This instrument revokes Banking (prudential standard) determination No. 4 of 2019 and replaces Prudential Standard APS 221 Large Exposures with a new version determined by APRA, taking effect 1 January 2023 (preamble; "This instrument commences on 1 January 2023"). It is made under s 11AF of the Banking Act 1959 (Authority, paragraph 1). The standard sets a quantitative threshold for what constitutes a "large exposure" and a hard ceiling for permitted exposures to any single counterparty or group of connected counterparties, prescribes how exposures are to be measured, and prescribes governance, systems and reporting obligations for authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (authorised NOHCs) at Level 1 and Level 2 (Application, paragraphs 2-6; Identifying large exposures, paragraphs 15-16; Large exposure limits, paragraph 30; Measuring large exposure values, paragraph 32).

Mechanically, the standard:

Defines a large exposure as an exposure ≥ 10 per cent of an ADI’s Tier 1 capital at Level 1 or Level 2 (paragraph 16).
Caps aggregate large exposures to a single counterparty or group of connected counterparties at 25 per cent of Tier 1 capital, with limited exceptions (paragraph 30). The exceptions are: (a) certain foreign government/central bank exposures with a 0% risk weight limited to 50 per cent of Tier 1 capital (paragraph 30(a)); and (b) where APRA has designated an ADI as a domestic systemically important bank (D‑SIB), exposures between D‑SIBs are capped at 20 per cent (paragraph 30(b)).
Requires Board‑approved policies, annual reviews, systems and controls, and stress testing for large exposures and risk concentrations (The role of the Board, paragraph 10; Control of large exposures and risk concentrations, paragraphs 11-14).

meta-content-style-type: text/css meta-content-type: application/xhtml+xml; charset=utf-8 meta-generator: Aspose.Words for .NET 22.10.0 meta-keywords: "[SEC=OFFICIAL]" title: Banking (prudential standard) determination No. 15 of 2022

Commonwealth Coat of Arms

Banking (prudential standard) determination No. 15 of 2022

Prudential Standard APS 221 Large Exposures

Banking Act 1959

I, Renée Roberts, a delegate of APRA:

(a) under subsection 11AF(3) of the Banking Act 1959 (the Act) REVOKE Banking (prudential standard) determination No. 4 of 2019, including Prudential Standard APS 221 Large Exposures, made under that determination; and

(b) under subsection 11AF(1) of the Act DETERMINE Prudential Standard APS 221 Large Exposures, in the form set out in the schedule, which applies to all ADIs and authorised NOHCs to the extent provided in paragraphs 2 to 5 of the prudential standard.

This instrument commences on 1 January 2023.

Dated: 1 December 2022

[Signed]

Renée Roberts

Executive Director

Policy and Advice Division

Interpretation

In this instrument:

APRA means the Australian Prudential Regulation Authority.

ADI and authorised NOHC have their respective meanings given in section 5 of the Act.

Schedule

Prudential Standard APS 221 Large Exposures comprises the document commencing on the following page.

Commonwealth Coat of Arms

Prudential Standard APS 221

Large Exposures

Objectives and key requirements of this Prudential Standard<br>This Prudential Standard requires authorised deposit-taking institutions to implement prudent measures and to set prudent limits to monitor and control their large exposures and risk concentrations.<br>The key requirements of this Prudential Standard are that an authorised deposit-taking institution must:<br>have a Board-approved policy that governs its large exposures and risk concentrations;have adequate systems and controls to identify, measure, monitor and report large exposures and risk concentrations;identify connected counterparties;ensure its large exposures meet the large exposure limits; andmeasure exposure values for large exposure purposes using specified treatments.

Table of Contents

The role of the Board

Control of large exposures and risk concentrations

Identifying large exposures

Large exposure limits

Measuring large exposure values

Prior notification requirements

Approval requirements

Notification requirements

Significant risk concentrations

Adjustments and exclusions

Previous exercise of discretion

Attachment A — Measuring large exposure values

Authority

This Prudential Standard is made under section 11AF of the Banking Act 1959 (Banking Act).

Application

2. This Prudential Standard applies to all authorised deposit-taking institutions (ADIs), subject to paragraph 3 of this Prudential Standard.

3. This Prudential Standard does not apply to:

(a) purchased payment facility providers; or

(b) foreign ADIs that are subject to consolidated supervision by their home country supervisors in respect of credit concentrations and large exposure limits. However, foreign ADIs must detail their large exposure and risk concentration policies as well as the relevant high level controls in the risk management strategy required under Prudential Standard CPS 220 Risk Management (CPS 220). As part of its prudential oversight of the Australian operations of a foreign ADI, APRA may discuss with the foreign ADI’s parent and home supervisor any undue credit risk concentrations associated with the foreign ADI’s Australian operations.

4. A reference to an ADI in this Prudential Standard, unless otherwise indicated, is a reference to:

(a) an ADI on a Level 1 basis; and

(b) a group of which an ADI is a member on a Level 2 basis.

5. If an ADI to which this Prudential Standard applies is:

(a) the holding company for a group, the ADI must ensure that the requirements in this Prudential Standard are met on a Level 2 basis, where applicable; or

(b) a subsidiary of an authorised non-operating holding company (authorised NOHC), the authorised NOHC must ensure that the requirements in this Prudential Standard are met on a Level 2 basis, where applicable.

6. This Prudential Standard commences on 1 January 2023.

Interpretation

7. Terms that are defined in Prudential Standard APS 001 Definitions appear in bold the first time they are used in this Prudential Standard.

8. Where this Prudential Standard provides for APRA to exercise a power or discretion, this power or discretion is to be exercised in writing. In this Prudential Standard, unless the contrary intention appears, a reference to an Act, Regulations, Prudential Standard or Australian Accounting Standards is a reference to the instrument as in force from time to time.

Definitions

9. The following definitions are used in this Prudential Standard:

(a) government-related entity means a public sector entity, a state-owned enterprise or an entity controlled (whether directly or indirectly) by any level of government or a central bank;

(b) group of connected counterparties has the meaning given in paragraph 21 of this Prudential Standard; and

(c) retail exposure means an exposure to a counterparty who is a natural person or for an ADI subject to Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk (APS 113) an exposure categorised as a retail exposure for the purposes of APS 113.

The role of the Board

10. The Board of directors (Board) of an ADI is ultimately responsible for the oversight of the ADI’s large exposures and risk concentrations and for approving policies governing large exposures and risk concentrations of the ADI. The Board must ensure that these policies are reviewed regularly (at least annually) and that they remain adequate and appropriate for the ADI’s risk appetite, risk profile, capital and balance sheet size.

Control of large exposures and risk concentrations

11. An ADI’s large exposures and risk concentrations policy must give consideration to particular counterparties, groups of connected counterparties, industries, countries and asset classes and form part of the ADI's risk management strategy and risk management framework required under CPS 220. Unlimited exposures to any individual counterparty (e.g. a general guarantee of the obligations of a counterparty) is not permitted.

12. An ADI’s policies on large exposures and risk concentrations must, at a minimum, cover:

(a) exposure limits for:

(i) various types of counterparties (including, but not limited to, governments, government-related entities, ADIs and foreign equivalents, corporate and individual borrowers and credit risk mitigation (CRM) providers);

(ii) groups of connected counterparties;

(iii) individual industry sectors (where applicable);

(iv) individual countries (where applicable). The limits for individual countries should consider, amongst other things, any potential transfer risks where a borrower is not able to convert local currency into foreign exchange and consequently would be unable to make debt service payments to the ADI. This risk can arise from exchange restrictions imposed by the government in the borrower’s country; and

(v) various asset classes,

that are commensurate with the ADI’s risk appetite, risk profile, capital and balance sheet size;

(b) the circumstances in which the exposure limits may be exceeded and the authority and processes required for approving such excesses (e.g. by the ADI’s Board or a board committee);

(c) the process for identifying, measuring, evaluating, monitoring, controlling and reporting large exposures and risk concentrations of the ADI; and

(d) stress testing and scenario analysis of the ADI’s large exposures and risk concentrations to assess the impact of changes in market conditions and key risk factors (e.g. economic cycles, interest rates, liquidity conditions or other market movements) on its risk profile, capital and earnings.

