
Consider also that a maximum financial leverage (fund assets/fund equity) of
1.1 applies according to the mandate. The FI holds 20% of the shares of the
fund, which represents an investment of RM 18.18.
96 An ED was issued on 16 December 2022. FIs should comply with the PD when it comes into effect.
22. First, the on-balance sheet exposures of RM 100 will be risk weighted according
to the risk weights applied to equity exposures (risk weight =100%), i.e. RWAon-
BS = RM 100 × 100% = RM 100.
23. Second, the FI is to assume that the fund has exhausted its limit on derivative
positions, i.e. RM 100 notional amount. The RWA for the maximum notional
amount of underlying the derivatives positions is calculated by multiplying the
following three amounts: (1) the Standardised Approach credit conversion
factor of 100% that is applicable to forward purchases; (2) the maximum
exposure to the notional of RM 100; and (3) the applicable risk weight for
equities under the Standardised Approach which is 100%. Thus, RWAunderlying
= 100% × RM100 × 100% = RM 100.
24. Third, the FI is to calculate the CCR exposure associated with the derivative
contract as set out in paragraph 14(c) of this Appendix, as follows:
(a) if the replacement cost related to the futures contract is unknown, the FI
is to approximate it by the maximum notional amount, i.e. RM 100;
(b) if the aggregate add-on for potential future exposure is unknown, the FI
is to approximate this by 15% of the maximum notional amount (i.e. 15%
of RM 100=RM 15); and
(c) the CCR exposure is calculated by multiplying
(i) the sum of the replacement cost; and
(ii) the aggregate add-on for potential future exposure.
25. The CCR exposure in this example, assuming the replacement cost and
aggregate add-on amounts are unknown, is therefore RM 161 (= 1.4
×(100+15)). Assuming the futures contract is cleared through a qualifying CCP,
a risk weight of 2% applies, so that RWACCR = RM 161 × 2% = RM 3.2.
26. The RWA of the fund is hence obtained by adding RWAon-BS, RWAunderlying and
RWACCR, i.e. RM 203.2 (=100 + 100 + 3.2).
27. The RWA (RM 203.2) will be divided by the total assets of the fund (RM 100)
resulting in an average risk weight of 203.2%. The FI’s total RWA associated
with its equity investment is calculated as the product of the average risk weight
of the fund, the fund’s maximum leverage and the size of the FI’s equity
investment. Thus, the FI’s total associated RWA are 203.2% × 1.1 × RM 18.18
= RM 40.6.
28. Consider a fund with assets of RM 100 that invests in corporate debt. Assume
that the fund is highly levered with equity of RM 5 and debt of RM 95. Such a
fund would have financial leverage of 100/5=20. Consider the two cases below.
29. In Case 1, the fund specialises in low-rated corporate debt and it has the
following balance sheet:
Assets
Cash RM 10
A+ to A- bonds/sukuk RM 20
BBB+ to BB- bonds/sukuk RM 30
Below BB- bonds/sukuk RM 40
Liabilities
Debt RM 95
Equity
Shares, retained earnings and other reserves RM 5
31. In Case 2, the fund specialises in high-rated corporate debt and it has the
following balance sheet:
Assets
Cash RM 5
AAA to AA- bonds/sukuk RM 75
A+ to A- bonds/sukuk RM 20
Liabilities
Debt RM 95
Equity
Shares, retained earnings and other reserves RM 5
33. The above examples illustrate that the rate at which the 1250% cap is reached
depends on the underlying riskiness of the portfolio (as judged by the average
risk weight) as captured by standardised approach risk weights or the IRB
approach. For example, for a “risky” portfolio (100% average risk weight), the
1250% limit is reached fairly quickly with a leverage of 12.5x, while for a “low
risk” portfolio (25% average risk weight) this limit is reached at a leverage of
50x.
