Capital Adequacy Requirements (CAR) Chapter 3 – Credit Risk

Securities lending; 3.1.15. Claims secured by commercial real estate; 3.1.16. Past due loans; 3.1.17. Higher-risk categories; 3.1.18. Skiptomaincontent Skiptosecondarymenu CapitalAdequacyRequirements(CAR)Chapter3–CreditRisk–StandardizedApproach PageContent AlternativeFormats PDF,777Kb AccompanyingDocuments GIAS-Apr.2018 GIAS-Nov.2017 Letter-Apr.2018 Letter-Nov.2017 Chapters Chapter1 Chapter2 Chapter4 Chapter5 Chapter6 Chapter7 Chapter8 Chapter9 RelatedDocuments NewsRelease TotalLossAbsorbingCapacityGuideline ImplementationNotes Approvals Revisionstothecapitalfloor DocumentProperties TypeofPublication:Guideline EffectiveDate:November2017/January2018Footnote1 Audiences:Banks/BHC/T&L/CRA TheCapitalAdequacyRequirements(CAR)forbanks(includingfederalcreditunions),bankholdingcompanies,federallyregulatedtrustcompanies,federallyregulatedloancompaniesandcooperativeretailassociationsaresetoutinninechapters,eachofwhichhasbeenissuedasaseparatedocument.Thisdocument,Chapter3–CreditRisk–StandardizedApproach,shouldbereadinconjunctionwiththeotherCARchapterswhichinclude: Chapter1-Overview Chapter2-DefinitionofCapital Chapter3-CreditRisk–StandardizedApproach Chapter4-SettlementandCounterpartyRisk Chapter5-CreditRiskMitigation Chapter6-CreditRisk-InternalRatingsBasedApproach Chapter7-StructuredCreditProducts Chapter8-OperationalRisk Chapter9-MarketRisk TableofContents 3.1.RiskWeightCategories 3.1.1.Claimsonsovereigns 3.1.2.Claimsonunratedsovereigns 3.1.3.Claimsonnon-centralgovernmentpublicsectorentities(PSEs) 3.1.4.Claimsonmultilateraldevelopmentbanks(MDBs) 3.1.5.Claimsondeposittakinginstitutionsandbanks 3.1.6.Claimsonsecuritiesfirms 3.1.7.Claimsoncorporates 3.1.8.Claimsincludedintheregulatoryretailportfolios 3.1.9.Claimssecuredbyresidentialproperty 3.1.10.Reversemortgages 3.1.11.Mortgage-backedsecurities 3.1.12.Pass-throughtypemortgage-backedsecurities 3.1.13.Repurchaseandreverserepurchaseagreements 3.1.14.Securitieslending 3.1.15.Claimssecuredbycommercialrealestate 3.1.16.Pastdueloans 3.1.17.Higher-riskcategories 3.1.18.EquityInvestmentsinFunds 3.1.19.Otherassets 3.1.20.Treatmentofpurchasedreceivables 3.2.Categoriesofoff-balancesheetinstruments 3.2.1.Directcreditsubstitutes 3.2.2.Transaction-relatedcontingencies 3.2.3.Trade-relatedcontingencies 3.2.4.SaleandRepurchaseAgreements 3.2.5.ForwardAssetPurchases 3.2.6.Forward/ForwardDeposits 3.2.7.PartlyPaidSharesandSecurities 3.2.8.NoteIssuance/RevolvingUnderwritingFacilities 3.2.9.Future/ForwardRateAgreements 3.2.10.InterestRateSwaps 3.2.11.InterestRateOptionsandCurrencyOptions 3.2.12.ForwardForeignExchangeContracts 3.2.13.CrossCurrencySwaps 3.2.14.CrossCurrencyInterestRateSwaps 3.2.15.FinancialandForeignCurrencyFutures 3.2.16.PreciousMetalsContractsandFinancialContractsonCommodities 3.2.17.Non-equityWarrants 3.3.Creditconversionfactors 3.4.Forwards,swaps,purchasedoptionsandothersimilarderivativecontracts 3.4.1.Interestratecontracts 3.4.2.Foreignexchangeratecontracts 3.4.3.Equitycontracts 3.4.4.Preciousmetals(i.e.,silver,platinum,andpalladium)contracts 3.4.5.Contractsonothercommodities 3.5.Commitments 3.5.1.Creditconversionfactors 3.5.2.Maturity 3.5.3.Specifictypesofcommitments 3.6.Externalcreditassessmentsandthemappingprocess 3.6.1.Externalcreditassessments 3.6.2.Implementationconsiderations Chapter3-CreditRisk–StandardizedApproach ThischapterisdrawnfromtheBaselCommitteeonBankingSupervision’s(BCBS)BaselIIandIIIframeworks,InternationalConvergenceofCapitalMeasurementandCapitalStandards–June2006andBaselIII:Aglobalregulatoryframeworkformoreresilientbanksandbankingsystems–December2010(revJune2011).Forreference,theBaselIItextparagraphnumbersthatareassociatedwiththetextappearinginthischapterareindicatedinsquarebracketsattheendofeachparagraphFootnote2. Notethatallexposuressubjecttothestandardizedapproachshouldberisk-weightednetofspecificallowancesFootnote3. 3.1.RiskWeightCategories Theriskweightcategoriesapplytoon-balancesheetandoff-balancesheetcreditequivalentamountswiththeexceptionofitemsthataredeductedfromcapitalasregulatoryadjustmentspursuanttosection2.3ofChapter2–DefinitionofCapital. Individualclaims 3.1.1.Claimsonsovereigns Claimsonsovereignsandtheircentralbanksareriskweightedasfollows: CreditAssessmentFootnote4 AAAtoAA- A+toA- BBB+toBBB- BB+toB- BelowB- Unrated RiskWeight 0% 20% 50% 100% 150% 100% [BCBSJune2006par53] Nationalsupervisorsmayallowalowerriskweighttobeappliedtobanks’exposurestotheirsovereign(orcentralbank)ofincorporationdenominatedindomesticcurrencyandfundedFootnote5inthatcurrency.Footnote6InstitutionsoperatinginCanadathathaveexposurestosovereignsmeetingtheabovecriteriamayusethepreferentialriskweightassignedtothosesovereignsbytheirnationalsupervisors.[BCBSJune2006par54] 3.1.2.Claimsonunratedsovereigns Forclaimsonsovereignsthatareunrated,institutionsmayusecountryriskscoresassignedbyExportCreditAgencies(ECAs).ConsensusriskscoresassignedbyECAsparticipatinginthe“ArrangementonOfficiallySupportedExportCredits”andavailableontheOECDwebsiteFootnote7,correspondtoriskweightsasfollows: ECAriskscores 0-1 2 3 4to6 7 Riskweight 0% 20% 50% 100% 150% [BCBSJune2006par55] ClaimsontheBankforInternationalSettlements,theInternationalMonetaryFund,theEuropeanCentralBank,theEuropeanCommunity,EuropeanStabilityMechanismandtheEuropeanFinancialStabilityFacilityreceivea0%riskweight.[BCBSJune2006par56,BCBSnl17Footnote8,March2014)] 3.1.3.Claimsonnon-centralgovernmentpublicsectorentities(PSEs) PSEsaredefinedas: entitiesdirectlyandwholly-ownedbyagovernment, schoolboards,hospitals,universitiesandsocialserviceprogramsthatreceiveregulargovernmentfinancialsupport,and municipalities. [BCBSJune2006par58] ClaimsonPSEsreceiveariskweightthatisonecategoryhigherthanthesovereignriskweight: CreditAssessmentofsovereign AAAtoAA- A+toA- BBB+toBBB- BB+toB- BelowB- Unrated SovereignRiskWeight 0% 20% 50% 100% 150% 100% PSEriskweight 20% 50% 100% 100% 150% 100% [BCBSJune2006par57] Therearetwoexceptionstotheabove: ClaimsonthefollowingentitieswillreceivethesameriskweightastheGovernmentofCanada: Allprovincialandterritorialgovernmentsandagentsofthefederal,provincialorterritorialgovernmentwhosedebtsare,byvirtueoftheirenablinglegislation,obligationsoftheparentgovernment Claimsonthefollowingentitieswillbetreatedlikeclaimsoncorporates: Entitiesthatare,inthejudgementofthehostgovernment,significantlyincompetitionwiththeprivatesector.InstitutionsshouldlooktothehostgovernmenttoconfirmwhetheranentityisaPSEincompetitionwiththeprivatesector. [BCBSJune2006par58] ThePSEriskweightismeantforthefinancingofthePSE’sownmunicipalandpublicservices.WherePSEsotherthanCanadianprovincialorterritorialgovernmentsprovideguaranteesorothersupportarrangementsotherthaninrespectofthefinancingoftheirownmunicipalorpublicservices,thePSEriskweightmaynotbeused. PSEsinforeignjurisdictionsshouldbegiventhesamecapitaltreatmentasthatappliedbythenationalsupervisorinthejurisdictionoforigin. 3.1.4.Claimsonmultilateraldevelopmentbanks(MDBs) ClaimsonMDBsthatmeetthefollowingcriteriareceiveariskweightof0%: veryhighqualitylong-termissuerratings,i.e.amajorityofanMDB’sexternalassessmentsmustbeAAA, shareholderstructureiscomprisedofasignificantproportionofsovereignswithlong-termissuercreditassessmentsofAA-orbetter,orthemajorityoftheMDB’sfund-raisingisintheformofpaid-inequity/capitalandthereislittleornoleverage, strongshareholdersupportdemonstratedbytheamountofpaid-incapitalcontributedbytheshareholders;theamountoffurthercapitaltheMDBshavetherighttocall,ifrequired,torepaytheirliabilities;andcontinuedcapitalcontributionsandnewpledgesfromsovereignshareholders, adequatelevelofcapitalandliquidity(acase-by-caseapproachisnecessaryinordertoassesswhethereachMDB’scapitalandliquidityareadequate),and strictstatutorylendingrequirementsandconservativefinancialpolicies,whichwouldincludeamongotherconditionsastructuredapprovalprocess,internalcreditworthinessandriskconcentrationlimits(percountry,sector,andindividualexposureandcreditcategory),largeexposuresapprovalbytheboardoracommitteeoftheboard,fixedrepaymentschedules,effectivemonitoringofuseofproceeds,statusreviewprocess,andrigorousassessmentofriskandprovisioningtoloanlossreserve. [BCBSJune2006par59] MDBscurrentlyeligiblefor0%riskweightare: InternationalBankforReconstructionandDevelopment(IBRD) InternationalFinanceCorporation(IFC) AsianDevelopmentBank(ADB) AfricanDevelopmentBank(AfDB) EuropeanBankforReconstructionandDevelopment(EBRD) Inter-AmericanDevelopmentBank(IADB) EuropeanInvestmentBank(EIB) EuropeanInvestmentFund(EIF) NordicInvestmentBank(NIB) CaribbeanDevelopmentBank(CDB) IslamicDevelopmentBank(IDB) CouncilofEuropeDevelopmentBank(CEDB) MultilateralInvestmentGuaranteeAgency(MIGA) InternationalDevelopmentAgency(IDA) InternationalFinanceFacilityforImmunisation(IFFIm) [BCBSJune2006par59,BCBSnl19,Nov2016Footnote9)] Otherwise,thefollowingriskweightsapply: CreditassessmentofMDBs AAAtoAA- A+toA- BBB+toBBB- BB+toB- BelowB- Unrated Riskweight 20% 50% 50% 100% 150% 50% 3.1.5.Claimsondeposittakinginstitutionsandbanks Canadiandeposittakinginstitutions(DTIs)includefederallyandprovinciallyregulatedinstitutionsthattakedepositsandlendmoney.Theseincludebanks,trustorloancompaniesandco-operativecreditsocieties. Thetermbankreferstothoseinstitutionsthatareregardedasbanksinthecountriesinwhichtheyareincorporatedandsupervisedbytheappropriatebankingsupervisoryormonetaryauthority.Ingeneral,bankswillengageinthebusinessofbankingandhavethepowertoacceptdepositsintheregularcourseofbusiness. ForbanksincorporatedincountriesotherthanCanada,thedefinitionofbankwillbethatusedinthecapitaladequacyregulationsofthehostjurisdiction. Theriskweightappliedtoaclaimonabankisdependentonthecreditassessmentofthesovereigninthebank’scountryofincorporation.Thebankriskweightisonenotchlessfavourablethanthatwhichappliestoitssovereignofincorporation.ThefollowingriskweightsapplytoclaimsonDTIsandbanks: CreditassessmentofSovereign AAAtoAA- A+toA- BBB+toBBB- BB+toB- BelowB- Unrated DTI/bankriskweight 20% 50% 100% 100% 150% 100% [BCBSJune2006par63] ClaimsonparentsofDTIsthatarenon-financialinstitutionsaretreatedascorporateexposures. 