13. An ADI must ensure that:

(a) adequate systems and controls are in place to identify, measure, monitor and report large exposures and risk concentrations of the ADI in a timely manner; and

(b) large exposures and risk concentrations of the ADI are reviewed at least annually.

14. Certain types of exposures and counterparties are excluded from the prudential limits in paragraph 30 of this Prudential Standard. An ADI must have adequate processes and controls in place to monitor these excluded exposures. An ADI is expected to consider how the risks arising from these types of exposures are incorporated into its risk management framework under CPS 220, including establishing internal limits and triggers commensurate with its risk appetite.

Identifying large exposures

15. An exposure to an individual counterparty or a group of connected counterparties is the aggregate of all claims, commitments and contingent liabilities arising from on- and off-balance sheet transactions (in both the banking and trading books) with the individual counterparty or group of connected counterparties and is measured in accordance with paragraphs 32 to 33 of this Prudential Standard.

16. A large exposure is an exposure to an individual counterparty or a group of connected counterparties (defined in paragraphs 20 to 29 of this Prudential Standard) that is greater than, or equal to, 10 per cent of an ADI’s Tier 1 Capital at either Level 1 or Level 2.[1]

17. A large exposure is one form of exposure that contributes to an ADI’s risk concentrations. Exposures to other sources of risk concentrations (e.g. commodities, currencies, sectors, geographies, funding sources) are not subject to the large exposure requirements in paragraphs 18 to 38 of this Prudential Standard.

18. A large exposure excludes:

(a) exposures deducted from an ADI’s Regulatory Capital (in accordance with Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111));[2]

(b) exposures to the extent that they have been written off;

(d) exposures to governments or central banks that are held as high-quality liquid assets under Prudential Standard APS 210 Liquidity (APS 210);

(e) exposures to governments or central banks which arise from the decomposition of derivatives into positions in accordance with Attachment B of Prudential Standard APS 116 Capital Adequacy: Market Risk (APS 116) that do not reflect a credit exposure to the government or central bank;

(f) intra-day interbank exposures;

(g) exposures arising in the course of settlement of market-related contracts unless the transaction remains unsettled after its delivery due date in which case the exposure value is the positive current exposure amount;

(h) exposures to qualifying central counterparties (QCCPs) relating to clearing activities (where QCCPs are defined in Prudential Standard APS 180 Capital Adequacy: Counterparty Credit Risk (APS 180);

(i) exposures to LMI arising from insured mortgages;[3] and

(j) exposures to an ADI required as part of an industry support contract relating to liquidity that has been certified by APRA under section 11CB of the Banking Act.

19. Where an exposure that has been excluded is hedged by a credit derivative, an ADI must recognise an exposure to the counterparty providing the credit protection in line with paragraph 5 of Attachment A of this Prudential Standard.

Connected counterparties

20. An ADI must treat a group of connected counterparties as a single counterparty.

21. A group of connected counterparties exists if:

(a) two or more counterparties are linked by:

(i) a control relationship (refer to paragraph 22 and 23 of this Prudential Standard);

(ii) an economic interdependence relationship (refer to paragraph 24 of this Prudential Standard);

(iii) other connections or relationships which, according to an ADI’s assessment, identifies the counterparties as constituting a single risk; or

(b) in relation to investments in structured vehicles, an ADI identifies a third party which contributes to an additional risk factor that is material, under paragraphs 27 to 30 of Attachment A of this Prudential Standard.

22. A control relationship exists between two counterparties if one of the counterparties has direct or indirect control over the other counterparty, or if both counterparties are directly or indirectly controlled by another entity (which may be another counterparty). This includes, but is not limited, to any of the following:

(a) the entity can exercise more than 50 per cent of the voting rights over the counterparty;

(b) the entity has a voting agreement with other shareholders resulting in control of voting rights over the counterparty;

(c) the entity has significant influence on the appointment of persons to or removal of persons from the counterparty’s management, board committees or Board; or

(d) the entity has significant influence on a senior manager or senior management of the counterparty (including influence on the policies of the counterparty).

23. In determining whether a control relationship exists, an ADI must also refer to the criteria in relevant Australian Accounting Standards.

24. If an ADI’s exposure to a non-retail counterparty exceeds five per cent of the ADI’s Tier 1 Capital, the ADI must identify all non-retail counterparties linked by an economic interdependence relationship to that counterparty. An economic interdependence relationship exists between two counterparties if, in the ADI’s assessment, the financial soundness of a counterparty could materially affect the financial soundness of another counterparty. This includes, but is not limited to, any of the following:

(a) 50 per cent or more of a counterparty’s annual gross receipts or gross expenditures is derived from transactions with the other counterparty;

(b) one counterparty has fully or partly guaranteed the exposure of the other counterparty, or is liable by other means, and the exposure is significant, such that the guarantor is likely to default if a claim occurs;

(c) a significant part of a counterparty’s business is transacted with the other counterparty, which cannot be easily replaced by business from other customers within a reasonable time period;

(d) the expected source of funds to repay the loans of both counterparties is the same and neither counterparty has another independent source of income from which the loans may be fully repaid;

(e) it is likely that the financial difficulties of one counterparty would cause difficulties for the other counterparty in terms of full and timely repayment of liabilities;

(f) the insolvency or default of one counterparty is likely to be associated with the insolvency or default of the other counterparty; or

(g) the counterparties rely on the same source for the majority of their funding and, in the event of the common funds provider’s default, it is expected that an alternative funds provider could not be found.

25. For the purposes of paragraph 22 and 24 of this Prudential Standard, a government-related entity is not required to be treated as a connected counterparty with:

(a) its related government or central bank; or

(b) other government-related entities that are related to the same government or central bank.

26. An ADI is not required to include a counterparty in a group of connected counterparties under paragraph 24 of this Prudential Standard if the ADI is satisfied that the counterparty is able to overcome financial difficulties (including as a result of a default by other counterparties in the group) by finding alternative business partners or funding sources within a reasonable time period.

27. Exposures to central counterparties (CCPs) that are specifically related to clearing activities may be excluded when measuring exposures to a group of connected counterparties.

28. An ADI must review the reasons for not treating certain counterparties (including structured vehicles and third parties which contribute additional risk factors) as a group of connected counterparties in a timely manner.

29. APRA may require an ADI to treat counterparties as a group of connected counterparties if in APRA’s view they meet the criteria in paragraph 21 of this Prudential Standard.

Large exposure limits

30. The aggregate large exposures of an ADI to a counterparty or a group of connected counterparties must not exceed 25 per cent of the ADI’s Tier 1 Capital, except:

(a) exposures to foreign governments or central banks that receive a zero per cent risk-weight in accordance with Attachment B of Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112), which must not exceed 50 per cent of the ADI’s Tier 1 Capital;[4] and

(b) where the ADI has been determined by APRA to be a domestic systemically important bank (D-SIB), exposures to any other ADI determined by APRA to be a D-SIB must not exceed 20 per cent of the ADI’s Tier 1 Capital.[5]

These limits apply to an ADI’s large exposures at both Level 1 and Level 2 net of eligible CRM techniques and excluded exposures under paragraph 18 of this Prudential Standard. These limits do not apply to the exposures of an ADI to its related entities.[6]

31. Notwithstanding paragraph 30 of this Prudential Standard, APRA may set specific limits on an ADI’s exposures to particular counterparties, groups of connected counterparties, industry sectors, countries or asset classes, including property holdings and any other investments, having regard to the ADI’s individual circumstances.