Scope of Requirements
5. The capital treatment set out in Appendix 5 in this policy document is applicable
to all transactions on securities, foreign exchange instruments and commodities
that give rise to a risk of delayed settlement or delivery. This includes
transactions through recognised clearing houses and central counterparties
that are subject to daily mark-to-market and payment of daily variation margins
and that involve a mismatched trade. The treatment does not apply to the
instruments that are subject to the CCR requirements set out in Appendix VIII
(Current Exposure Method) of the CAF (RWA) PD or Appendix VI (Counterparty
Credit Risk and Current Exposure Method) of the CAFIB (RWA) PD (i.e. over-
97 For the purpose of this Framework, DvP transactions include payment-versus-payment transactions.
98 Refer to paragraph 9 of this Appendix.
99 Refer to paragraphs 10 to 12 of this Appendix.
6. Where they do not appear on the balance sheet (i.e. settlement date
accounting), an FI shall apply a 100% credit conversion factor on the unsettled
exposure amount to determine the credit equivalent amount.
9. For DvP transactions, if the payments have not yet taken place 5 business days
after the settlement date, an FI must calculate a capital requirement by
multiplying the positive current exposure of the transaction by the appropriate
factor, according to the table below:
10. For non-DvP transactions (i.e. free deliveries), after the first contractual
payment/delivery leg, the FI that has made the payment will treat its exposure
as a financing if the second leg has not been received by the end of the
business day 100. This means that:
(a) for counterparties to which the FI applies the Standardised Approach to
credit risk, the FI will use the risk weight applicable to the counterparty
set out in Part E Individual Exposures; and
(b) for counterparties to which the FI applies the Internal Ratings-Based
(IRB) approach to credit risk, the FI will apply the appropriate IRB
formula (set out in the CAF (RWA) PD and CAFIB (RWA) PD) applicable
to the counterparty. When applying this requirement, if the FI has no
other banking book exposures to the counterparty (that are subject to
100 If the dates when two payment legs are made are the same according to the time zones where
each payment is made, it is deemed that they are settled on the same day. For example, if a bank
in Tokyo transfers Yen on day X (Japan Standard Time) and receives corresponding US Dollar via
the Clearing House Interbank Payments System on day X (US Eastern Standard Time), the
settlement is deemed to take place on the same value date.
12. If the second leg has not yet effectively taken place 5 business days after the
second contractual payment/delivery date, the FI that has made the first
payment leg must risk weight the full amount of the value transferred plus
replacement cost, if any, at 1250%. This treatment will apply until the second
payment/delivery leg is effectively made.
13. The CRR aims to measure the amount necessary to accommodate a given
level of a counterparty risk 101 specifically for unsettled trades 102 and free
deliveries with respect to a licensed investment bank’s equity business. The
CRR capital charge (as stated in the table on the next page) will be multiplied
by a factor of 12.5 to arrive at the CRR risk weighted asset amount.
101 Counterparty risk means the risk of a counterparty defaulting on its financial obligation to the banking
institution.
102 An unsettled agency purchase/sale or an unsettled principal sale/purchase.
103 Where a licensed investment bank delivers equities without receiving payment, or pays for equities
without receiving the equities.
104 Due date where the licensed investment bank delivers equities without receiving payment shall be
the date of such delivery, and where the licensed investment bank pays for equities without
receiving the equities, shall be the date of such payment.
The capital treatment for exposures from SBBA and reverse SBBA transactions under
the banking book is provided below:
Counterparty credit risk in the forward Note: The ‘positive MTM’ amount
purchase transaction refers to the difference between
Credit RWA = Credit equivalent the underlying asset market value
amount (derived from the Current and forward sale transaction value,
Exposure Method) x risk weight of where the underlying asset market
counterparty. value < the forward sale
transaction value.
Note: The ‘positive MTM’ amount refers to
the difference between the underlying
asset market value and forward purchase
transaction value, where the underlying
asset market value > the forward
purchase transaction value.
The underpinning basis for the capital treatment for SBBA and reverse SBBA
transactions is the risk profile of the underlying transactions i.e. outright sale/buy
contract as well as forward transactions as wa’d (promise) to buyback/sellback.
