Banking (prudential standard) determination No. 6 of 2024
In ForceCTH
Jurisdiction
Commonwealth
Collection
legislative instrument
Plain English Summary
9/10 complexity
The determination sets how authorised deposit‑taking institutions (ADIs) must measure capital and leverage: it defines Tier 1/Total capital, risk‑weighted assets (RWA) under standardised or IRB methods, an ADI‑specific countercyclical buffer, and a leverage exposure measure, and it constrains capital distributions when Common Equity Tier 1 (CET1) falls into buffer quartiles. It changes how banks calculate and report capital, affects dividend and AT1/Tier 1 payouts, and gives APRA case‑by‑case discretion to vary treatments (for example, exclusions or model approvals).
This instrument sets out detailed prudential rules for Australian authorised deposit-taking institutions (ADIs) on capital measurement, capital distribution constraints, the countercyclical capital buffer, the leverage ratio and the composition of the leverage exposure measure. It does not restate the definitions of capital instruments themselves; instead it instructs ADIs to apply the capital definitions in Prudential Standard APS 111 for Common Equity Tier 1 (CET1), Additional Tier 1 (AT1) and Tier 2 capital (Attachment A, para 1). It then prescribes three headline risk metrics: CET1 ratio, Tier 1 ratio and Total Capital ratio, calculated as each capital numerator divided by total risk-weighted assets (RWA) (Attachment A, para 2, table).
Mechanically the instrument:
Defines how total RWA are calculated for two broad ADI approaches: Standardised ADIs and IRB ADIs (Attachment A, paras 3-4). For Standardised ADIs total RWA equals credit RWA under APS 112, securitisation RWA under APS 120 and either a fixed operational risk add-on (10 per cent of credit+securitisation RWA for non-significant financial institutions) or, for significant financial institutions, the sum of counterparty credit RWA under APS 180 and 12.5 times capital charges from APS 115 (operational risk), APS 116 (market risk) and APS 180 (counterparty credit) (Attachment A, para 3).
For IRB ADIs total RWA is the greater of an IRB-derived measure and a floor equal to 72.5 per cent of the total RWA that would be calculated under the Standardised approach (Attachment A, para 4). The IRB-derived measure itself aggregates IRB credit RWA (APS 113), standardised credit RWA where required (APS 112), securitisation RWA (APS 120), APS 180 counterparty RWA and 12.5 times capital charges under APS 115, 116, 180 and APS 117 (interest rate risk in the banking book) (Attachment A, para 4(a)).
Current sections
Direct links to the current provisions in Banking (prudential standard) determination No. 6 of 2024.
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Attachment A — Risk-based regulatory cap
Attachment A — Risk-based regulatory capital ratios
Attachment A – Risk-based regulatory capital ratios
An ADI’s Tier 1 Capital is the sum of its Common Equity Tier 1 Capital and Additional Tier 1 Capital. Its Total Capital is the sum of Tier 1 Capital and Tier 2 Capital. The criteria for inclusion in Common Equity Tier 1 Capital, Additional Tier 1 Capital and Tier 2 Capital are set out in APS 111.
Under APRA’s risk-based capital adequacy framework, an ADI’s capital adequacy is measured by means of risk-based capital ratios calculated by dividing each of its Common Equity Tier 1 Capital, Tier 1 Capital and Total Capital by its total RWA. That is:
Total RWA are calculated in accordance with paragraph 3 or paragraph 4 of this Attachment.
Standardised ADIs must calculate total RWA as the sum of:
RWA determined in accordance with Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112);
RWA determined in accordance with Prudential Standard APS 120 Securitisation (APS 120); and
unless APRA determines otherwise in a particular case, either:
for non-significant financial institutions, 10 per cent of the sum of RWA calculated under sub-paragraphs 3(a) and 3(b) of this Attachment as RWA for operational risk; or
for significant financial institutions, risk-weighted credit exposures calculated under Prudential Standard APS 180 Capital Adequacy: Counterparty Credit Risk (APS 180) and 12.5 times the sum of the capital charges determined under Prudential Standard APS 115 Capital Adequacy: Standardised Measurement Approach to Operational Risk (APS 115), Prudential Standard APS 116 Capital Adequacy: Market Risk (APS 116) and APS 180.[9]
IRB ADIs must calculate total RWA as the greater of:
the sum of:
RWA determined in accordance with APS 112 for those asset classes where an IRB ADI is required to use the standardised approach to credit risk, or where APRA has approved partial use;
RWA determined in accordance with Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk (APS 113);
RWA determined in accordance with APS 120;
risk-weighted credit exposures calculated under APS 180;[10] and
12.5 times the sum of the capital charges determined under APS 115, APS 116, APS 180 and Prudential Standard APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book (APS 117);[11] or
72.5 per cent of total RWA calculated in accordance with paragraph 3 of this Attachment.[12]
For the purpose of paragraph 4(b) of this Attachment, an IRB ADI may determine its market risk capital charge using its internal model approach, rather than the standard method set out in APS 116.