Measuring large exposure values

32. An ADI must measure exposure values in accordance with Attachment A of this Prudential Standard. In measuring large exposures, an ADI must include all on-balance sheet exposures and off-balance sheet exposures in both the banking book and trading book and instruments that would give rise to counterparty credit risk (CCR) under APS 180.

33. APRA may determine the exposure value of a particular on-balance sheet or off-balance sheet exposure of an ADI if APRA considers that the ADI has not appropriately assessed the exposure.

Prior notification requirements

34. An ADI must notify APRA prior to committing to any proposed large exposures to non-government and non-ADI counterparties, subject to paragraph 35 of this Prudential Standard.

35. APRA may determine that an ADI is not required to notify APRA about proposed exposures that are below a specified threshold, having regard to the robustness of the ADI’s credit risk management framework.

Approval requirements

36. An ADI must obtain approval from APRA prior to undertaking any proposed exposures which would exceed the large exposure limits under paragraph 30 of this Prudential Standard or any specific limits determined under paragraph 31 of this Prudential Standard. Such approval will only be granted on an exceptions basis taking into consideration the individual circumstances of the ADI and the ADI’s assessment of:

(a) the concentration risks involved with exceeding the large exposure limits and why the proposed exposures will not unreasonably expose the ADI to excessive risk; and

(b) how the proposed exposures are consistent with its large exposures and risk concentration policies.

Notification requirements

37. An ADI must notify APRA immediately of any breach of the large exposure limits under paragraph 30 of this Prudential Standard or any specific limits determined by APRA under paragraph 31 of this Prudential Standard (other than those where APRA has provided an approval under paragraph 36 of this Prudential Standard), including how the breach arose and remedial actions taken or planned to be taken to deal with the breach.

38. An ADI must notify APRA immediately where it has concerns that its large exposures or risk concentrations have the potential to have a material impact on its capital adequacy and provide details of the proposed measures to address these concerns.

Significant risk concentrations

39. Where an ADI has a number of large exposures or where APRA is of the view that the ADI is exposed to a significant level of risk concentration, APRA may:

(a) require the ADI to maintain higher Prudential Capital Requirements (PCRs) at Level 1 or Level 2 or both. In considering whether an ADI’s PCRs should be increased, APRA will take into account:

(i) the consistency of the ADI’s exposures with the ADI’s large exposures and risk concentrations policies;

(ii) the number of exposures, their individual size and nature; and

(iii) the characteristics of the ADI, including the nature of its business and the experience of its management;

(b) impose higher risk-weights in relation to those exposures; or

Adjustments and exclusions

40. APRA may adjust or exclude a specific prudential requirement in this Prudential Standard in relation to one or more specified ADIs or authorised NOHCs.[7]

Previous exercise of discretion

41. An ADI must contact APRA if it seeks to place reliance, for the purposes of complying with this Prudential Standard, on a previous exemption or other exercise of discretion by APRA under a previous version of this Prudential Standard.

Attachment A—Measuring large exposure values

The exposure value to be used in measuring large exposures is:

(a) for banking book on-balance sheet non-derivative assets, the accounting value of the exposure that is net of specific provisions and value adjustments. An ADI may only use exposure values gross of specific provisions and value adjustments with prior agreement from APRA;

(b) for instruments that give rise to CCR held in the banking book and trading book (excluding securities financing transactions (SFTs)),[8] the exposure at default as measured under APS 180;

(c) for SFTs, the exposure value calculated using the simple or comprehensive approach to the recognition of collateral, and applying netting, as required under APS 112; and

(d) for banking book commitments, all committed exposures i.e. drawn on-balance sheet commitments and undrawn off-balance sheet commitments. Off-balance sheet commitments are to be converted into credit equivalent amounts by applying a 100 per cent conversion factor.

Credit risk mitigation

2. Eligible CRM techniques for large exposure purposes are those which are allowed in APS 112. Forms of collateral that are only eligible under the internal ratings-based approach in APS 113 are not permitted to be used in reducing exposure values for large exposure purposes.

3. An ADI must apply an eligible CRM technique in measuring exposures if the eligible CRM technique has been used in calculating the ADI’s capital requirements.

4. Where paragraph 3 of this Attachment applies, an ADI must reduce the exposure value to a counterparty by the amount determined by applying the eligible CRM technique, being:

(a) for guarantees and credit derivatives, the value of the protected amount;

(b) when the ADI uses the simple approach to the recognition of collateral in APS 112, the value of the part of the claim collateralised by the market value of the recognised eligible collateral;

(c) for any instruments with CCR, the value of the collateral as recognised in the calculation of the CCR exposure value; and

(d) in the case of eligible collateral when the ADI applies the comprehensive approach to the recognition of collateral in APS 112, the value of the collateral adjusted after applying supervisory haircuts. ADIs must not use internally modelled haircuts.

5. When the exposure value to a counterparty is reduced due to an eligible CRM technique, an ADI must also recognise an exposure to the CRM provider equal to the amount that the exposure value to the original counterparty was reduced (except for credit protection in the form of a credit default swap (CDS), which must be treated in accordance with paragraph 17(b) of this Attachment).

6. If there is a maturity mismatch in respect of credit risk mitigants, the credit protection (for the purpose of calculating an ADI’s large exposures) must be adjusted applying the requirements in Attachments G, I and J of APS 112.[9]

On-balance sheet netting

7. Where an ADI has legally enforceable netting arrangements in place for loans and deposits, an ADI must use net credit exposures subject to the requirements for on-balance sheet netting for loans and deposits in APS 112.

Exposure values for trading book positions

8. An ADI must aggregate banking book and trading book exposures to determine its total exposure to an individual counterparty.

9. The exposure value for non-derivative debt instruments and equity instruments is the accounting value of the exposure i.e. the market value.

10. The exposure value for swaps, futures, forwards and credit derivatives is calculated by converting the instruments into positions in accordance with Attachment B of APS 116 such that these instruments are decomposed into their individual legs. An ADI is to recognise only those transaction legs for which exposures are not excluded under paragraph 18 of this Prudential Standard.

11. For credit derivatives that represent sold protection, the exposure to the referenced name is the amount due in the case that the referenced name triggers the instrument less the absolute market value of the credit protection.[10] For credit-linked notes, the protection seller must consider positions in the bond of the note issuer as well as in the underlying credit referenced by the note.

12. For the purposes of this Prudential Standard, the exposure value of an option is calculated as the change in the option value that would result from a default of the respective underlying instrument as follows:[11]

(a) for a call, the exposure is the market value of the option. For a long call this is a positive value whereas for a short call this is a negative value; and

(b) for a put, the exposure value is the option’s strike price less the market value of the option. For a short put this is a positive value whereas for a long put this is a negative value.

An ADI must aggregate the resulting option exposures to each underlying counterparty. If there is a negative net exposure after aggregation of all option exposures, the option exposure must be set to nil.

13. An ADI’s exposure to transactions (e.g. index positions, securitisations, hedge funds, investment funds) must be calculated according to the requirements for similar instruments in paragraphs 21 to 30 of this Attachment. This may result in the exposure value being assigned to a structured vehicle itself and treated as a distinct counterparty, to counterparties corresponding to the underlying assets or to an aggregated unknown exposure amount (which is treated as applying to a distinct counterparty to the ADI) when the ADI is unable to identify underlying assets.

Offsetting long and short positions in the trading book in the same issue

14. An ADI may offset long and short positions in the same issue i.e. if the issuer, coupon, currency and maturity are identical resulting in a net position in that specific issue in order to calculate its exposures to a particular issuer.

Offsetting long and short positions in the trading book in different issues

15. An ADI may offset positions in different issues from the same issuer only when the short position is junior to, or ranks pari passu with, the long position. An ADI may allocate securities into broad categories of seniority (e.g. equity, subordinated debt and senior debt) to determine the relative seniority of positions.