Hence, while SBBA and reverse SBBA are not securities financing transactions, the
treatment prescribed for securities financing transactions (e.g. requirements on
maturity and floor) is also applicable to SBBA and reverse SBBA except for treatment
on CRM 106).
105 In addition to the capital charge applied here, if an arrangement that could effectively transfer the
risk back to the SBBA seller is not legally binding, the SBBA buyer is required to provide for credit
risk charge of the underlying asset.
106 Refer to Part G.
General Criteria
1. An FI may recognise physical assets as eligible collateral for CRM purposes for
Islamic banking exposures, subject to fulfilling all the minimum requirements
specified in this Appendix and obtaining prior approval from the Board. In
addition, FIs are required to notify the Bank in writing two months in advance of
any recognition.
2. An FI shall only recognise completed physical assets for their intended use and
such assets must fulfil the following minimum conditions for recognition as
eligible collateral:
(a) assets are legally owned by the FI. For Ijarah contracts, these are
restricted to operating Ijarah only, where related costs of asset
ownership are borne by the FI 107; or
(b) the physical assets attract capital charges other than credit risk prior
to/and throughout the financing period (e.g. operating Ijarah and
inventories 108 under Murabahah).
Specific Criteria
Commercial real estate (CRE) and residential real estate (RRE)
3. For purposes of Appendix 8, eligible CRE or RRE collateral is defined as:
(a) collateral where risk of the obligor is not materially dependent upon the
performance of the underlying property or project, but rather on the
underlying capacity of the obligor to repay the debt from other sources.
As such, repayment of the facility is not materially dependent on any
cash flow generated by the underlying CRE/RRE serving as collateral;
and
(b) the value of the collateral pledged must not be materially dependent on
the performance of the obligor. This requirement is not intended to
preclude situations where purely macro-economic factors affect both the
value of the collateral and the performance of the obligor.
4. Subject to meeting the definition above, an FI shall only treat CRE and RRE
collateral as eligible for recognition as CRM under the comprehensive
approach, if the CRE and RRE collateral meet the following requirements:
(a) legal enforceability: any claim on collateral taken must be legally
enforceable in all relevant jurisdictions, and any claim on collateral must
be properly filed on a timely basis. Collateral interests must reflect a
perfected lien (i.e. all legal requirements for establishing the claim has
107 Shariah requires that the lessor/ owner bears the costs related to the ownership of or any other costs
as agreed between the lessor and the lessee.
108 This excludes inventories which are merely used as a ‘pass-through’ mechanism such as in
(b) existence of well established, publicly available market prices for the
collateral. The amount an FI receives when collateral is realised shall not
deviate significantly from these market prices.
Leased assets
7. An FI may recognise assets used in operating Ijarah and Ijarah Muntahia
Bittamleek (IMB) (leased assets) as eligible collateral and used as credit risk
mitigation under the comprehensive approach for collateralised transactions,
provided they meet the additional conditions under paragraph 8 of this
Appendix.
10. An FI shall use relevant data to verify the appropriateness of the minimum 30%
haircut on physical assets particularly non-CRE and non-RRE collateral at least
on an annual basis. FIs shall use a more stringent haircut if their internal
historical data on disposal of these physical assets reveal loss amounts that
exceed the 30% haircut.
11. In addition, for the regulatory retail portfolio, an FI is required to have at least
two years of empirical evidence on data such as recovery rates and value of
physical collateral prior to its recognition as a credit risk mitigant.
Independent review
12. An FI is required to conduct an independent review 110 to ascertain compliance
with all minimum requirements specified in this framework for the purpose of
recognising physical collateral as a credit risk mitigant. The review shall be
performed prior to the recognition of the physical collateral as a credit risk
mitigant and at least annually thereafter to ensure on-going fulfilment of all
criteria and operational requirements.