3.1.6.Claimsonsecuritiesfirms ClaimsonsecuritiesfirmsmaybetreatedasclaimsonbanksprovidedthesefirmsaresubjecttosupervisoryandregulatoryarrangementscomparabletothoseunderBaselIIframework(including,inparticular,risk-basedcapitalrequirements).Footnote10Otherwise,suchclaimswouldfollowtherulesforclaimsoncorporates.[BCBSJune2006par65] 3.1.7.Claimsoncorporates Thetableprovidedbelowillustratestheriskweightingofratedcorporateclaims,includingclaimsoninsurancecompanies.Thestandardriskweightforunratedclaimsoncorporateswillbe100%.Noclaimonanunratedcorporatemaybegivenariskweightpreferentialtothatassignedtoitssovereignofincorporation. CreditassessmentofCorporate AAAtoAA- A+toA- BBB+toBB- BelowBB- Unrated Riskweight 20% 50% 100% 150% 100% [BCBSJune2006par66] Institutionsmaychoosetoapplya100%riskweighttoallcorporateexposures,withpriorsupervisoryapprovalfromOSFI.However,ifaninstitutionchoosestoadoptthisoption,itmustusethe100%riskweightforallofitscorporateexposures.[BCBSJune2006par68] 3.1.8.Claimsincludedintheregulatoryretailportfolios Retailclaimsarerisk-weightedat75%.[BCBSJune2006par69] Tobeincludedintheregulatoryretailportfolio,claimsmustmeetthefollowingfourcriteria: Orientationcriterion theexposureistoanindividualpersonorpersonsortoasmallbusiness. Productcriterion theexposuretakestheformofanyofthefollowing:revolvingcreditsandlinesofcredit(includingcreditcardsandoverdrafts),personaltermloansandleases(e.g.instalmentloans,autoloansandleases,studentandeducationalloans,personalfinance)andsmallbusinessfacilitiesandcommitments.Securities(suchasbondsandequities),whetherlistedornot,arespecificallyexcludedfromthiscategory.Mortgageloansareexcludedtotheextentthattheyqualifyfortreatmentasclaimssecuredbyresidentialproperty. Granularitycriterion thesupervisormustbesatisfiedthattheregulatoryretailportfolioissufficientlydiversifiedtoadegreethatreducestherisksintheportfolio,warrantingthe75%riskweight. Lowvalueofindividualexposures themaximumaggregatedretailexposuretoonecounterpartcannotexceedanabsolutethresholdofCAD$1.25million.Smallbusinessloansextendedthroughorguaranteedbyanindividualaresubjecttothesameexposurethreshold. [BCBSJune2006par70] Residentialconstructionloansmeetingtheabovecriteriaarerisk-weightedat75%.Residentialconstructionloansthatdonotmeettheabovecriteriamustbetreatedasacorporateexposuresubjecttotheriskweightsinsection3.1.7. 3.1.9.Claimssecuredbyresidentialproperty Mortgagesonresidentialpropertythatisorwillbeoccupiedbytheborrower,orthatisrented,areriskweightedat35%.[BCBSJune2006par72] Qualifyingresidentialmortgagesinclude: loanssecuredbyfirstmortgagesonindividualcondominiumresidencesandone-to four-unitresidencesmadetoaperson(s)orguaranteedbyaperson(s),providedthat suchloansarenot90daysormorepastdueanddonotexceedaloan-to-valueratio of80%Footnote11,and collateralmortgages(firstandjunior)onindividualcondominiumresidencesor one-tofour-unitresidentialdwellings,providedthatsuchloansaremadetoa person(s)orguaranteedbyaperson(s),wherenootherpartyholdsasenioror interveninglienonthepropertytowhichthecollateralmortgageappliesandsuch loansarenotmorethan90dayspastdueanddonot,collectively,exceedaloan-to-value ratioof80%Footnote12. Investmentsinhotelpropertiesandtime-sharesareexcludedfromthedefinitionofqualifyingresidentialproperty. Uninsuredcollateralmortgagesthatwouldotherwisequalifyasresidentialmortgages,exceptthattheirloan-to-valueratioexceeds80%,receiveariskweightof75%. Residentialmortgagesareriskweightedaccordingtotherequirementsandriskweightsinparagraphs27to30.MortgageinsuranceinCanadaisconsideredaguaranteeandinstitutionsmayrecognizetherisk-mitigatingeffectoftheguaranteewheretheoperationalrequirementsincludedinChapter5forguaranteesaswellastheadditionaloperationalrequirementsformortgageinsurancearemet.Theriskweightappliedtotheinsuredmortgageaftertherecognitionoftheguaranteewillbecalculatedaccordingtoparagraph86ofChapter5. 3.1.10.Reversemortgages TheStandardizedApproachmustbeusedforreversemortgageexposures.Reversemortgagesarenon-recourseloanssecuredbypropertythathavenodefinedtermandnomonthlyrepaymentofprincipalandinterest.Theamountowingonareversemortgagegrowswithtimeasinterestisaccruedanddeferred.Theloanisgenerallyrepaidfromthenetproceedsofthesale(i.e.netofdispositioncosts)aftertheborrowerhasvacatedtheproperty.Reversemortgagelendersarerepaidthelesserofthefairmarketvalueofthehome(lessdispositioncosts)atthetimeitissoldandtheamountoftheloan.Assumingthereisnoeventofdefault(forexample,failuretopaypropertytaxesandinsurance,orfailuretokeepthehomeinagoodstateofrepair),reversemortgagelendershavenorecoursetotheborroweriftheamountrealizedonthesaleofthehomeislessthantheamountowingonthereversemortgage. AreversemortgageexposureFootnote13qualifiesfora35%riskweightprovidedthatallofthefollowingconditionsaremet: itsinitialloantovalueratio(LTV)islessthanorequalto40% itscurrentLTVislessthanorequalto60% dispositioncostsonthemortgagedpropertyandriskofappraisalerrorarenotexpectedtoexceed15%-20%ofthecurrentappraisedvalue thecriteriaforqualifyingresidentialmortgagessetoutinsection3.1.9oftheCARguidelinearemet(exceptthatthereisnorequirementforrecoursetotheborrowerforadeficiency) Further,forareversemortgagetoqualifyfora35%riskweight,theunderwritinginstitutionmusthave,atmortgageinceptionandatthetimesuchriskweightisbeingconsidered,eachofthefollowing: documentedandprudentunderwritingstandards,includingsystematicmethodsforestimatingexpectedoccupancyterm(whichshouldatminimumrefertostandardmortalitytables),futurerealestateappreciation/depreciation,futureinterestratesonthereversemortgageanddeterminingappropriatelevelsformaximuminitialLTVsandamaximumdollaramountthatmaybelent documentedproceduresformonitoringloantovalueratiosonanongoingbasis,basedonoutstandingloanamounts,includingaccruedinterest,undrawnbalancesanduptodatepropertyvalues documentedproceduresforobtainingindependentreappraisalsofthepropertiesatregularintervals,notlessthanonceeveryfiveyears,withmorefrequentappraisalsasloantovalueratiosapproach80% adocumentedprocesstoensuretimelyreappraisalofpropertiesinamajorurbancentrewhereresalehomepricesinthaturbancentredeclinebymorethan10% documentedproceduresforensuringthatborrowersremainincompliancewithloanconditions arigorousmethodforstresstestingthereversemortgageportfoliothataddressesexpectedoccupancy,propertyvalueandinterestrateassumptions ongoingmonitoringofreversemortgagestresstestingthatisincorporatedintheinstitution’sPillarIIInternalCapitalAdequacyAssessmentandcapitalplanningprocesses Forpurposesofcalculatingriskweightedassets,currentLTVisdefinedas: thereversemortgageexposure(asdefinedinthefootnote)dividedby: wherethemostrecentappraisalisgreaterthantheoriginalappraisal,thegreateroftheoriginalappraisedvalueor80%ofthemostrecentappraisedvalueoftheproperty, OR wherethemostrecentappraisalislessthantheoriginalappraisal,themostrecentappraisedvalueoftheproperty. Thefollowingtablesetsouttheriskweightsthatapplytoreversemortgageexposures: InitialLTV CurrentLTV RiskWeight ≤40% and ≤60% 35% >40% and ≤60% 50% >60%and≤75% 75% >75%and≤85% 100% >85% Partialdeduction Inparticular: Areversemortgageexposurethatoriginallyqualifiedfora35%riskweightbutnowhasacurrentLTVthatisgreaterthan60%,butlessthanorequalto75%,isriskweightedat75%. AreversemortgageexposurethathadaninitialLTVgreaterthan40%(butthatotherwisewouldhavequalifiedfora35%riskweight)isriskweightedat50%,provideditscurrentloantovalueratioislessthanorequalto60%. AllreversemortgageexposureswithcurrentLTVsgreaterthan60%andlessthanorequalto75%,exceptthosethatcouldnot(regardlessoforiginalLTV)qualifyforthe35%or50%riskweightareriskweightedat75%. AllreversemortgageexposureswithcurrentLTVsgreaterthan75%andlessthanorequalto85%,andallreversemortgagesthatcouldnot(regardlessoftheoriginalLTV)qualifyfora35%or50%riskweightandwhichhaveacurrentLTVlessthanorequalto85%,areriskweightedat100%. WhereareversemortgageexposurehasacurrentLTVgreaterthan85%,theexposureamountthatexceeds85%LTVisdeductedfromcapital.Theremainingamountisrisk-weightedat100%. 