16. An ADI must not offset long and short positions in different issues relating to the same issuer in calculating its exposure values if it determines that allocation by seniority is not feasible.

17. For positions hedged by credit derivatives:

(a) the hedge may be recognised provided the underlying of the hedge and the position hedged satisfy the requirement in paragraph 15 of this Attachment; and

(b) any reduction in exposure to the original counterparty must result in a new exposure to the credit protection provider (in accordance with paragraph 5 of this Attachment), except where the credit protection is in the form of a CDS and either the CDS provider, or the entity to which the credit protection applies, is not a financial institution. In this situation, the amount assigned to the CDS provider is the exposure at default calculated under APS 180.

18. An ADI is not permitted to offset trading book positions against banking book positions.

19. When the result of offsetting in the trading book is a net short position with an individual counterparty, this net short position does not need to be considered as an exposure for the purposes of this Prudential Standard.

Exposure values for covered bonds

20. An ADI must calculate the exposure value for a covered bond using the full (i.e. 100 per cent) nominal value of its covered bond holding.[12] The counterparty to which the exposure value is assigned is the issuer of the covered bond.

Exposures to structured vehicles

21. An ADI must calculate an exposure to a structured vehicle (e.g. funds, securitisation vehicles, structured finance products) which holds non-retail assets using the look-through requirements in paragraphs 22 to 26 of this Attachment.

22. Where an ADI’s exposure to a structured vehicle is less than 0.25 per cent of the ADI’s Tier 1 Capital, or the ADI can demonstrate that all the underlying assets of the structured vehicle are less than 0.25 per cent of the ADI’s Tier 1 Capital, an ADI must assign an exposure value to the structured vehicle equal to the nominal exposure it has to the structured vehicle. In this case, an ADI is not required to look through the structured vehicle to identify the underlying assets.

23. Where an ADI’s exposure value to at least one of the underlying assets of the structured vehicle is greater than or equal to 0.25 per cent of the ADI’s Tier 1 Capital, the ADI must assign an exposure value to the structured vehicle equal to the nominal exposure it has to the structured vehicle and:

(a) for each underlying asset of the structured vehicle that can be identified and that has an exposure value greater than or equal to 0.25 per cent of the ADI’s Tier 1 Capital, the ADI must look through the structured vehicle and assign the exposure values to the counterparties for each of the underlying assets; and

(b) for each underlying asset of the structured vehicle that cannot be identified and that has an exposure value greater than or equal to 0.25 per cent of the ADI’s Tier 1 Capital, the ADI must assign the exposure value to an unknown counterparty which is treated as a distinct counterparty to the ADI. An ADI must aggregate unknown counterparties across its exposures to structured vehicles as if they relate to a single counterparty to which large exposure limits would apply under paragraph 30 of this Prudential Standard.

24. When an ADI has applied the look-through requirements for a structured vehicle under paragraph 23 of this Attachment, and all investors in the structured vehicle rank pari passu, the exposure value assigned to each counterparty is equal to the pro rata share that the ADI holds in the structured vehicle multiplied by the value of the underlying assets.

25. When an ADI has applied the look-through requirements for a structured vehicle under paragraph 23 of this Attachment, and there are different seniority levels among investors in the structured vehicle, the exposure value to a counterparty must be measured for each tranche within the structured vehicle assuming a pro rata distribution of losses amongst investors in a single tranche. To measure the exposure value in the underlying assets, the ADI must:

(a) identify the lower of the value of the tranche in which an ADI has an exposure to and the nominal value of each underlying asset included in the underlying portfolio of assets; and

(b) apply the pro rata share of the ADI’s exposure in the tranche to the value determined in paragraph 25(a) of this Attachment.

The resulting exposure value to each underlying asset is capped at the nominal value of the underlying asset.

26. When an ADI has not applied the look-through requirements for an exposure to a structured vehicle it must assess the risk concentrations of the underlying assets of the structured vehicle on an annual basis.

Additional risk factor

27. An ADI must identify third parties which contribute to an additional risk factor inherent in the structured vehicle itself rather than in the assets held by the vehicle. Third parties may include, but are not limited to, fund managers, originators, liquidity providers and credit protection providers. This applies regardless of whether an ADI has applied the look-through requirements in paragraphs 22 to 26 of this Attachment.

28. An ADI must treat structured vehicles as a group of connected counterparties if they share one or more common additional risk factors that pose material risks to the ADI’s exposures to these structured vehicles.

29. Where an ADI identifies more than one third party as a driver of a particular additional risk factor, the ADI must assign the exposure in the structured vehicles to each of the third parties if they pose material risks to the structured vehicles.

30. An ADI must add its exposures to a structured vehicle associated with a third party deemed to contribute to an additional risk factor to other exposures that the ADI has to that third party if:

(a) there is a material risk to the exposures in the structured vehicle if the third party were to default on a direct exposure to the ADI; or

(b) there is a material risk to a direct exposure to that third party if the third party were to default in its role in the structured vehicles.

Exposure values for non-qualifying central counterparties and clearing activity exposures

31. An ADI must measure its exposure to non-qualifying CCPs as the sum of clearing exposures (determined in accordance with paragraph 32 of this Attachment) and non-clearing exposures (determined in accordance with paragraph 34 of this Attachment). This aggregate exposure is subject to the large exposure limits in paragraph 30 of this Prudential Standard.

32. Clearing exposures to a non-qualifying CCP are calculated as:

(a) for trade exposures, the exposure measure corresponding to trading book exposure value determined in accordance with APS 112;

(b) for non-segregated initial margin, the nominal amount of initial margin posted;

(d) for equity stakes, the nominal amount.

Clearing exposures to a non-qualifying CCP in relation to segregated initial margin and unfunded default fund contributions are excluded.

33. When an ADI acts as a clearing member to a CCP or is a client of a clearing member, the counterparty to which exposures are assigned must be determined in accordance with APS 180.

34. Non-clearing exposures to a non-qualifying CCP are all exposures to a non-qualifying CCP not directly related to the provision of clearing services (e.g. funding facilities, credit facilities, and guarantees).

[1] For the avoidance of doubt, a reference to a counterparty includes a structured vehicle.

[2] Exposures which are 1250 per cent risk-weighted under Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112) are subject to the large exposure limits.

[3] In the case of an ADI using the standardised approach to credit risk, insured mortgages are those subject to risk-weights for residential property under paragraph 16 of Attachment A of APS 112.

[4] Paragraph 30(a) includes exposures guaranteed by, or secured against securities issued by, foreign governments or central banks that receive a zero per cent risk weight under Attachment B of APS 112, provided the criteria for recognition of the credit risk mitigation in paragraphs 2 to 3 of Attachment A are met.

[5] Refer to Information Paper - Domestic systemically important banks in Australia as at December 2013.

[6] Prudential limits on an ADI’s exposures to related entities are set out in Prudential Standard APS 222 Associations with Related Entities (APS 222). The limits on exposures to related entities in APS 222 do not apply to the exposures of an ADI to its unrelated entities.

[7] Refer to subsection 11AF(2) of the Banking Act.

[8] SFTs are defined in paragraph 14 of APS 112.

[9] APS 112 only recognises CRM with maturity mismatches when their original maturities are greater than or equal to 12 months and the residual maturity of the CRM is more than three months.

[10] Where the market value of the credit derivative is positive for the protection seller, the positive market value must be added to the exposure of the protection seller to the protection buyer, such as in the case where the present value of the already agreed but not yet paid periodic premium leg exceeds the present value of the contingent credit protection leg.

[11] The treatment of options for large exposure purposes is different to the exposure values used for options in calculating capital requirements in APS 116.

