Risk weights under the simple approachRisk weights under the simple approach

Risk weights under the simple approach

1. Under the simple approach, the portion of an exposure that is secured by received collateral may be risk-weighted according to the risk weight of the received collateral. The risk weight on that portion is subject to a floor of 20 per cent, except under the conditions specified in paragraphs 18 to 20 of this Attachment. The unsecured portion of an exposure must be risk-weighted according to the risk weight applicable to the original counterparty.
2. Where cash on deposit, certificates of deposit and bank bills issued by the ADI are held as received collateral at a third-party bank in a non-custodial arrangement, and are pledged or assigned to the ADI and the pledge or assignment is unconditional and irrevocable, the exposure amount covered by the received collateral may be assigned the risk weight of the third-party bank, determined in accordance with Attachment B to this Prudential Standard.
3. A zero per cent risk weight may be applied to collateralised transactions where the exposure and the collateral are denominated in the same currency and either:
   1. the collateral is cash on deposit as defined in paragraph 14(a) of this Attachment; or
   2. the collateral is in the form of sovereign securities eligible for a zero per cent risk weight as detailed in Attachment B to this Prudential Standard, and its market value has been discounted by 20 per cent.
4. SFTs that fulfil all of the following conditions may be risk-weighted at 10 per cent, or at zero per cent where the counterparty is a core market participant as defined in paragraph 20:
   1. both the exposure and the collateral are cash, or a sovereign security qualifying for a zero per cent risk weight as set out in Attachment B to this Prudential Standard;
   2. both the exposure and the collateral are denominated in the same currency;
   3. either the transaction is overnight, or both the exposure and the collateral are marked-to-market daily and are subject to daily remargining;
   4. following a counterparty’s failure to remargin, the time between the last mark-to-market before the failure to remargin and the liquidation of the collateral is no more than four business days;
   5. the transaction is settled across an established settlement system for that type of transaction;
   6. the documentation for the transaction is standard market documentation;
   7. the documentation for the transaction specifies that if the counterparty fails to satisfy an obligation to deliver cash, securities or a margin call, or otherwise defaults, the transaction is immediately terminable; and
   8. upon any default event, regardless of whether the counterparty is insolvent or bankrupt, the ADI has an unequivocal, legally enforceable right to immediately seize and liquidate the collateral.