110 Validation must be performed by a unit that is independent from risk taking/ business units.
Originator/
Lessee SPV Sukuk holders
Sukuk holders
Originator SPV
Scope
3. An FI that borrows (or lends) securities are exempted from the haircut floors on
collateral upgrade transactions if the recipient of the securities that the FI has
delivered as collateral (or lent) is either –
(a) unable to re-use the securities; or
(b) provides representations to the FI that they do not and will not re-use the
securities.
111 Financial Stability Board, Strengthening oversight and regulation of shadow banking, Policy
framework for addressing shadow banking risks in securities lending and repos, 29 August 2013,
www.fsb.org/wp-content/uploads/r_130829b.pdf.
Haircut floors
4. An FI shall refer to the following table for the haircut floors for in-scope SFTs
(referred to in paragraphs 1 to 3 of this Appendix):
Haircut level
Residual maturity of collateral Corporate and Securities
other issuers products
≤ 1 year debt securities, and floating rate
0.5% 1%
notes
> 1 year, ≤ 5 years debt securities 1.5% 4%
> 5 years, ≤ 10 years debt securities 3% 6%
> 10 years debt securities 4% 7%
Main index equities 6%
Other assets within the scope of the
10%
framework
5. An FI shall treat SFTs that do not meet the haircut floors as unsecured
financing. In determining whether the treatment applies to an in-scope SFT, an
FI must compare the collateral haircut H and a haircut floor f.
6. An FI shall compute the values of H and f for single in-scope SFT not included
in a netting set as follows:
(a) For a single cash-lent-for-collateral SFT, H and f are known since H is
simply defined by the amount of collateral received and f is defined in
paragraph 4 of this Appendix. For the purpose of this calculation,
collateral that is called by either counterparty can be treated collateral
received from the moment that it is called (i.e. the treatment is
independent of the settlement period).
Therefore, the SFT does not meet the haircut floor and must be treated
as unsecured financing as per paragraph 5 of this Appendix.
1 1 1+ 𝑓𝑓𝐵𝐵
f = ��1+𝑓𝑓 ���1+𝑓𝑓 �� − 1 = −1
𝐴𝐴 𝐵𝐵 1+ 𝑓𝑓𝐴𝐴
1+6%
f = 1+3% − 1 = 2.91%
Therefore, the SFT does not meet the haircut floor and must be treated
as unsecured financing as per paragraph 5 of this Appendix.
𝐸𝐸𝑠𝑠 𝐶𝐶𝑡𝑡
∑𝑠𝑠� � ∑𝑡𝑡� �
1+ 𝑓𝑓𝑠𝑠 1+𝑓𝑓𝑡𝑡
fportfolio = �� ∑𝑠𝑠 𝐸𝐸𝑠𝑠
��� ∑𝑡𝑡 𝐶𝐶𝑡𝑡
�� − 1
Where –
Es = the net position in each security (or cash) s that is net lent
fs = the haircut floors for the securities that are net lent
ft = the haircut floors for the securities that are net borrowed
(c) If the portfolio haircut does breach the floor, then the netting set of SFTs
must be treated as unsecured financing. This treatment shall be applied
to all trades for which the security received appears in the table in
paragraph 4 of this Appendix and for which, within the netting set, the FI
is also a net receiver in that security. For the purposes of this calculation,
collateral that is called by either counterparty can be treated collateral
received from the moment that it is called (i.e. the treatment is
independent of the settlement period).
𝐸𝐸𝑠𝑠 𝐶𝐶𝑡𝑡
∑𝑠𝑠� � ∑𝑡𝑡� �
1+ 𝑓𝑓𝑠𝑠 1+𝑓𝑓𝑡𝑡
fportfolio = �� ∑𝑠𝑠 𝐸𝐸𝑠𝑠
��� ∑𝑡𝑡 𝐶𝐶𝑡𝑡
�� − 1 -0.00023
∑ 𝐶𝐶𝑡𝑡 − ∑ 𝐸𝐸𝑠𝑠
0
∑ 𝐸𝐸𝑠𝑠
The portfolio does not breach the floor as per paragraph 7 of this Appendix.