[12] Covered bonds are defined in Prudential Standard APS 121 Covered bonds.

meta-content-style-type: text/css meta-content-type: application/xhtml+xml; charset=utf-8 meta-generator: Aspose.Words for .NET 22.10.0 meta-keywords: "[SEC=OFFICIAL]" title: Banking (prudential standard) determination No. 15 of 2022

Banking (prudential standard) determination No. 15 of 2022

Prudential Standard APS 221 Large Exposures

Banking Act 1959

I, Renée Roberts, a delegate of APRA:

This instrument commences on 1 January 2023.

Dated: 1 December 2022

[Signed]

Renée Roberts

Executive Director

Policy and Advice Division

Interpretation

In this instrument:

APRA means the Australian Prudential Regulation Authority.

ADI and authorised NOHC have their respective meanings given in section 5 of the Act.

Schedule

Prudential Standard APS 221 Large Exposures comprises the document commencing on the following page.

Prudential Standard APS 221

Large Exposures

The standard organises around a small set of operationally consequential concepts: large exposure, group of connected counterparties, Level 1 and Level 2 application, exposure measurement, eligible CRM, excluded exposures, structured vehicle look‑through, and supervisory discretion.

Large exposure: An exposure to an individual counterparty or group of connected counterparties that is ≥ 10 per cent of Tier 1 capital on either Level 1 or Level 2 (paragraph 16). The regulatory purpose is to isolate exposures large enough to materially affect an ADI’s capital, but the standard itself sets the threshold and then requires both monitoring and hard aggregate limits (see paragraph 30).

Group of connected counterparties: A group treated as a single counterparty where counterparties are linked by control, economic interdependence, other relevant connections identified by the ADI, or through additional risk factors in structured vehicles (paragraphs 20-21). Control is defined by typical corporate control indicia and requires reference to Australian Accounting Standards for determining control in borderline cases (paragraphs 22-23). Economic interdependence is triggered where, for instance, 50 per cent+ of receipts/expenditure is with the other party, material guarantees exist, shared funding sources are present, or default of one is likely to cause default of another (paragraph 24).

Level 1 and Level 2: The standard applies to ADIs on a Level 1 basis and to groups of which an ADI is a member on a Level 2 basis (Application, paragraph 4). If the ADI is a holding company or a subsidiary of an authorised NOHC it must ensure the standard is met on a Level 2 basis where applicable (paragraph 5). That requires institutions to aggregate exposures both at the solo and consolidated group levels and align governance accordingly.

Measurement rules: Attachment A prescribes exposure value methodologies for different instruments: accounting net carrying values for non‑derivative on‑balance sheet banking book exposures (Attachment A.1(a)), exposure at default under APS 180 for CCR instruments (Attachment A.1(b)), SFT treatment aligned with APS 112 (Attachment A.1(c)), 100% conversion factor for commitments (Attachment A.1(d)), special option treatments (Attachment A.12), covered bonds at full nominal (Attachment A.20), and detailed look‑through rules for structured vehicles with thresholds at 0.25% of Tier 1 capital triggering look‑through (Attachment A.21-26).

Credit Risk Mitigation (CRM): Only CRM techniques eligible under APS 112 are usable for reducing large exposure values (Attachment A.2). If CRM reduces the exposure value, an ADI must recognise an offsetting exposure to the CRM provider equal to the reduction, subject to particular treatments for CDS (Attachment A.5, A.17(b)). Maturity mismatch adjustments are required as in APS 112 (Attachment A.6).

Excluded exposures and monitoring: Certain categories are excluded from the large exposure calculation (e.g. exposures deducted from regulatory capital; Australian Government and some RBA exposures; intra‑day interbank; QCCP clearing exposures; insured mortgages; industry support liquidity obligations certified under s 11CB) but the ADI must still monitor and integrate risks arising from excluded exposures into its CPS 220 risk management framework and establish internal limits where appropriate (paragraphs 14, 18).

Supervisory discretion and remedies: APRA may set specific limits tailored to ADIs (paragraph 31), require reporting and higher capital or higher risk‑weights for significant concentrations (paragraph 39), determine exposure values where an ADI’s assessment is judged inappropriate (paragraph 33), require connected treatment of counterparties (paragraph 29), and adjust or exclude requirements for specified entities (paragraph 40). Notification and approval requirements create procedural controls on large or limit‑breaching exposures (paragraphs 34-37).

The standard applies to all authorised deposit‑taking institutions (ADIs), except where explicitly excluded, and to authorised non‑operating holding companies to the extent provided (Application, paragraphs 2-5). The primary population is therefore: locally incorporated ADIs (banks, building societies, credit unions) and the consolidated groups of which they are members on a Level 2 basis, including authorised NOHCs that must ensure Level 2 compliance where applicable (paragraphs 4-5).

Explicit exclusions: Purchased payment facility providers are excluded (paragraph 3(a)). Foreign ADIs that are subject to consolidated supervision by their home country supervisors in respect of credit concentrations and large exposure limits are not required to apply the full content of this standard, but they must still detail their large exposure and risk concentration policies and high level controls in their CPS 220 Risk Management documentation. APRA may engage with the foreign ADI’s parent and home supervisor where it identifies undue credit risk concentrations in the Australian operations (paragraph 3(b)).

Subsidiaries and groups: Where an ADI is a holding company for a group, that ADI must ensure Level 2 compliance; similarly, if an ADI is a subsidiary of an authorised NOHC the authorised NOHC must ensure Level 2 requirements are met (paragraph 5). The standard therefore attaches obligations up and down the ownership chain to ensure consolidation of exposures.

Internal stakeholders: The Board has ultimate responsibility for oversight and must approve and annually review policies governing large exposures and risk concentrations (paragraph 10). Senior management and functions responsible for risk measurement, credit approval, and compliance will be directly affected by the measurement, monitoring and reporting prescriptions (paragraphs 11-14; Attachment A).

Counterparties and markets: Although not regulated by the standard, counterparties (corporates, sovereigns, banks, structured vehicles, CCPs, CRM providers) will be identified and aggregated in ways that influence ADI credit appetite and contracting behaviour. The standard requires ADIs to treat groups of connected counterparties as a single counterparty where specified connections exist (paragraphs 20-21), and APRA may require treating certain counterparties as connected (paragraph 29). This can change how ADIs underwrite exposures, structure collateral or guarantees, and price credit.

Third parties in structured vehicles: Fund managers, originators, liquidity providers and credit protection providers can become de facto aggregation points because the standard requires ADIs to identify third parties that contribute additional risk factors in structured vehicles and to aggregate exposures to those third parties as necessary (Attachment A, paragraphs 27-30). Thus entities that provide key services to multiple structured vehicles can become central to an ADI’s large exposure calculus.

Supervisory counterparties: APRA itself is directly empowered to require notices, approvals and to set specific limits or adjustments and to determine exposure values where an ADI’s measurement is judged inappropriate (paragraphs 31-36, 33, 40). ADIs must build processes to interact with APRA for prior notifications, approvals and breach reporting (paragraphs 34-38).

Duties distributed across the standard are operational, governance and reporting in nature. They allocate responsibility between Boards, senior management, ADI risk functions and APRA.

Board duties: The Board is "ultimately responsible" for oversight of large exposures and risk concentrations, must approve a policy governing them, and must ensure at least annual reviews to maintain alignment with risk appetite, risk profile, capital and balance sheet size (paragraph 10). The Board therefore must set limit structures, exceptions processes, and compliance oversight.

Policy and systems duties: An ADI must have a Board‑approved policy covering exposure limits by counterparty type, groups of connected counterparties, industry sectors, countries and asset classes commensurate with its risk appetite, and procedures for approving and documenting excesses (paragraph 12(a)-(b)). The policy must also describe identification, measurement, monitoring, control and reporting processes and stress testing arrangements (paragraph 12(c)-(d)). The ADI must ensure adequate systems and controls to identify, measure, monitor and report large exposures and risk concentrations in a timely manner and review them at least annually (paragraph 13).