3.1.11.Mortgage-backedsecurities 0%Riskweight NHAmortgage-backedsecuritiesthatareguaranteedbytheCanadaMortgageandHousingCorporation(CMHC),inrecognitionofthefactthatobligationsincurredbyCMHCarelegalobligationsoftheGovernmentofCanada. 35%Riskweight Pass-throughmortgage-backedsecuritiesthatarefullyandspecificallysecuredagainstqualifyingresidentialmortgages(see3.1.9.). 100%Riskweight amountsreceivableresultingfromthesaleofmortgagesunderNHAmortgage-backedsecuritiesprograms. 3.1.12.Pass-throughtypemortgage-backedsecurities Mortgage-backedsecuritiesthatareofpass-throughtypeandareeffectivelyadirectholdingoftheunderlyingassetsshallreceivetherisk-weightoftheunderlyingassets,providedthatallthefollowingconditionsaremet: Theunderlyingmortgagepoolcontainsonlymortgagesthatarefullyperformingwhenthemortgage-backedsecurityiscreated. Thesecuritiesmustabsorbtheirpro-ratashareofanylossesincurred. Aspecial-purposevehicleshouldbeestablishedforsecuritizationandadministrationofthepooledmortgageloans. Theunderlyingmortgagesareassignedtoanindependentthirdpartyforthebenefitoftheinvestorsinthesecuritieswhowillthenowntheunderlyingmortgages. Thearrangementsforthespecial-purposevehicleandtrusteemustprovidethatthefollowingobligationsareobserved: Ifamortgageadministratororamortgageservicerisemployedtocarryoutadministrationfunctions,thevehicleandtrusteemustmonitortheperformanceoftheadministratororservicer. Thevehicleand/ortrusteemustprovidedetailedandregularinformationonstructureandperformanceofthepooledmortgageloans. Thevehicleandtrusteemustbelegallyseparatefromtheoriginatorofthepooledmortgageloans. Thevehicleandtrusteemustberesponsibleforanydamageorlosstoinvestorscreatedbytheirownortheirmortgageservicer’smismanagementofthepooledmortgages. Thetrusteemusthaveafirstprioritychargeonunderlyingassetsonbehalfoftheholdersofthesecurities. Theagreementmustprovideforthetrusteetotakeclearlyspecifiedstepsincaseswhenthemortgagordefaults. Theholderofthesecuritymusthaveapro-ratashareintheunderlyingmortgageassetsorthevehiclethatissuesthesecuritymusthaveonlyliabilitiesrelatedtotheissuingofthemortgage-backedsecurity. Thecashflowsoftheunderlyingmortgagesmustmeetthecashflowrequirementsofthesecuritywithoutunduerelianceonanyreinvestmentincome. Thevehicleortrusteemayinvestcashflowspendingdistributiontoinvestorsonlyinshort-termmoneymarketinstruments(withoutanymaterialreinvestmentrisk)orinnewmortgageloans. Mortgage-backedsecuritiesthatdonotmeettheseconditionswillreceivearisk-weightof100%.Strippedmortgage-backedsecuritiesordifferentclassesofsecurities(senior/juniordebt,residualtranches)thatbearmorethantheirpro-ratashareoflosseswillautomaticallyreceivea100%riskweight. Wheretheunderlyingpoolofassetsiscomprisedofassetsthatwouldattractdifferentriskweights,theriskweightofthesecuritieswillbethehighestriskweightassociatedwithrisk-weightedassets. Forthetreatmentofmortgage-backedsecuritiesissuedintranches,refertochapter7,StructuredProducts. 3.1.13.Repurchaseandreverserepurchaseagreements Asecuritiesrepurchase(repo)isanagreementwherebyatransferoragreestosellsecuritiesataspecifiedpriceandrepurchasethesecuritiesonaspecifieddateandataspecifiedprice.Sincethetransactionisregardedasafinancingforaccountingpurposes,thesecuritiesremainonthebalancesheet.Giventhatthesesecuritiesaretemporarilyassignedtoanotherparty,therisk-weightedassetsassociatedwiththisexposureshouldbethehigherofrisk-weightedassetscalculatedusing: theriskweightofthesecurity,or theriskweightofthecounterpartytothetransaction,recognizinganyeligiblecollateral;seeChapter5. Areverserepurchaseagreementistheoppositeofarepurchaseagreement,andinvolvesthepurchaseandsubsequentresaleofasecurity.Reversereposaretreatedascollateralisedloans,reflectingtheeconomicrealityofthetransaction.Theriskisthereforetobemeasuredasanexposuretothecounterparty.Iftheassettemporarilyacquiredisasecuritythatqualifiesaseligiblecollateralperchapter5,therisk-weightedexposuremaybereducedaccordingly. 3.1.14.Securitieslending Insecuritieslending,institutionscanactasaprincipaltothetransactionbylendingtheirownsecuritiesorasanagentbylendingsecuritiesonbehalfoftheirclients. Whentheinstitutionlendsitsownsecurities,thecreditriskisbasedonthehigherof: thecreditriskoftheinstrumentlent,and thecounterpartycreditriskoftheborrowerofthesecurities.Thisriskcouldbereducediftheinstitutionheldeligiblecollateral(refertochapter5).Wheretheinstitutionlendssecuritiesthroughanagentandreceivesanexplicitguaranteeofthereturnofthesecurities,theinstitution’scounterpartyistheagent. Whentheinstitution,actingasagent,lendssecuritiesonbehalfoftheclientandguaranteesthatthesecuritieslentwillbereturnedortheinstitutionwillreimbursetheclientforthecurrentmarketvalue,thecreditriskisbasedonthecounterpartycreditriskoftheborrowerofthesecurities.Thisriskcouldbereducediftheinstitutionheldeligiblecollateral(seechapter5). 3.1.15.Claimssecuredbycommercialrealestate Commercialmortgagesarerisk-weightedat100%. 3.1.16.Pastdueloans Theunsecuredportionofanyloan(otherthanaqualifyingresidentialmortgageloan)thatispastdueformorethan90days,netofspecificFootnote14allowances,willberisk-weightedasfollows: 150%riskweightwhenspecificallowancesarelessthan20%oftheoutstandingamountoftheloan. 100%riskweightwhenspecificallowancesaremorethan20%andlessthan100%oftheoutstandingamountoftheloan. [BCBSJune2006par75] Forthepurposeofdefiningthesecuredportionofthepastdueloan,eligiblecollateralandguaranteeswillbethesameasforcreditriskmitigationpurposes(seechapter5).Forrisk-weightingpurposes,pastdueretailloansaretobeexcludedfromtheoverallregulatoryretailportfoliowhenassessingthegranularitycriterionspecifiedin3.1.8.[BCBSJune2006par76] Qualifyingresidentialmortgageloansthatarepastdueformorethan90dayswillberiskweightedat100%,netofspecificallowances.[BCBSJune2006par78] 3.1.17.Higher-riskcategories Thefollowingclaimswillberiskweightedat150%orhigher: claimsonsovereigns,PSEs,banks,andsecuritiesfirmsratedbelowB-, claimsoncorporatesratedbelowBB-, pastdueloansassetoutabove,and securitisationtranchesthatareratedbetweenBB+andBB-willberiskweightedat350%assetoutinChapter7–StructuredCreditProducts,paragraph56. [BCBSJune2006par79] 3.1.18EquityInvestmentsinFunds Chapter2ofthisGuidelinerequiresbankstodeductcertaindirectandindirectinvestmentsinfinancialinstitutions. Exposures,includingunderlyingexposuresheldbyfunds,thatarerequiredtobedeductedaccordingtoChapter2shouldnotberiskweightedandthereforeareexcludedfromthetreatmentinparagraphs52-69below. Equityinvestmentsinfundsthatareheldinthebankingbookmustbetreatedinamannerconsistentwithoneormoreofthefollowingthreeapproaches,whichvaryintheirrisksensitivityandconservatism:the“look-throughapproach”(LTA),the“mandate-basedapproach”(MBA),andthe“fall-backapproach”(FBA).[BCBSDecember2013,par80(i)] (i)Thelook-throughapproach TheLTArequiresabanktoriskweighttheunderlyingexposuresofafundasiftheexposureswerehelddirectlybythebank.Thisisthemostgranularandrisk-sensitiveapproach.Itmustbeusedwhen: thereissufficientandfrequentinformationprovidedtothebankregardingtheunderlyingexposuresofthefund;and suchinformationisverifiedbyanindependentthirdparty. [BCBSDecember2013,par80(ii)] Tosatisfycondition(a)above,thefrequencyoffinancialreportingofthefundmustbethesameas,ormorefrequentthan,thatofthebank’sandthegranularityofthefinancialinformationmustbesufficienttocalculatethecorrespondingriskweightsFootnote15.Tosatisfycondition(b)above,theremustbeverificationoftheunderlyingexposuresbyanindependentthirdparty,suchasthedepositoryorthecustodianbankor,whereapplicable,themanagementcompany.[BCBSDecember2013,par80(iii)] UndertheLTAbanksmustriskweightallunderlyingexposuresofthefundasifthoseexposuresweredirectlyheld.Thisincludes,forexample,anyunderlyingexposurearisingfromthefund’sderivativesactivities(forsituationsinwhichtheunderlyingreceivesariskweightingtreatmentunderPillar1)andtheassociatedcounterpartycreditrisk(CCR)exposure.Insteadofdeterminingacreditvaluationadjustment(CVA)chargeassociatedwiththefund’sderivativesexposuresinaccordancewithsection4.1.7ofChapter4,banksmustmultiplytheCCRexposurebyafactorof1.5beforeapplyingtheriskweightassociatedwiththecounterpartyFootnote16.[BCBSDecember2013,par80(iv)] Banksmayrelyonthird-partycalculationsfordeterminingtheriskweightsassociatedwiththeirequityinvestmentsinfunds(i.e.theunderlyingriskweightsoftheexposuresofthefund)iftheydonothaveadequatedataorinformationtoperformthecalculationsthemselves.Insuchcases,theapplicableriskweightshallbe1.2timeshigherthantheonethatwouldbeapplicableiftheexposurewerehelddirectlybythebankFootnote17.