Risk-weighted off-balance sheet exposureRisk-weighted off-balance sheet exposures

Risk-weighted off-balance sheet exposures

1. The RWA of a non-SFT off-balance sheet exposure must be calculated by applying the following two-step process:

   1. first, the exposure amount or exposure at default (EAD), representing the on-balance sheet equivalent amount, must be determined according to:
      1. Attachment C to this Prudential Standard for any commitments; and
      2. where the ADI is a significant financial institution, APS 180 for OTC and exchange-traded derivative transactions or long-settlement transactions. Where an ADI uses the adjusted current exposure method (CEM) under APS 180 and the transaction is collateralised, the ADI may also adjust the credit equivalent amount (CEA) by applying the comprehensive approach in Attachment G to this Prudential Standard;
   2. second, the resulting exposure amount or EAD must be multiplied by the relevant risk weight applicable to the counterparty or exposure type.

2. For SFTs, including securities lending transactions, an ADI must calculate:

   1. RWA arising from its exposure to the SFT counterparty, where EAD is calculated in accordance with Attachment G to this Prudential Standard and is multiplied by the relevant risk weight applicable to the SFT counterparty; and
   2. the capital requirement for the credit risk or market risk inherent in any securities the ADI lends or posts as collateral, if that risk remains with the ADI.

Credit risk mitigation

1. Where multiple CRM techniques cover a single exposure, an ADI must divide the exposure into portions covered by each CRM technique. The RWA of each portion must be calculated separately, and then totalled. If credit protection provided by a single protection provider has differing maturities, they must also be subdivided into separate protected portions.
2. An ADI must not recognise additional CRM on exposures where the risk weight is mapped from an ECAI issue-specific credit rating, and that credit rating already incorporates the recognition of CRM.
3. An ADI must not recognise the use of CRM where the credit quality of the counterparty has a material positive correlation with the CRM technique used, or with any resulting residual risks (e.g. collateral in the form of securities issued by the counterparty to the credit exposure is considered to have a material positive correlation with the credit quality of the original counterparty).
4. To obtain capital relief through the use of a CRM technique, all documentation must be binding on all parties and legally enforceable in all relevant jurisdictions. The ADI must have undertaken sufficient legal review to be satisfied of the legal enforceability of the CRM technique, and must undertake periodic reviews to confirm its ongoing enforceability.