Measurement duties: Exposure values must be measured in accordance with Attachment A, which prescribes detailed treatments for on‑ and off‑balance sheet items, CCR instruments, SFTs, commitments (100% conversion), options, covered bonds and structured vehicles (paragraph 32; Attachment A, paragraphs 1-34). ADIs must apply only eligible CRM recognised in APS 112 and must recognise offsetting exposures to CRM providers when CRM is applied (Attachment A, paragraphs 2-6).

Connected counterparties duties: ADIs must identify connected counterparties and treat a group as a single counterparty (paragraph 20). Determination of control must refer to the criteria in the standard and relevant Australian Accounting Standards (paragraphs 22-23). Where a non‑retail counterparty exposure exceeds 5 per cent of Tier 1 capital, the ADI must identify economically interdependent counterparties (paragraph 24).

Notification and approval duties: ADIs must notify APRA prior to committing to proposed large exposures to non‑government and non‑ADI counterparties (paragraph 34), and must obtain APRA approval before undertaking exposures that would exceed the limits in paragraph 30 or any APRA‑set specific limits (paragraph 36). Notifications of breaches must be immediate, with details on causes and remedial actions (paragraph 37). ADIs must also notify APRA immediately where concerns about material impacts on capital adequacy exist (paragraph 38).

Monitoring of excluded exposures: Certain exposures are excluded from the limit calculations but ADIs must have adequate processes and controls to monitor those excluded exposures and consider how they feed into CPS 220 risk management (paragraphs 14, 18).

Rights and APRA discretion: The text creates rights for ADIs to seek and obtain APRA approvals and, conversely, for APRA to withhold or condition approvals. APRA may set thresholds below which prior notification is not required (paragraph 35), determine exposure values where an ADI’s assessment is deficient (paragraph 33), require that counterparties be treated as connected (paragraph 29), set specific limits tailored to an ADI (paragraph 31), require higher PCRs or impose higher risk weights where concentrations are significant (paragraph 39), and adjust or exclude particular prudential requirements for specified ADIs or authorised NOHCs (paragraph 40). The exercise of APRA’s powers and discretions is to be given in writing (Interpretation, paragraph 8).

Procedural duty to review reliance on past discretions: If an ADI intends to rely on a prior APRA exemption or discretion granted under an earlier version of the standard, it must contact APRA (paragraph 41). This creates an operational duty to validate continuity of past approvals in light of the updated standard.

The standard itself does not prescribe criminal sanctions or fixed monetary fines within its text. Enforcement and remedial responses are framed as supervisory tools and procedural controls, and the standard cross‑refers to APRA’s powers under the Banking Act (Authority, paragraph 1; footnote referring to subsection 11AF(2) for adjustments and exclusions). Within the text APRA’s enforcement and supervisory mechanisms are explicit and transactionally significant:

Approval and consent regime: ADIs must obtain APRA approval before undertaking exposures that would exceed the large exposure limits (paragraph 36). APRA will grant such approvals only on an exceptions basis and expects the ADI to justify concentration risk and consistency with policies (paragraph 36(a)-(b)). Undertaking an exposure without obtaining required approval would place the ADI in breach of the standard and trigger immediate notification obligations (paragraph 37).
Immediate notification obligations: An ADI must notify APRA immediately of breaches of paragraph 30 limits or any APRA-set specific limits (paragraph 37). The ADI must explain how the breach arose and the remedial actions taken or planned. There is a parallel notification duty where large exposures or risk concentrations have potential material impacts on capital adequacy (paragraph 38).
Supervisory remedial powers: APRA may require an ADI to maintain higher Prudential Capital Requirements (PCRs) at Level 1 or Level 2, impose higher risk weights for specific exposures, or require the ADI to take measures to reduce concentration (paragraph 39(a)-(c)). These are direct prudential outcomes that affect capital planning and pricing.
Discretion to determine or adjust requirements: APRA may determine exposure values if it considers an ADI has not appropriately assessed them (paragraph 33). APRA may also set specific limits on exposures to particular counterparties or classes (paragraph 31) and adjust or exclude specific prudential requirements for specified ADIs or authorised NOHCs (paragraph 40). These powers let APRA tailor enforcement and supervisory outcomes to institutional circumstances.
Procedural binding and documentation: APRA’s exercise of power or discretion under the standard is required to be in writing (Interpretation, paragraph 8). ADIs are obligated to contact APRA if they intend to rely on previous exemptions or exercises of discretion under prior versions of the standard (paragraph 41).

What the standard does not do in its own text: It does not set out criminal penalties, civil monetary fines, or enforcement procedures such as directions, enforceable undertakings, or revocation of licences; those powers and sanctions are found in the Banking Act and related legislation rather than in the prudential standard text provided. The standard instead relies on supervisory levers , approvals, required notifications, capital add‑ons, specific limits and risk‑weight adjustments , to achieve compliance.

Compliance failure implications in practice: Given APRA’s listed tools, failure to comply can be expected to lead to supervisory intervention that increases reported capital requirements, alters risk‑weighting and limits, and constrains business activity until remedial steps are implemented. The standard creates procedural bases (notifications, approval requirements) that lawfully expose an ADI to APRA scrutiny and possible prudential adjustments; these create economic costs even absent explicit fines set within this instrument.

APS 221 is explicitly cross‑referential; it operates within APRA’s broader prudential architecture and interacts with other prudential standards, the Banking Act and Australian Accounting Standards. The standard both defers to and imposes consistency with multiple instruments.

Banking Act and APRA powers: The standard is made under s 11AF of the Banking Act 1959 (Authority, paragraph 1) and references section 11CB as the statutory basis for excluding certain industry support liquidity obligations when certified by APRA (paragraph 18(j)). It also refers to subsection 11AF(2) in the footnote on APRA’s ability to adjust or exclude requirements (footnote [[7]]). APRA’s ability to exercise discretion, determine exposure values and set limits sits within this statutory framework.

Interaction with other APS instruments: APS 221 references and relies on definitions, methods and eligibility tests contained in other APRA standards:

APS 112 Capital Adequacy: Standardised Approach to Credit Risk , determines zero per cent risk weights for certain foreign government exposures relevant to the 50 per cent exception in paragraph 30(a) and supplies CRM recognition rules and maturity mismatch treatments referenced in Attachment A (Attachment A.2, A.6; paragraph 30(a); footnotes [[4]], [[9]]).
APS 113 Internal Ratings‑Based Approach , defines retail exposure and is referenced in definitions (Definitions, paragraph 9(c)).
APS 111 Measurement of Capital , exposures deducted from regulatory capital are excluded from the large exposures calculation (paragraph 18(a)).
APS 116 Market Risk Attachment B , decomposition treatment of derivatives that may generate exposures to governments or central banks that do not reflect credit exposures (paragraph 18(e); Attachment A.10 referencing APS 116 Attachment B).
APS 180 Counterparty Credit Risk , definitions for QCCPs and rules for CCR exposure at default feed the measurement rules (Attachment A.1(b); paragraph 18(h)).
APS 210 Liquidity , identifies high‑quality liquid assets that feed into exclusions for exposures to governments or central banks (paragraph 18(d)).
APS 121 Covered Bonds , defines covered bonds for the purpose of full nominal treatment (Attachment A.20).
APS 222 Associations with Related Entities , sets separate prudential limits for exposures to related entities and is not displaced by APS 221 (footnote [[6]]).

Accounting standards: The standard requires ADIs to use Australian Accounting Standards to determine control when applying the control relationship test for connected counterparties (paragraph 23). For on‑balance sheet measurement, it sets accounting value net of specific provisions and value adjustments as the default exposure value for non‑derivative assets (Attachment A.1(a)). It also allows ADIs, with APRA agreement, to use gross values in certain circumstances.