[BCBSDecember2013,par80(v)] ExampleofthecalculationofRWAusingtheLTA: Considerafundthatreplicatesanequityindex.Moreover,assumethefollowing: BankusestheStandardisedApproachforcreditriskwhencalculatingitscapitalrequirements; Bankowns20%ofthesharesofthefund; Thefundpresentsthefollowingbalancesheet: Assets: Cash:$20; Governmentbonds(AAArated):$30;and Non-significantequityinvestmentsincommercialentities:$50 Liabilities: Notespayable$5 Equity Shares$95 Balancesheetexposuresof$100willberiskweightedaccordingtotheriskweightsappliedforcash(RW=0%),governmentbonds(RW=0%),andnon-significantequityholdingsofcommercialentities(RW=100%). Theleverageofthefundis100/95≈1.05. Therefore,therisk-weightedassetsforthebank’sequityinvestmentinthefundarecalculatedasfollows: AvgRWfund*Leverage*Equityinvestment =((RWAcash+RWAbonds+RWAequities)/TotalAssetsfund)*Leverage*Equityinvestment =(($20*0%+$30*0%+$50*100%)/100)*1.05*(20%*95) =$9.975 (ii)Themandate-basedapproach Thesecondapproach,theMBA,providesamethodforcalculatingregulatorycapitalthatcanbeusedwhentheconditionsforapplyingtheLTAarenotmet.[BCBSDecember2013,par80(vi)] UndertheMBAbanksmayusetheinformationcontainedinafund’smandateorinthenationalregulationsgoverningsuchinvestmentfundsFootnote18.Toensurethatallunderlyingrisksaretakenintoaccount(includingCCR)andthattheMBArenderscapitalrequirementsnolessthantheLTA,therisk-weightedassetsforthefund’sexposuresarecalculatedasthesumofthefollowingthreeitems: Balancesheetexposures(iethefunds’assets)areriskweightedassumingtheunderlyingportfoliosareinvestedtothemaximumextentallowedunderthefund’smandateinthoseassetsattractingthehighestcapitalrequirements,andthenprogressivelyinthoseotherassetsimplyinglowercapitalrequirements.Ifmorethanoneriskweightcanbeappliedtoagivenexposure,themaximumriskweightapplicablemustbeusedFootnote19. Whenevertheunderlyingriskofaderivativeexposureoranoff-balance-sheetitemreceivesariskweightingtreatmentunderPillar1,thenotionalamountofthederivativepositionoroftheoff-balancesheetexposureisriskweightedaccordinglyFootnote20Footnote21. TheCCRassociatedwiththefund’sderivativeexposuresiscalculatedusingtheCurrentExposureMethod,setoutinsection4.1.6ofChapter4ofthisGuideline,whichincludesareplacementcostandpotentialfutureexposure(PFE)component.Wheneverthereplacementcostisunknown,theexposuremeasureforCCRwillbecalculatedinaconservativemannerbyusingthenotionalamountasaproxyforthereplacementcost.WheneverthePFEisunknown,themaximumadd-onfactorof15%Footnote22appliesFootnote23.TheriskweightassociatedwiththecounterpartyisappliedtothesumofthereplacementcostandPFE.InsteadofdeterminingaCVAchargeassociatedwiththefund’sderivativeexposuresinaccordancewithsection4.1.7ofChapter4,banksmustmultiplytheCCRexposurebyafactorof1.5beforeapplyingtheriskweightassociatedwiththecounterpartyFootnote24. [BCBSDecember2013,par80(vii)] (iii)Thefall-backapproach WhereneithertheLTAnortheMBAisfeasible,banksarerequiredtoapplytheFBA.TheFBAappliesa1250%riskweighttothebank’sequityinvestmentinthefund.[BCBSDecember2013,par80(viii)] (iv)Treatmentoffundsthatinvestinotherfunds Whenabankhasaninvestmentinafund(egFundA)thatitselfhasaninvestmentinanotherfund(egFundB),whichthebankidentifiedbyusingeithertheLTAortheMBA,theriskweightappliedtotheinvestmentofthefirstfund(ieFundA’sinvestmentinFundB)canbedeterminedbyusingoneofthethreeapproachessetoutabove.Forallsubsequentlayers(egFundB’sinvestmentsinFundCandsoforth),theriskweightsappliedtoaninvestmentinanotherfund(FundC)canbedeterminedbyusingtheLTAundertheconditionthattheLTAwasalsousedfordeterminingtheriskweightfortheinvestmentinthefundatthepreviouslayer(FundB).Otherwise,theFBAmustbeapplied.[BCBSDecember2013,par80(ix)] (v)Partialuseofanapproach Abankmayuseacombinationofthethreeapproacheswhendeterminingthecapitalrequirementsforanequityinvestmentinanindividualfund,providedthattheconditionssetoutinparagraphs52to64aremet.[BCBSDecember2013,par80(x)] (vi)Exclusionstothelook-through,mandate-basedandfall-backapproaches EquityholdingsinentitieswhosedebtobligationsqualifyforazeroriskweightareexcludedfromtheLTA,MBAandFBAapproaches(includingthosepubliclysponsoredentitieswhereazeroriskweightcanbeapplied).[BCBSDecember2013,par80(xi)] Topromotespecifiedsectorsoftheeconomy,supervisorsmayexcludefromtheequityinvestmentsinfundscapitalchargesequityholdingsmadeunderlegislatedprogrammesthatprovidesignificantsubsidiesortheinvestmenttothebankandinvolvesomeformofgovernmentoversightandrestrictionsontheequityinvestments.Examplesofrestrictionsarelimitationsonthesizeandtypesofbusinessesinwhichthebankisinvesting,allowableamountsofownershipinterests,geographicallocationandotherpertinentfactorsthatlimitthepotentialriskoftheinvestmenttothebank.Equityholdingsmadeunderlegislatedprogrammescanonlybeexcludeduptoanaggregateof10%ofabank’stotalregulatorycapital.[BCBSDecember2013,par80(xii)] OSFINotes EquityinvestmentsmadepursuanttotheSpecializedFinancing(Banks)RegulationsoftheBankActqualifyforthisexclusionandareriskweightedat100%.ThistreatmentisextendedtoCanadianinstitutionforeignoperations’holdingsofequitiesmadeundernationallylegislatedprogramsofthecountriesinwhichtheyoperate. (vii)Leverageadjustments Leverageisdefinedastheratiooftotalassetstototalequity.Nationaldiscretionmaybeappliedtochooseamoreconservativeleveragemetric,ifdeemedappropriate.LeverageistakenintoaccountintheMBAbyusingthemaximumfinancialleveragepermittedinthefund’smandateorinthenationalregulationgoverningthefund.[BCBSDecember2013,par80(xiii)] Whendeterminingthecapitalrequirementrelatedtoitsequityinvestmentinafund,abankmustapplyaleverageadjustmenttotheaverageriskweightofthefund,assetoutinparagraph68,subjecttoacapof1,250%. [BCBSDecember2013,par80(xiv)] Aftercalculatingthetotalrisk-weightedassetsofthefundaccordingtotheLTAortheMBA,bankswillcalculatetheaverageriskweightofthefund(AvgRWfund)bydividingthetotalrisk-weightedassetsbythetotalassetsofthefund.UsingAvgRWfundandtakingintoaccounttheleverageofafund(Lvg),therisk-weightedassetsforabank’sequityinvestmentinafundcanberepresentedasfollows: RWAinvestment=AvgRWfund*Lvg*equityinvestment [BCBSDecember2013,par80(xv)] Theeffectoftheleverageadjustmentsdependsontheunderlyingriskinessoftheportfolio(ietheaverageriskweight)asobtainedbyapplyingtheStandardizedApproachortheIRBapproachesforcreditrisk.Theformulacanthereforebere-writtenas: RWAinvestment=RWAfund*percentageofshares [BCBSDecember2013,par80(xvi)] 3.1.19Otherassets 0%Riskweight cashandgoldbullionheldintheinstitution’sownvaultsoronanallocatedbasistotheextentbackedbybullionliabilities, unrealizedgainsandaccruedreceivablesonforeignexchangeandinterestrate-relatedoff-balancesheettransactionswheretheyhavebeenincludedintheoff-balancesheetcalculations,and alldeductionsfromcapital,asspecifiedinchapter2. 20%Riskweight chequesandotheritemsintransit. 100%Riskweight theamountofnon-significantinvestmentsinthecapitalofbanking,financialandinsuranceentitiestowhichacreditriskstandardizedapproachappliesnotdeductedfromcapital non-significantinvestmentsintheequityofnon-financialentities, premises,plantandequipmentandotherfixedassets, realestateandotherinvestments(includingnon-consolidatedinvestmentparticipationinothercompanies), prepaidexpensessuchaspropertytaxesandutilities, deferredchargessuchasmortgageoriginationcosts,and allotherassets. 250%Riskweight itemsdescribedasThresholdDeductions(basket)inChapter2-DefinitionofCapital,Section2.3.1whichfallbelowtheapplicablethresholds. 1250%Riskweight refertosection2.3.4ofChapter2–DefinitionofCapital. 3.1.20Treatmentofpurchasedreceivables Purchasedretailreceivablesthatmeetthefourcriteriaforregulatoryretailexposures,asspecifiedinparagraph25,areriskweightedat75%.Purchasedreceivablestocorporateentitiesorexposuresthatdonotmeettheretaildefinition,arerisk-weightedascorporateexposuresaspersection3.1.7. Inaddition,aspartoftheinstitution’sriskmanagementprocesses,itshouldestablishunderwritingcriteriaandmonitoringproceduresforallpurchasedassets/receivables,particularlywhereaninstitutionregularlypurchasesassetsfromasellerpursuanttoafacilityorprogram.Therefore,aninstitutionisexpectedto: establishqualitycriteriabothforreceivablestobepurchasedandfortheseller/servicerofthereceivables, regularlymonitorthepurchasedreceivablestoensuretheymeetthecriteria, regularlymonitorthefinancialconditionoftheseller/servicerofthereceivables, havelegalcertaintythattheinstitutionhasownershipofthereceivablesandallassociatedcashremittances, haveconfidencethatcurrentandfutureadvancesorpurchasescanberepaidfromtheliquidationorcollectionsfromthereceivablespool, periodicallyverifytheaccuracyofreportsrelatedtoboththeseller/servicerandthereceivables/obligors, periodicallyverifythecreditandcollectionpoliciesoftheseller/servicer,and establishproceduresformonitoringadherencetoallcontractualtermsbytheseller/servicerandregularauditsofcriticalphasesoftheprogram. 3.2.Categoriesofoff-balancesheetinstruments Thedefinitionsinthissectionapplytooff-balancesheetinstruments.Theterm“off-balancesheetinstruments”,asusedinthisguideline,encompassesguarantees,commitments,derivatives,andsimilarcontractualarrangementswhosefullnotionalprincipalamountmaynotnecessarilybereflectedonthebalancesheet.Suchinstrumentsaresubjecttoacapitalchargeirrespectiveofwhethertheyhavebeenrecordedonthebalancesheetatmarketvalue. Institutionsshouldcloselymonitorsecurities,commodities,andforeignexchangetransactionsthathavefailed,startingthefirstdaytheyfail.AcapitalchargeforfailedtransactionsshouldbecalculatedinaccordancewithChapter4,Section4.2.Withrespecttounsettledsecurities,commodities,andforeignexchangetransactionsthatarenotprocessedthroughadelivery-versus-payment(DvP)orpayment-versus-payment(PvP)mechanism,institutionsshouldcalculateacapitalchargeassetforthinChapter4. ThecreditequivalentamountofSecuritiesFinancingTransactions(SFT)Footnote25andderivativesthatexposeabanktocounterpartycreditriskFootnote26istobecalculatedundertherulessetforthinChapter4,Section4.1orChapter5(forSFTsnotcoveredbytheInternalModelMethod).Chapter4appliestoderivativesheldintheboththebankingbookandtradingbook. 3.2.1.Directcreditsubstitutes Directcreditsubstitutesincludeguaranteesorequivalentinstrumentsbackingfinancialclaims.Withadirectcreditsubstitute,theriskoflosstotheinstitutionisdirectlydependentonthecreditworthinessofthecounterparty. Examplesofdirectcreditsubstitutesinclude: guaranteesgivenonbehalfofcustomerstostandbehindthefinancialobligationsofthecustomerandtosatisfytheseobligationsshouldthecustomerfailtodoso;forexample,guaranteesof: paymentforexistingindebtednessforservices paymentwithrespecttoapurchaseagreement lease,loanormortgagepayments paymentofuncertifiedcheques remittanceof(sales)taxtothegovernment paymentofexistingindebtednessformerchandisepurchased paymentofanunfundedpensionliability reinsuranceoffinancialobligations, standbylettersofcreditorotherequivalentirrevocableobligations,servingasfinancialguarantees,suchaslettersofcreditsupportingtheissueofcommercialpaper, riskparticipationinbankers’acceptancesandriskparticipationinfinanciallettersofcredit.Riskparticipationconstitutesguaranteesbytheparticipatinginstitutionssuchthat,ifthereisadefaultbytheunderlyingobligor,theywillindemnifythesellinginstitutionforthefullprincipalandinterestattributabletothem, securitieslendingtransactions,wheretheinstitutionisliabletoitscustomerforanyfailuretorecoverthesecuritieslent,and creditderivativesinthebankingbookwhereabankissellingcreditprotection. 3.2.2.Transaction-relatedcontingencies Transaction-relatedcontingenciesrelatetotheongoingbusinessactivitiesofacounterparty,wheretheriskoflosstothereportinginstitutiondependsonthelikelihoodofafutureeventthatisindependentofthecreditworthinessofthecounterparty.Essentially,transaction-relatedcontingenciesareguaranteesthatsupportparticularperformanceofnon-financialorcommercialcontractsorundertakings,ratherthansupportingcustomers’generalfinancialobligations.Performance-relatedguaranteesspecificallyexcludeitemsrelatingtonon-performanceoffinancialobligations. Performance-relatedandnon-financialguaranteesincludeitemssuchas: performancebonds,warrantiesandindemnities.Performancestandbylettersofcreditrepresentobligationsbackingtheperformanceofnon-financialorcommercialcontractsorundertakings.Theseincludearrangementsbacking: subcontractors’andsuppliers'performance labourandmaterialcontracts deliveryofmerchandise,bidsortenderbonds guaranteesofrepaymentofdepositsorprepaymentsincasesofnon-performance, customsandexcisebonds.Theamountrecordedforsuchbondsshouldbethereportinginstitution'smaximumliability. 3.2.3.Trade-relatedcontingencies Theseincludeshort-term,self-liquidatingtrade-relateditemssuchascommercialanddocumentarylettersofcreditissuedbytheinstitutionthatare,oraretobe,collateralizedbytheunderlyingshipment. Lettersofcreditissuedonbehalfofacounterpartyback-to-backwithlettersofcreditofwhichthecounterpartyisabeneficiary("back-to-back"letters)shouldbereportedasdocumentarylettersofcredit. Lettersofcreditadvisedbytheinstitutionforwhichtheinstitutionisactingasreimbursementagentshouldnotbeconsideredasariskasset. 3.2.4.SaleandRepurchaseAgreements Arepurchaseagreementisatransactionthatinvolvesthesaleofasecurityorotherassetwiththesimultaneouscommitmentbythesellerthat,afterastatedperiodoftime,thesellerwillrepurchasetheassetfromtheoriginalbuyeratapre-determinedprice.Areverserepurchaseagreementconsistsofthepurchaseofasecurityorotherassetwiththesimultaneouscommitmentbythebuyerthat,afterastatedperiodoftime,thebuyerwillreselltheassettotheoriginalselleratapre-determinedprice.Inanycircumstancewheretheyarenotreportedon-balancesheet,theyshouldbereportedasanoff-balancesheetexposurewitha100%creditconversionfactor. 3.2.5.ForwardAssetPurchasesFootnote27 Acommitmenttopurchasealoan,security,orotherassetataspecifiedfuturedate,usuallyonprearrangedterms. 3.2.6.Forward/ForwardDeposits Anagreementbetweentwopartieswherebyonewillpayandotherreceiveanagreedrateofinterestonadeposittobeplacedbyonepartywiththeotheratsomepre-determineddateinthefuture.Suchdepositsaredistinctfromfutureforwardrateagreementsinthat,withforward/forwards,thedepositisactuallyplaced. 3.2.7.PartlyPaidSharesandSecurities Transactionswhereonlyapartoftheissuepriceornotionalfacevalueofasecuritypurchasedhasbeensubscribedandtheissuermaycallfortheoutstandingbalance(orafurtherinstallment),eitheronadatepre-determinedatthetimeofissueoratanunspecifiedfuturedate. 3.2.8.NoteIssuance/RevolvingUnderwritingFacilities Thesearearrangementswherebyaborrowermayissueshort-termnotes,typicallythreetosixmonthsinmaturity,uptoaprescribedlimitoveranextendedperiodoftime,commonlybymeansofrepeatedofferingstoatenderpanel.Ifatanytimethenotesarenotsoldbythetenderatanacceptableprice,anunderwriter(orgroupofunderwriters)undertakestobuythemataprescribedprice. 3.2.9.Future/ForwardRateAgreements Thesearearrangementsbetweentwopartieswhereatsomepre-determinedfuturedateacashsettlementwillbemadeforthedifferencebetweenthecontractedrateofinterestandthecurrentmarketrateonapre-determinednotionalprincipalamountforapre-determinedperiod. 3.2.10.InterestRateSwaps Inaninterestrateswap,twopartiescontacttoexchangeinterestservicepaymentsonthesameamountofnotionalindebtedness.Inmostcases,fixedinterestratepaymentsareprovidedbyonepartyinreturnforvariableratepaymentsfromtheotherandviceversa.However,itispossiblethatvariableinterestpaymentsmaybeprovidedinreturnforothervariableinterestratepayments. 3.2.11.InterestRateOptionsandCurrencyOptions Anoptionisanagreementbetweentwopartieswheretheselleroftheoptionforcompensation(premium/fee)grantsthebuyerthefutureright,butnottheobligation,tobuyfromtheseller,ortoselltotheseller,eitheronaspecifieddateorduringaspecifiedperiod,afinancialinstrumentorcommodityatapriceagreedwhentheoptionisarranged.Otherformsofinterestrateoptionsincludeinterestratecapagreementsandcollar(floor/ceiling)agreements. 3.2.12.ForwardForeignExchangeContracts Aforwardforeignexchangecontractisanagreementbetweenaninstitutionandacounterpartyinwhichtheinstitutionagreestoselltoorpurchasefromthecounterpartyafixedamountofforeigncurrencyatafixedrateofexchangefordeliveryandsettlementonaspecifieddateinthefutureorwithinafixedoptionalperiod. 3.2.13.CrossCurrencySwaps Acrosscurrencyswapisatransactioninwhichtwopartiesexchangecurrenciesandtherelatedinterestflowsforaperiodoftime.Crosscurrencyswapsareusedtoswapfixedinterestrateindebtednessindifferentcurrencies. 3.2.14.CrossCurrencyInterestRateSwaps Crosscurrencyinterestrateswapscombinetheelementsofcurrencyandinterestrateswaps. 3.2.15.FinancialandForeignCurrencyFutures Afutureisastandardizedcontractualobligationtomakeortakedeliveryofaspecifiedquantityofacommodity(financialinstrument,foreigncurrency,etc.)onaspecifiedfuturedateataspecifiedfuturepriceestablishedinacentralregulatedmarketplace. 3.2.16.PreciousMetalsContractsandFinancialContractsonCommodities Preciousmetalscontractsandfinancialcontractsoncommoditiescaninvolvespot,forward,futuresandoptioncontracts.Preciousmetalsaremainlygold,silver,andplatinum.Commoditiesarebulkgoodssuchasgrains,metalsandfoodstradedonacommoditiesexchangeoronthespotmarket.Forcapitalpurposes,goldcontractsaretreatedthesameasforeignexchangecontracts. 3.2.17.Non-equityWarrants Non-equitywarrantsincludecashsettlementoptions/contractswhosevaluesaredeterminedbythemovementsinagivenunderlyingindex,product,orforeignexchangeovertime.Wherenon-equitywarrantsorthehedgeforsuchwarrantsexposethefinancialinstitutiontocounterpartycreditrisk,thecreditequivalentamountshouldbedeterminedusingthecurrentexposuremethodforexchangeratecontracts. 3.3.Creditconversionfactors Thefaceamount(notionalprincipalamount)ofoff-balancesheetinstrumentsdoesnotalwaysreflecttheamountofcreditriskintheinstrument.Toapproximatethepotentialcreditexposureofnon-derivativeinstruments,thenotionalamountismultipliedbytheappropriatecreditconversionfactor(CCF)toderiveacreditequivalentamountFootnote28.Thecreditequivalentamountistreatedinamannersimilartoanon-balancesheetinstrumentandisassignedtheriskweightappropriatetothecounterpartyor,ifrelevant,theguarantororcollateral.Thecategoriesofcreditconversionfactorsareoutlinedbelow. 