Supervisory coordination for foreign ADIs: Foreign ADIs consolidated by home country supervisors are partly exempt from the full standard but must disclose large exposure and risk concentration policies under CPS 220, and APRA may discuss issues with home supervisors and parents where Australian operations show undue concentrations (paragraph 3(b)). That creates an interface for international supervisory cooperation.

Capital and liquidity regulatory linkage: The standard ties exposure limits and measurement to Tier 1 capital. It also permits APRA to increase Prudential Capital Requirements (PCRs) or risk weights where concentrations are material (paragraph 39). Thus exposures feed into capital adequacy and liquidity planning through linkages to APS 111, APS 112 and APS 210.

Netting, CRM and SFT rules: Attachment A binds measurement to the netting and CRM recognition frameworks set out in APS 112 and APS 180. For example, SFTs exposure values use APS 112 approaches and netting rules; eligible CRM is limited to APS 112‑recognised techniques (Attachment A.1(c), A.2). Where APS 112 recognises maturity mismatches only in certain circumstances, the same constraints apply for large exposure calculation (Attachment A.6; footnote [[9]]).

Regulatory capital exclusions and high risk weight exceptions: The standard excludes exposures deducted from regulatory capital (APS 111) but clarifies that exposures subject to 1250 per cent risk weight under APS 112 remain subject to the large exposure limits (footnote [[2]]). This establishes a specific interaction where capital treatment does not automatically exempt exposures from large exposure limits unless they are deducted from regulatory capital.

Procedural cross‑references and prior discretions: ADIs relying on prior APRA exemptions or discretionary exercises under previous versions of the standard must contact APRA to confirm continued reliance is permissible (paragraph 41). APRA’s power to adjust or exclude requirements (paragraph 40) and to issue written discretions (Interpretation, paragraph 8) creates a procedural interface between historical supervisory items and the new standard.

The instrument itself replaces Banking (prudential standard) determination No. 4 of 2019 and the previous Prudential Standard APS 221 Large Exposures made under that determination, revoking them and determining the new standard in their place (preamble). The revocation and replacement were effected by an APRA delegate, Renée Roberts, Executive Director Policy and Advice Division, by instrument dated 1 December 2022, with commencement 1 January 2023 (preamble). The schedule contains the full text of the new Prudential Standard APS 221 Large Exposures.

The standard cross‑refers to prior APRA documents and standards whose own amendment histories are not reproduced in this instrument. A specific external reference appears in a footnote to an APRA Information Paper on D‑SIBs from December 2013 (footnote [[5]]), which is cited to explain the D‑SIB concept used in paragraph 30(b). The instrument does not itself summarise prior amendments to the APS 221 text beyond revoking the 2019 instrument.

The instrument also incorporates, by reference, provisions from other APRA prudential standards (APS 111, APS 112, APS 113, APS 116, APS 116 Attachment B, APS 180, APS 210, APS 121, APS 222, CPS 220) and to the extent those instruments change over time the cross‑referenced criteria apply "as in force from time to time" (Interpretation, paragraph 8). That means the practical measurement and eligibility tests embedded by reference will evolve with amendments to those standards without requiring amendment of APS 221 for each technical change in cross‑referenced material.

APRA retains explicit authority to adjust or exclude the application of specific prudential requirements in APS 221 for specified ADIs or authorised NOHCs under paragraph 40, with the statutory basis noted in footnote [[7]] pointing to subsection 11AF(2) of the Banking Act. That creates an ongoing mechanism for ad hoc modifications at APRA’s discretion, subject to written exercise per the Interpretation clause (paragraph 8).

No other legislative amendment history, transitional provisions beyond the commencement date, or staged implementation timetables are contained in the text provided. The standard does, however, require ADIs to check with APRA about any prior exemptions relied on under previous versions (paragraph 41), which operationally forces reconciliation of historical discretions with the new standard.

The instrument contains no reference to judicial decisions, appeals, or litigation arising from its content. It names no cases, does not cite judicial interpretations, and does not summarise any litigation history against APRA or ADIs concerning large exposure regulation. The only non‑legislative reference is to an APRA Information Paper on domestic systemically important banks (D‑SIBs) from December 2013 (footnote [[5]]).

Where the standard contemplates APRA exercising discretion (for example, determining exposure values under paragraph 33, treating counterparties as connected under paragraph 29, or adjusting or excluding requirements under paragraph 40), the text requires APRA to exercise such powers in writing (Interpretation, paragraph 8). The standard does not set out the internal administrative review rights, merits review processes or judicial review thresholds; those remedies would be determined by the Banking Act and general administrative law principles rather than by APS 221’s text.

The instrument does require ADIs to contact APRA if they intend to rely on previous exemptions or discretions ("Previous exercise of discretion", paragraph 41), which could affect the factual basis of any past supervisory decisions and, potentially, the grounds on which a party might seek judicial review. However, the standard does not record past outcomes or legal challenges.

Given the absence of litigation references within the text, a search of external databases would be required to determine whether any judicial review or other litigation has occurred in relation to earlier versions of APS 221 or to APRA's exercise of discretion under relevant prudential standards. That external research falls outside the instrument itself.

The standard contains several operational details that can catch practitioners and risk teams if not carefully implemented. These are concrete technical traps and procedural requirements grounded in the text.

Dual thresholds and aggregation across Levels: A "large exposure" is defined by a 10 per cent Tier 1 capital threshold at either Level 1 or Level 2 (paragraph 16). That means exposures that are immaterial on a solo basis can become large once consolidated. ADIs that focus only on a single reporting level risk missing large exposures arising at the group level.
Different ceilings and exceptions: The base ceiling is 25 per cent of Tier 1 capital (paragraph 30). Exceptions include 50 per cent for certain foreign government/central bank exposures with 0% risk weight (paragraph 30(a)) and a 20 per cent ceiling for exposures between D‑SIBs where applicable (paragraph 30(b)). Applying the wrong ceiling to the wrong exposure category will result in a breach.
Exclusions do not remove monitoring obligations: Several exposures are excluded from the large exposure calculation (paragraph 18), but ADIs must still have adequate processes and controls to monitor excluded exposures and incorporate them into CPS 220 risk management (paragraph 14). Misreading an exclusion as a licence to ignore risk is a compliance error.
Credit Risk Mitigation recognition limits: Only CRM techniques permitted in APS 112 may be used to reduce large exposure values (Attachment A.2), and CRM applied for capital calculation must also be applied for large exposure measurement (Attachment A.3). CRM with internal models under APS 113 that are not permitted under APS 112 cannot be used. Institutions using internal models for CRM must ensure they have APRA approval for large exposure treatment.
Offsetting and netting constraints: Netting of long and short positions is allowed in limited circumstances in the trading book (Attachment A.14-16), but trading book positions cannot be offset against banking book positions (Attachment A.18). Also, legally enforceable on‑balance sheet netting for loans and deposits must meet APS 112 requirements (Attachment A.7). Legal enforceability issues can therefore change exposure values materially.
Structured vehicle look‑through threshold is low: The look‑through requirement is triggered when exposure to the structured vehicle or any underlying asset is ≥ 0.25 per cent of Tier 1 capital (Attachment A.22-23). That is a small number relative to Tier 1 capital, which means many fund positions will attract look‑through and potentially produce exposures to multiple underlying counterparties and unknown counterparties, requiring aggregation.
Unknown counterparties aggregation: Where underlying assets cannot be identified and exceed the 0.25 per cent threshold, unknown counterparties must be treated as a single distinct counterparty and aggregated across structured vehicle exposures (Attachment A.23(b)). This can produce concentrated "unknown" exposures that suddenly become subject to the 25 per cent limit.
Recognised CRM creates counterparty exposure to the CRM provider: When CRM reduces exposure to an original counterparty, an offsetting exposure to the CRM provider must be recognised (Attachment A.5). In particular, credit protection in the form of a CDS has special treatment (Attachment A.5 and Attachment A.17(b)), and if the CDS provider or the reference entity is not a financial institution the exposure assigned to the CDS provider is APS 180 exposure at default (Attachment A.17(b)).
Option treatment differs from capital rules: The exposure measure for options is the change in option value resulting from default of the underlying instrument, with different directional rules for calls and puts (Attachment A.12). The standard explicitly notes that this treatment differs from option exposure calculation under APS 116 (Attachment A.12; footnote [[11]]). Reusing capital calculation routines for large exposures without adjusting for this difference risks misstatement.
APRA discretion and documentation: APRA may determine exposure values if it considers an ADI’s assessment inappropriate (paragraph 33). ADIs relying on previous APRA discretions must contact APRA (paragraph 41). Failure to maintain contemporaneous documentation explaining why a counterparty was not treated as connected or why a CRM was eligible may expose an ADI to APRA re‑assessment and reallocation of exposures.
Government‑related entities carve‑out: A government-related entity is not required to be treated as connected with its government or with other related government-related entities (paragraph 25). Misapplying that carve‑out without assessing the functional links among entities may understate concentration risks.
Prior notification thresholds can be varied by APRA: While ADIs must notify APRA prior to committing to proposed large exposures to non‑government/non‑ADI counterparties (paragraph 34), APRA may determine that notification is not required below a specified threshold (paragraph 35). ADIs should not assume a default lower notification threshold exists; they must confirm with APRA.
Covered bonds counted at full nominal: Covered bonds are measured at 100 per cent nominal value and assigned to the issuer (Attachment A.20). For ADIs holding covered bonds, this creates a potentially larger measured exposure than market or risk‑weighted approaches might suggest.