100%Conversionfactor Directcreditsubstitutes(generalguaranteesofindebtednessandguarantee-typeinstruments,includingstandbylettersofcreditservingasfinancialguaranteesfor,orsupporting,loansandsecurities), Acquisitionsofriskparticipationinbankers'acceptancesandparticipationindirectcreditsubstitutes(forexample,standbylettersofcredit), SaleandrepurchaseagreementsandassetsaleswithrecourseFootnote29, PartlypaidsharesandsecuritiesFootnote23, Forwardagreements(contractualobligations)topurchaseassets,includingfinancingfacilitieswithcertaindrawdownandforwarddepositsFootnote23,and WrittenputoptionsonspecifiedassetswiththecharacteristicsofacreditenhancementFootnote30. 50%Conversionfactor Transaction-relatedcontingencies(forexample,bidbonds,performancebonds,warranties,andstandbylettersofcreditrelatedtoaparticulartransaction), Commitmentswithanoriginalmaturityexceedingoneyear,includingunderwritingcommitmentsandcommercialcreditlines,and Revolvingunderwritingfacilities(RUFs),noteissuancefacilities(NIFs)andothersimilararrangements. 20%Conversionfactor Short-term,self-liquidatingtrade-relatedcontingencies,includingcommercial/documentarylettersofcredit(Note:a20%CCFisappliedtobothissuingandconfirmingbanks), Commitmentswithanoriginalmaturityofoneyearorless,and 0%Conversionfactor Commitmentsthatareunconditionallycancellableatanytimewithoutpriornotice. [BCBSJune2006par82to89] 3.4.Forwards,swaps,purchasedoptionsandothersimilarderivativecontracts Thetreatmentofforwards,swaps,purchasedoptionsandothersimilarderivativesneedsspecialattentionbecauseinstitutionsarenotexposedtocreditriskforthefullfacevalueoftheircontracts(notionalprincipalamount),butonlytothepotentialcostofreplacingthecashflow(oncontractsshowingapositivevalue)ifthecounterpartydefaults.Thecreditequivalentamountsarecalculatedusingthecurrentexposuremethodandareassignedtheriskweightappropriatetothecounterparty.Asanalternativetothecurrentexposuremethod,institutionsmaycalculatethecreditequivalentamountusingtheinternalmodellingmethod,subjecttosupervisoryapproval.SeeChapter4,Sections4.1.5and4.1.6fordetailsonthesetwomethods. Institutionsshouldcloselymonitorsecurities,commodities,andforeignexchangetransactionsthathavefailed,startingthefirstdaytheyfail.AcapitalchargeforfailedtransactionsshouldbecalculatedinaccordancewithChapter4–SettlementandCounterpartyRisk,Section4.2.Withrespecttounsettledsecurities,commodities,andforeignexchangetransactionsthatarenotprocessedthroughadelivery-versus-payment(DvP)orpayment-versus-payment(PvP)mechanism,institutionsshouldcalculateacapitalchargeassetforthinChapter4–SettlementandCounterpartyRisk,Section4.2. 3.4.1.Interestratecontracts Theseinclude: single-currencyinterestrateswaps basisswaps forwardrateagreementsandproductswithsimilarcharacteristics interestratefutures interestrateoptionspurchased 3.4.2.Foreignexchangeratecontracts Theseinclude: goldcontractsFootnote31 cross-currencyswaps cross-currencyinterestrateswaps outrightforwardforeignexchangecontracts currencyfutures currencyoptionspurchased 3.4.3.Equitycontracts Theseinclude: futures forwards swaps purchasedoptions similarcontractsbasedonbothindividualequitiesaswellasonequityindices 3.4.4.Preciousmetals(i.e.,silver,platinum,andpalladium)contracts Theseinclude: futures forwards swaps purchasedoptions similarcontractsbasedonpreciousmetals 3.4.5.Contractsonothercommodities Theseinclude: futures forwards swaps purchasedoptions similarderivativescontractsbasedonenergycontracts,agriculturalcontracts,basemetals(e.g.,aluminium,copper,andzinc) othernon-preciousmetalcommoditycontracts 3.5.Commitments Commitmentsarearrangementsthatobligateaninstitution,ataclient'srequest,to: extendcreditintheformofloansorparticipationsinloans,leasefinancingreceivables,mortgages(includingtheundrawnportionofHELOCs),overdrafts,acceptances,lettersofcredit,guaranteesorloansubstitutes,or purchaseloans,securities,orotherassets Notethatunfundedmortgagecommitmentsaretreatedascommitmentsforrisk-basedcapitalpurposeswhentheborrowerhasacceptedthecommitmentextendedbytheinstitutionandallconditionsrelatedtothecommitmenthavebeenfullysatisfied. Normally,commitmentsinvolveawrittencontractoragreementandsomeformofconsideration,suchasacommitmentfee. 3.5.1.Creditconversionfactors Thecreditconversionfactorappliedtoacommitmentisdependentonitsmaturity.Longermaturitycommitmentsareconsideredtobeofhigherriskbecausethereisalongerperiodbetweencreditreviewsandlessopportunitytowithdrawthecommitmentifthecreditqualityofthedrawerdeteriorates. Conversionfactorsapplytocommitmentsassetoutbelow. 0%Conversionfactor Commitmentsthatareunconditionallycancellableatanytimebytheinstitutionwithoutnoticeorthateffectivelyprovideforautomaticcancellationduetodeteriorationintheborrower’screditworthiness.Thisimpliesthattheinstitutionconductsaformalreviewofthefacilityatleastannually,thusgivingitanopportunitytotakenoteofanyperceiveddeteriorationincreditquality.Retailcommitmentsareunconditionallycancellableifthetermpermitstheinstitutiontocancelthemtothefullextentallowableunderconsumerprotectionandrelatedlegislation. 20%Conversionfactor Commitmentswithanoriginalmaturityofoneyearandunder. 50%Conversionfactor Commitmentswithanoriginalmaturityofoveroneyear, NIFsandRUFs, theundrawnportionofacommitmenttoprovidealoanthatwillbedrawndowninanumberoftranches,somelessthanandsomeoveroneyear,and forwardcommitments(wheretheinstitutionmakesacommitmenttoissueacommitment)iftheloancanbedrawndownmorethanoneyearaftertheinstitution’sinitialundertakingissigned. [BCBSJune2006par83] 3.5.2.Maturity Institutionsshoulduseoriginalmaturity(asdefinedbelow)toreporttheseinstruments. 3.5.2.1.Originalmaturity Thematurityofacommitmentshouldbemeasuredfromthedatewhenthecommitmentwasacceptedbythecustomer,regardlessofwhetherthecommitmentisrevocableorirrevocable,conditionalorunconditional,untiltheearliestdateonwhich: thecommitmentisscheduledtoexpire,or theinstitutioncan,atitsoption,unconditionallycancelthecommitment. Amaterialadversechangeclauseisnotconsideredtogivesufficientprotectionforacommitmenttobeconsideredunconditionallycancellable. Wheretheinstitutioncommitstograntingafacilityatafuturedate(aforwardcommitment),theoriginalmaturityofthecommitmentistobemeasuredfromthedatethecommitmentisaccepteduntilthefinaldatethatdrawdownsarepermitted. 3.5.2.2.Renegotiationsofacommitment Ifbothpartiesagree,acommitmentmayberenegotiatedbeforeitstermexpires.Iftherenegotiationprocessinvolvesacreditassessmentofthecustomerconsistentwiththeinstitution’screditstandards,andprovidestheinstitutionwiththetotaldiscretiontoreneworextendthecommitmentandtochangeanyothertermsandconditionsofthecommitment,thenonthedateofacceptancebythecustomeroftherevisedtermsandconditions,theoriginalcommitmentmaybedeemedtohavematuredandanewcommitmentbegun.Ifnewtermsarenotreached,theoriginalcommitmentwillremaininforceuntilitsoriginalmaturitydate. Thisrenegotiationprocessmustbeclearlydocumented. Insyndicatedandparticipatedtransactions,aparticipatinginstitutionmustbeabletoexerciseitsrenegotiationrightsindependentoftheothersyndicatemembers. Wheretheseconditionsarenotmet,theoriginalstartdateofthecommitmentmustbeusedtodeterminematurity. 3.5.3.Specifictypesofcommitments 3.5.3.1.Undated/open-endedcommitments A0%creditconversionfactorisappliedtoundatedoropen-endedcommitments,suchasunusedcreditcardlines,personallinesofcredit,andoverdraftprotectionforpersonalchequingaccountsthatareunconditionallycancellableatanytime. 3.5.3.2.Evergreencommitments Open-endedcommitmentsthatarecancellablebythefinancialinstitutionatanytimesubjecttoanoticeperioddonotconstituteunconditionallycancellablecommitmentsandareconvertedat50%.Long-termcommitmentsmustbecancellablewithoutnoticetobeeligibleforthe0%conversionfactor. 3.5.3.3.Commitmentsdrawndowninanumberoftranches A50%creditconversionfactorisappliedtoacommitmenttoprovidealoan(orpurchaseanasset)tobedrawndowninanumberoftranches,someoneyearandunderandsomeoveroneyear.Inthesecases,theabilitytorenegotiatethetermsoflatertranchesshouldberegardedasimmaterial.Oftenthesecommitmentsareprovidedfordevelopmentprojectsfromwhichtheinstitutionmayfinditdifficulttowithdrawwithoutjeopardizingitsinvestment. Wherethefacilityinvolvesunrelatedtranches,andwhereconversionsarepermittedbetweentheover-andunder-oneyeartranches(i.e.,wheretheborrowermaymakeongoingselectionsastohowmuchofthecommitmentisunderoneyearandhowmuchisover),thentheentirecommitmentshouldbeconvertedat50%. Wherethefacilityinvolvesunrelatedtrancheswithnoconversionbetweentheover-andunder-oneyeartranches,eachtranchemaybeconvertedseparately,dependingonitsmaturity. 3.5.3.4.Commitmentsforfluctuatingamounts Forcommitmentsthatvaryinamountoverthelifeofthecommitment,suchasthefinancingofabusinesssubjecttoseasonalvariationincashflow,theconversionfactorshouldapplytothemaximumunutilizedamountthatcanbedrawnundertheremainingperiodofthefacility. 3.5.3.5.Commitmenttoprovidealoanwithamaturityofoveroneyear Acommitmenttoprovidealoanthathasamaturityofoveroneyearbutthatmustbedrawndownwithinaperiodoflessthanoneyearmaybetreatedasanunder-one-yearinstrument,aslongasanyundrawnportionofthefacilityisautomaticallycancelledattheendofthedrawdownperiod. However,ifthroughanycombinationofoptionsordrawdowns,repaymentsandredrawdowns,etc.,theclientcanaccessalineofcreditpastoneyear,withnoopportunityfortheinstitutiontounconditionallycancelthecommitmentwithinoneyear,thecommitmentshallbeconvertedat50%. 3.5.3.6.Commitmentsforoff-balancesheettransactions Wherethereisacommitmenttoprovideanoff-balancesheetitem,institutionsaretoapplythelowerofthetwoapplicablecreditconversionfactors. 3.6.Externalcreditassessmentsandthemappingprocess 3.6.1.Externalcreditassessments 3.6.1.1.Therecognitionprocess Nationalsupervisorsareresponsiblefordeterminingonacontinuousbasiswhetheranexternalcreditassessmentinstitution(ECAI)meetsthecriterialistedintheparagraphbelow.NationalsupervisorsshouldrefertotheIOSCOCodeofConductFundamentalsforCreditRatingAgencieswhendeterminingECAIeligibility.TheassessmentsofECAIsmayberecognisedonalimitedbasis,e.g.bytypeofclaimsorbyjurisdiction.ThesupervisoryprocessforrecognisingECAIsshouldbemadepublictoavoidunnecessarybarrierstoentry.[BCBSJune2006par90andBCBSJune2011par120]] OSFINotes OSFIconductedaprocesstodeterminewhichofthemajorinternationalratingagencieswouldberecognized.Itincludedcompletionofaself-assessmenttemplateandsubmissionofdatarequiredtocompleteamappingexercise(seeparagraph124).Asaresultofthisprocess,OSFIwillpermitbankstorecognizecreditratingsfromthefollowingratingagenciesforcapitaladequacypurposes: DBRS Moody’sInvestorsService StandardandPoor’s(S&P) FitchRatingServices 3.6.1.2.Eligibilitycriteria AnECAImustsatisfyeachofthefollowingsixcriteria. Objectivity: Themethodologyforassigningcreditassessmentsmustberigorous,systematic,andsubjecttosomeformofvalidationbasedonhistoricalexperience.Moreover,assessmentsmustbesubjecttoongoingreviewandresponsivetochangesinfinancialcondition.Beforebeingrecognisedbysupervisors,anassessmentmethodologyforeachmarketsegment,includingrigorousbacktesting,musthavebeenestablishedforatleastoneyearandpreferablythreeyears. Independence: AnECAIshouldbeindependentandshouldnotbesubjecttopoliticaloreconomicpressuresthatmayinfluencetherating.Theassessmentprocessshouldbeasfreeaspossiblefromanyconstraintsthatcouldariseinsituationswherethecompositionoftheboardofdirectorsortheshareholderstructureoftheassessmentinstitutionmaybeseenascreatingaconflictofinterest. Internationalaccess/Transparency: Theindividualassessments,thekeyelementsunderliningtheassessmentsandwhethertheissuerparticipatedintheassessmentprocessshouldbepublicallyavailableonanon-selectivebasis,unlesstheyareprivateassessment.Inaddition,thegeneralprocedures,methodologiesandassumptionsforarrivingatassessmentsusedbytheECAIshouldbepubliclyavailable. Disclosure: AnECAIshoulddisclosethefollowinginformation:itscodeofconduct;thegeneralnatureofitscompensationarrangementswithassessedentities;itsassessmentmethodologies,includingthedefinitionofdefault,thetimehorizon,andthemeaningofeachrating;theactualdefaultratesexperiencedineachassessmentcategory;andthetransitionsoftheassessments,e.g.thelikelihoodofAAratingsbecomingAovertime. Resources: AnECAIshouldhavesufficientresourcestocarryouthighqualitycreditassessments.Theseresourcesshouldallowforsubstantialongoingcontactwithseniorandoperationallevelswithintheentitiesassessedinordertoaddvaluetothecreditassessments.Suchassessmentsshouldbebasedonmethodologiescombiningqualitativeandquantitativeapproaches. Credibility: Tosomeextent,credibilityisderivedfromthecriteriaabove.Inaddition,therelianceonanECAI’sexternalcreditassessmentsbyindependentparties(investors,insurers,tradingpartners)isevidenceofthecredibilityoftheassessmentsofanECAI.ThecredibilityofanECAIisalsounderpinnedbytheexistenceofinternalprocedurestopreventthemisuseofconfidentialinformation.Inordertobeeligibleforrecognition,anECAIdoesnothavetoassessfirmsinmorethanonecountry. [BCBSJune2006par91andBCBSJune2011par120] OSFINotes Inadditionaltotheabovecriteria,OSFIrequiresthatanECAIberecognizedasadesignatedratingorganizationbytheCanadianSecuritiesAdministratorsNationalInstrument25-101inordertobeaneligibleECAIinCanada. 3.6.2.Implementationconsiderations 3.6.2.1.Themappingprocess SupervisorswillberesponsibleforassigningeligibleECAIs’assessmentstotheriskweightsavailableunderthestandardisedriskweightingframework,i.e.decidingwhichassessmentcategoriescorrespondtowhichriskweights.Themappingprocessshouldbeobjectiveandshouldresultinariskweightassignmentconsistentwiththatofthelevelofcreditriskreflectedinthetablesabove.Itshouldcoverthefullspectrumofriskweights.[BCBSJune2006par92] Long-termrating StandardizedRiskWeightCategory DBRS Moody’s S&P Fitch LongTerm 1 (AAAtoAA-) AAAtoAA(low) AaatoAa3 AAAtoAA- AAAtoAA- 2 (A+toA-) A(high)toA(low) A1toA3 A+toA- A+toA- 3 (BBB+toBBB-) BBB(high) toBBB(low) Baa1toBaa3 BBB+toBBB- BBB+toBBB- 4 (BB+toBB-) BB(high)toBB(low) Ba1toBa3 BB+toBB- BB+toBB- 5 (B+toB-) B(high)toB(low) B1toB3 B+toB- B+toB- 6 BelowB- CCCorlower BelowB3 BelowB- BelowB- Whenconductingsuchamappingprocess,factorsthatsupervisorsshouldassessinclude,amongothers,thesizeandscopeofthepoolofissuersthateachECAIcovers,therangeandmeaningoftheassessmentsthatitassigns,andthedefinitionofdefaultusedbytheECAI.Inordertopromoteamoreconsistentmappingofassessmentsintotheavailableriskweightsandhelpsupervisorsinconductingsuchaprocess,Annex2oftherevisedFrameworkprovidesguidanceastohowsuchamappingprocessmaybeconducted.[BCBSJune2006par93] BanksmustusethechosenECAIsandtheirratingsconsistentlyforeachtypeofclaim,forbothriskweightingandriskmanagementpurposes.Bankswillnotbeallowedto“cherry-pick”theassessmentsprovidedbydifferentECAIsandtoarbitrarilychangetheuseofECAIs.[BCBSJune2006par94andBCBSJune2011par121] BanksmustdiscloseECAIsthattheyusefortheriskweightingoftheirassetsbytypeofclaims,theriskweightsassociatedwiththeparticularratinggradesasdeterminedbysupervisorsthroughthemappingprocessaswellastheaggregatedrisk-weightedassetsforeachriskweightbasedontheassessmentsofeacheligibleECAI.[BCBSJune2006par95] 3.6.2.2.Multipleassessments IfthereisonlyoneassessmentbyanECAIchosenbyabankforaparticularclaim,thatassessmentshouldbeusedtodeterminetheriskweightoftheclaim.[BCBSJune2006par96] IftherearetwoassessmentsbyECAIschosenbyabankwhichmapintodifferentriskweights,thehigherriskweightwillbeapplied.[BCBSJune2006par97] Iftherearethreeormoreassessmentswithdifferentriskweights,theassessmentscorrespondingtothetwolowestriskweightsshouldbereferredtoandthehigherofthosetworiskweightswillbeapplied.[BCBSJune2006par98] 3.6.2.3.Issuerversusissuesassessment Whereabankinvestsinaparticularissuethathasanissue-specificassessment,theriskweightoftheclaimwillbebasedonthisassessment.Wherethebank’sclaimisnotaninvestmentinaspecificassessedissue,thefollowinggeneralprinciplesapply. Incircumstanceswheretheborrowerhasaspecificassessmentforanissueddebt-butthebank’sclaimisnotaninvestmentinthisparticulardebt─ahighqualitycreditassessment(onewhichmapsintoariskweightlowerthanthatwhichappliestoanunratedclaim)onthatspecificdebtmayonlybeappliedtothebank’sunassessedclaimifthisclaimranksparipassuorseniortotheclaimwithanassessmentinallrespects.Ifnot,thecreditassessmentcannotbeusedandtheunassessedclaimwillreceivetheriskweightforunratedclaims. Incircumstanceswheretheborrowerhasanissuerassessment,thisassessmenttypicallyappliestoseniorunsecuredclaimsonthatissuer.Consequently,onlyseniorclaimsonthatissuerwillbenefitfromahighqualityissuerassessment.Otherunassessedclaimsofahighlyassessedissuerwillbetreatedasunrated.Ifeithertheissuerorasingleissuehasalowqualityassessment(mappingintoariskweightequaltoorhigherthanthatwhichappliestounratedclaims),anunassessedclaimonthesamecounterpartythatranksparipassuorissubordinatedtoeithertheseniorunsecuredissuerassessmentortheexposureassessmentwillbeassignedthesameriskweightasisapplicabletothelowqualityassessment. [BCBSJune2006par99andBCBSJune2011par118] Whetherthebankintendstorelyonanissuer-oranissue-specificassessment,theassessmentmusttakeintoaccountandreflecttheentireamountofcreditriskexposurethebankhaswithregardtoallpaymentsowedtoit.Footnote32[BCBSJune2006par100] Inordertoavoidanydoublecountingofcreditenhancementfactors,nosupervisoryrecognitionofcreditriskmitigationtechniqueswillbetakenintoaccountifthecreditenhancementisalreadyreflectedintheissuespecificrating(seeChapter5–CreditRiskMitigation,paragraph8).[BCBSJune2006par101] 3.6.2.4.Domesticcurrencyandforeigncurrencyassessments Whereunratedexposuresareriskweightedbasedontheratingofanequivalentexposuretothatborrower,thegeneralruleisthatforeigncurrencyratingswouldbeusedforexposuresinforeigncurrency.Domesticcurrencyratings,ifseparate,wouldonlybeusedtoriskweightclaimsdenominatedinthedomesticcurrency.Footnote33[BCBSJune2006par102] 3.6.2.5.Short-term/long-termassessments Forrisk-weightingpurposes,short-termassessmentsaredeemedtobeissue-specific.Theycanonlybeusedtoderiveriskweightsforclaimsarisingfromtheratedfacility.Theycannotbegeneralisedtoothershort-termclaims.Innoeventcanashort-termratingbeusedtosupportariskweightforanunratedlong-termclaim.Short-termassessmentsmayonlybeusedforshort-termclaimsagainstbanksandcorporates.Thetablebelowprovidesaframeworkforbanks’exposurestospecificshort-termfacilities,suchasaparticularissuanceofcommercialpaper: Creditassessment A-1/P-1Footnote34 A-2/P-2 A-3/P-3 OthersFootnote35 Riskweight 20% 50% 100% 150% Short-termrating StandardizedRiskWeightCategory DBRS Moody’s S&P Fitch ShortTerm 1 (A-1/P-1) R-1(high)toR-1(low) P-1 A-1+,A-1 F1+,F1 2 (A-2/P-2) R-2(high)toR-2(low) P-2 A-2 F2 3 (A-3/P-3) R-3 P-3 A-3 F3 4 Others BelowR-3 NP Allshort-termratingsbelowA-3 BelowF3 [BCBSJune2006par103] Ifashort-termratedfacilityattractsa50%risk-weight,unratedshort-termclaimscannotattractariskweightlowerthan100%.Ifanissuerhasashort-termfacilitywithanassessmentthatwarrantsariskweightof150%,allunratedclaims,whetherlong-termorshort-term,shouldalsoreceivea150%riskweight,unlessthebankusesrecognisedcreditriskmitigationtechniquesforsuchclaims.