Compliance requires coordinated changes to governance, credit and market risk processes, data systems, legal documentation, and APRA engagement protocols. The following is a practical, source‑based checklist mapped to the standard’s requirements.

Board governance and policy approval (paragraph 10; paragraph 12): Ensure the Board approves a large exposures and risk concentrations policy that sets limits by counterparty type, groups of connected counterparties, industry, country and asset class commensurate with the ADI’s risk appetite, capital and balance sheet size. The policy must specify exception approval authorities and processes for exceeding limits. Schedule an annual formal review and include stress test results in the review.
Systems and controls (paragraph 13; Attachment A): Implement systems that capture all on‑ and off‑balance sheet exposures in both banking and trading books, CCR instruments, SFTs and commitments. Ensure the systems apply the measurement rules in Attachment A: accounting value net of specific provisions for non‑derivative assets, APS 180 EAD for CCR instruments, SFT recognition consistent with APS 112, 100% conversion for commitments, option exposure calculations as per Attachment A.12 and full nominal treatment for covered bonds.
CRM and netting documentation (Attachment A.2-7): Align CRM treatment with APS 112 eligibility. Maintain legal opinions and collateral valuations showing CRM meets APS 112 recognition criteria. Where netting is used for loans and deposits, maintain legally enforceable netting documentation meeting APS 112 requirements.
Structured vehicle processes (Attachment A.21-26): Implement look‑through processes with thresholds at 0.25 per cent of Tier 1 capital. Maintain mapping from fund holdings to underlying assets and record unknown counterparties. For structured vehicles, identify third parties that cause additional risk factors (Attachment A.27-30) and aggregate exposures to such third parties where material.
Connected counterparties identification (paragraphs 20-29): Build a connected counterparties identification matrix that uses control indicia consistent with Australian Accounting Standards (paragraph 23) and economic interdependence tests (paragraph 24). Trigger expanded identification whenever a non‑retail counterparty exposure exceeds 5 per cent of Tier 1 capital (paragraph 24). Document reasons where counterparties are not treated as connected and periodically review those decisions (paragraph 28).
Limits and credit approval procedures (paragraph 12): Flow Board‑approved limits into delegated credit approvals and ensure credit committees check aggregated exposure calculations before committing to large transactions. Require credit approval officers to verify large exposure calculations and CRM application consistent with Attachment A.
Stress testing and scenario analysis (paragraph 12(d)): Integrate large exposure concentration scenarios into the ADI’s stress testing framework, including scenarios for economic cycles, counterparty default, funding shocks and exchange controls which may create transfer risk for country exposures (paragraph 12(a)(iv)).
Notification and approval workflow (paragraphs 34-36; 37-38): Set up pre‑deal APRA notification triggers for proposed large exposures to non‑government/non‑ADI counterparties and ensure processes exist to obtain APRA approval before breaching paragraph 30 limits. Implement immediate escalation and reporting workflows to notify APRA of breaches or material concerns about capital adequacy and prepare standardised breach packages that explain causes and remedial actions.
Monitoring excluded exposures (paragraphs 14, 18): Even where exposures are excluded from the large exposure calculation (e.g. intra‑day, certain QCCP clearing exposures, insured mortgages), establish internal limits and monitoring to ensure excluded categories do not materially affect concentration risk in ways unaddressed by the standard.
Interaction with capital and other APS instruments (Attachment A; paragraphs 18, 30): Coordinate legal, capital and risk teams to ensure exposure aggregation informs capital calculations and vice versa. For example, exposures deducted from regulatory capital are excluded from large exposure calculation (paragraph 18(a)), but exposures with extreme risk weights may still be captured (footnote [[2]]). Ensure consistency between CRM used for capital and CRM used for large exposure measurement (Attachment A.3).
Documentation and audit trails: Maintain clear written records demonstrating the legal basis for netting and collateral arrangements, CRM eligibility analyses, look‑through decisions for structured vehicles, connected counterparty assessments, and Board approvals. Keep contemporaneous evidence when relying on historical APRA discretions and contact APRA to confirm continued reliance where required (paragraph 41).
Legal and accounting alignment: Engage legal counsel to confirm enforceability of netting and collateral arrangements under applicable laws; use Australian Accounting Standards guidance when assessing control and consolidation issues for connected counterparties (paragraph 23).
APRA engagement plan: Because APRA can set specific limits (paragraph 31), determine exposure types that may attract APRA scrutiny and prepare briefing materials that justify exceptions, concentrations and proposed remedial measures. Prepare to respond to APRA requests to treat counterparties as connected or to revise exposure values (paragraphs 29, 33).
Training and culture: Train credit officers, traders, relationship managers and finance staff on the distinct exposure measurement rules in Attachment A (e.g. options, covered bonds, structured vehicle look‑through) to prevent misapplication of capital‑oriented methods to large exposure measurement.

These steps map directly to obligations and measurement rules set out in APS 221 (paragraphs 10-14, 15-18, 20-30, Attachment A). Adoption requires coordinated change across governance, risk systems, legal documentation and APRA engagement processes.

Deep Dive

What it does

Current sections

Banking (prudential standard) determination No. 15 of 2022

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Authority

Application

Interpretation

Definitions

The role of the Board

Control of large exposures and risk concentrations

Identifying large exposures

Connected counterparties

Large exposure limits

Measuring large exposure values

Prior notification requirements

Approval requirements

Notification requirements

Significant risk concentrations

Adjustments and exclusions

Previous exercise of discretion

Attachment A—Measuring large exposure values

Credit risk mitigation

On-balance sheet netting

Exposure values for trading book positions

Offsetting long and short positions in the trading book in the same issue

Offsetting long and short positions in the trading book in different issues

Exposure values for covered bonds

Exposures to structured vehicles

Additional risk factor

Exposure values for non-qualifying central counterparties and clearing activity exposures

Source text: opening excerpt

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Main concepts

Who it affects

Key duties and rights

Penalties and enforcement

How it interacts with other laws

Amendment history

Litigation history

Gotchas

How to comply

Authority

Application

Interpretation

Definitions

The role of the Board

Control of large exposures and risk concentrations

Identifying large exposures

Connected counterparties