[BCBSJune2006par104] Whenashort-termassessmentistobeused,theinstitutionmakingtheassessmentneedstomeetalloftheeligibilitycriteriaforrecognisingECAIsaspresentedinparagraph122intermsofitsshort-termassessment.[BCBSJune2006par106] 3.6.2.6.Levelofapplicationoftheassessment Externalassessmentsforoneentitywithinacorporategroupcannotbeusedtoriskweightotherentitieswithinthesamegroup.[BCBSJune2006par107] 3.6.2.7.Unsolicitedratings Asageneralrule,banksshouldusesolicitedratingsfromeligibleECAIs.Nationalsupervisoryauthoritiesmay,however,allowbankstouseunsolicitedratingsinthesamewayassolicitedratingsiftheyaresatisfiedthatthecreditassessmentsofunsolicitedratingsarenotinferiorinqualitytothegeneralqualityofsolicitedratings.However,theremaybethepotentialforECAIstouseunsolicitedratingstoputpressureonentitiestoobtainsolicitedratings.Suchbehaviour,whenidentified,shouldcausesupervisorstoconsiderwhethertocontinuerecognisingsuchECAIsaseligibleforcapitaladequacypurposes.[BCBSJune2006par108andBCBSJune2011par121] OSFINotes Banksarenotpermittedtorelyonanyunsolicitedratingindetermininganasset’sriskweightexceptwheretheassetisasovereignexposureandsolicitedratingsarenotavailable.Asnotedinparagraph139,theunsolicitedratingmustnotbeinferiortothegeneralqualityofsolicitedratings. Footnotes Footnote1 ForinstitutionswithafiscalyearendingOctober31orDecember31,respectively. Returntofootnote1 Footnote2 Followingtheformat:[BCBSJune2006parx] Returntofootnote2 Footnote3 UnderIFRS9,Stage3allowancesandpartialwrite-offsareconsideredtobespecificallowances,whileStage1andStage2allowancesareconsideredtobegeneralallowances. Returntofootnote3 Footnote4 ThisnotationreferstothemethodologyusedbyStandardandPoor’s.Refertosection3.6.2.1.todeterminetheapplicableriskweightforotherratingagencymethodologies. Returntofootnote4 Footnote5 Thisistosaythatthebankwouldalsohavecorrespondingliabilitiesdenominatedinthedomesticcurrency. Returntofootnote5 Footnote6 Thislowerriskweightmaybeextendedtotheriskweightingofcollateralandguarantees.Seesection5.1.3.and5.1.5. Returntofootnote6 Footnote7 TheconsensuscountryriskclassificationisavailableontheOECD’swebsite(http://www.oecd.org)intheExportCreditArrangementwebpageoftheTradeDirectorate. Returntofootnote7 Footnote8 http://www.bis.org/publ/bcbs_nl17.htm Returntofootnote8   Returntofootnote Footnote9 http://www.bis.org/publ/bcbs_nl19.htm Returntofootnote9 Footnote10 Thatis,capitalrequirementsthatarecomparabletothoseappliedtobanksinthisFramework.Implicitinthemeaningoftheword“comparable”isthatthesecuritiesfirm(butnotnecessarilyitsparent)issubjecttoconsolidatedregulationandsupervisionwithrespecttoanydownstreamaffiliates. Returntofootnote10 Footnote11 Thepropertyvalueatoriginationoftheloanistobeusedindeterminingtheloan-to-valueratio. Returntofootnote11 Footnote12 Theloan-to-valueforpurposesofHELOCsistheauthorizedamountoftheHELOC. Returntofootnote12 Footnote13 Reversemortgageexposuremeansalladvances,plusaccruedinterestand50%ofundrawnamounts,netofspecificallowances.Undrawnamountsonreversemortgagesdonotincludefutureloangrowthduetocapitalizinginterest.Undrawnamountsaretreatedasundrawncommitmentsandaresubjecttoacreditconversionfactorof50%(i.e.,commitmentswithanoriginalmaturityexceedingoneyear). Returntofootnote13 Footnote14 UnderIFRS9,Stage3allowancesandpartialwrite-offsareconsideredtobespecificallowances,whileStage1andStage2allowancesareconsideredtobegeneralallowances. Returntofootnote14 Footnote15 Anexternalauditisnotrequired. Returntofootnote15 Footnote16 Abankisnotrequiredtoapplythe1.5factorforsituationsinwhichtheCVAcapitalchargewouldnototherwisebeapplicable.Thisincludes:(i)transactionswithacentralcounterpartyand(ii)securitiesfinancingtransactions(SFTs),unlessthebank’snationalsupervisordeterminesthatthebank’sCVAlossexposurearisingfromSFTsarematerial. Returntofootnote16 Footnote17 Forinstance,anyexposurethatissubjecttoa20%riskweightundertheStandardisedApproachwouldbeweightedat24%(1.2*20%)whenthelookthroughisperformedbyathirdparty. Returntofootnote17 Footnote18 Informationusedforthispurposeisnotstrictlylimitedtoafund’smandateornationalregulationsgoverninglikefunds.Itmayalsobedrawnfromotherdisclosuresofthefund. Returntofootnote18 Footnote19 Forinstance,forinvestmentsincorporatebondswithnoratingsrestrictions,ariskweightof150%mustbeapplied. Returntofootnote19 Footnote20 Iftheunderlyingisunknown,thefullnotionalamountofderivativepositionsmustbeusedforthecalculation. Returntofootnote20 Footnote21 Ifthenotionalamountofderivativesmentionedinparagraph58isunknown,itwillbeestimatedconservativelyusingthemaximumnotionalamountofderivativesallowedunderthemandate. Returntofootnote21 Footnote22 Thiscorrespondstothehighestadd-onfactorinthematrixincludedinSection4.1.6.1ofChapter4(i.e.asappliedtoderivativecontractswith“OtherCommodities”asunderlyingwitharesidualmaturityoverfiveyears. Returntofootnote22 Footnote23 Forinstance,ifbothreplacementcostandPFEareunknown,atotalmultiplicationfactorof1.15isappliedtothenotionalamounttoreflecttheCCRexposure. Returntofootnote23 Footnote24 Abankisnotrequiredtoapplythe1.5factorforsituationsinwhichtheCVAcapitalchargewouldnototherwisebeapplicable.Thisincludes:(i)transactionswithacentralcounterpartyand(ii)securitiesfinancingtransactions(SFTs),unlessOSFIdeterminesthatthebank’sCVAlossexposurearisingfromSFTsismaterial. Returntofootnote24 Footnote25 SecuritiesFinancingTransactions(SFT)aretransactionssuchasrepurchaseagreements,reverserepurchaseagreements,securitylendingandborrowing,andwholesalemarginlendingtransactions,wherethevalueofthetransactionsdependsonthemarketvaluationsandthetransactionsareoftensubjecttomarginagreements. Returntofootnote25 Footnote26 Thecounterpartycreditriskisdefinedastheriskthatthecounterpartytoatransactioncoulddefaultbeforethefinalsettlementofthetransaction’scashflows.Aneconomiclosswouldoccurifthetransactionsorportfoliooftransactionswiththecounterpartyhasapositiveeconomicvalueatthetimeofdefault.Unlikeaninstitution’sexposuretocreditriskthroughaloan,wheretheexposuretocreditriskisunilateralandonlythelendinginstitutionfacestheriskofloss,thecounterpartycreditriskcreatesabilateralriskofloss:themarketvalueofthetransactioncanbepositiveornegativetoeithercounterpartytothetransaction.Themarketvalueisuncertainandcanvaryovertimewiththemovementofunderlyingmarketfactors. Returntofootnote26 Footnote27 Thisdoesnotincludeaspottransactionthatiscontractedtosettlewithinthenormalsettlementperiod. Returntofootnote27 Footnote28 See3.4.,“Forwards,Swaps,PurchasedOptionsandOtherSimilarDerivatives”. Returntofootnote28 Footnote29 Theseitemsaretobeweightedaccordingtothetypeofassetandnotaccordingtothetypeofcounterpartywithwhomthetransactionhasbeenenteredinto. Returntofootnote29 Footnote30 Writtenputoptions(wherepremiumsarepaidupfront)expressedintermsofmarketratesforcurrenciesorfinancialinstrumentsbearingnocreditorequityriskareexcludedfromtheframework. Returntofootnote30 Footnote31 Goldcontractsaretreatedthesameasforeignexchangeratecontractsforthepurposeofcalculatingcreditrisk. Returntofootnote31 Footnote32 Forexample,ifabankisowedbothprincipalandinterest,theassessmentmustfullytakeintoaccountandreflectthecreditriskassociatedwithrepaymentofbothprincipalandinterest. Returntofootnote32 Footnote33 However,whenanexposurearisesthroughabank'sparticipationinaloanthathasbeenextended,orhasbeenguaranteedagainstconvertibilityandtransferrisk,bycertainMDBs,itsconvertibilityandtransferriskcanbeconsideredbynationalsupervisoryauthoritiestobeeffectivelymitigated.Toqualify,MDBsmusthavepreferredcreditorstatusrecognisedinthemarketandbeincludedinChapter3.Insuchcases,forriskweightingpurposes,theborrower'sdomesticcurrencyratingmaybeusedinsteadofitsforeigncurrencyrating.Inthecaseofaguaranteeagainstconvertibilityandtransferrisk,thelocalcurrencyratingcanbeusedonlyfortheportionthathasbeenguaranteed.Theportionoftheloannotbenefitingfromsuchaguaranteewillberisk-weightedbasedontheforeigncurrencyrating. Returntofootnote33 Footnote34 ThenotationsfollowthemethodologyusedbyStandard&PoorandbyMoody’sInvestorsService.TheA-1ratingofStandard&PoorincludesbothA-1+andA-1-. Returntofootnote34 Footnote35 Thiscategoryincludesallnon-primeandBorCratings. 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