Attachment B — Constraints on capital di
Attachment B — Constraints on capital distributions
Attachment B – Constraints on capital distributions
Capital distribution constraints apply when an ADI’s Common Equity Tier 1 Capital ratio is within the capital buffer (CB) range (consisting of the capital conservation buffer plus any countercyclical capital buffer). The CB range is divided into four quartiles for the purposes of determining the minimum capital conservation ratios, as set out in Table 1.
Table 1: Minimum capital conservation ratios
Common Equity Tier 1 Capital ratio
Minimum capital conservation ratios (expressed as a percentage of earnings)
Within first quartile of bufferPCR to ≤ (PCR + 0.25CB)
100
Within second quartile of buffer> (PCR + 0.25CB) to ≤ (PCR + 0.50CB)
80
Within third quartile of buffer> (PCR + 0.50CB) to ≤ (PCR + 0.75CB)
60
Within fourth quartile of buffer> (PCR + 0.75CB) to ≤ (PCR + CB)
40
Above top of buffer> (PCR + CB)
0
The minimum capital conservation ratios in Table 1 represent the percentage of earnings that an ADI must not distribute if its Common Equity Tier 1 Capital ratio falls within the corresponding quartile. If the Common Equity Tier 1 Capital ratio falls within the first quartile, the ADI must also cease all Tier 1 Capital distributions.
Earnings are defined for the purposes of this Attachment as distributable profits calculated prior to the deduction of elements subject to the restriction on distributions. Earnings are calculated after the tax that would have been reported had none of the distributable items been paid. As such, any tax impact of making such distributions is reversed out. An ADI that does not have positive earnings and has a Common Equity Tier 1 Capital ratio less than the sum of its Common Equity Tier 1 PCR plus the capital conservation buffer must not make positive net distributions.
Payments made by an ADI that do not result in a depletion of Common Equity Tier 1 Capital are not considered to be distributions for the purposes of this Attachment. APRA may impose restrictions on capital distributions even where an ADI’s Common Equity Tier 1 Capital ratio is above the capital conservation buffer.
APRA may impose limits on the period in which an ADI may operate within the capital conservation buffer range, on a case-by-case basis.
Attachment C — Countercyclical capital b
Attachment C — Countercyclical capital buffer
Attachment C – Countercyclical capital buffer
An ADI must calculate the ADI-specific countercyclical capital buffer requirement as the weighted average of the jurisdictional countercyclical capital buffers that apply in jurisdictions in which the ADI has exposures.
The weighting applied to the jurisdictional countercyclical capital buffer in each jurisdiction will be the risk-weighted amount of an ADI’s private sector credit exposures in that jurisdiction, divided by the risk-weighted amount of the ADI’s private sector credit exposures across all jurisdictions, where:
private sector credit exposures are:
on-balance sheet assets, off-balance sheet exposures and on- and off-balance sheet securitisation and resecuritisation exposures determined under APS 112, APS 113 or APS 120, as relevant; and
exposures for which an ADI calculates a trading book capital charge for specific risk, including equity specific risk, interest rate specific risk, incremental risk, securitisation and resecuritisation under APS 116,
to private sector counterparties, excluding ADIs (and equivalent overseas deposit-taking institutions) but including other financial institutions; and
the risk-weighted amount of an ADI’s private sector credit exposures is the sum of:
the risk-weighted assets for the assets and exposures in paragraph 2(a)(i) of this Attachment; and
the risk-weighted equivalent trading book capital charges for exposures in paragraph 2(a)(ii) of this Attachment.
When determining the jurisdiction to which a private sector credit exposure relates, ADIs must use an ultimate risk basis, where possible. An ADI must use the jurisdiction where the guarantor of the exposure resides, not where the exposure has been booked.
APRA may require an ADI to apply a higher countercyclical capital buffer for a particular jurisdiction than may be determined by the regulator in that jurisdiction.
For Level 2 purposes, the ADI-specific countercyclical capital buffer must cover all exposures incurred in relevant jurisdictions, even though the business may be undertaken by a member of the Level 2 group that is not itself an ADI or equivalent overseas deposit-taking institution.
For the Value-at-Risk (VaR) for specific risk, the incremental risk charge and the comprehensive risk measurement charge included in calculating the ADI-specific countercyclical capital buffer, an ADI must consult with APRA to develop an approach that would translate these charges into individual instrument risk-weights that would then be allocated to the geographic location of the specific counterparties that make up the charge.
Attachment D — Leverage ratio
Attachment D — Leverage ratio
Attachment D – Leverage ratio
An ADI must calculate its leverage ratio as follows:
Tier 1 Capital is determined in accordance with APS 111; and
the exposure measure is determined in accordance with this Attachment and is calculated as the sum of:[13]
on-balance sheet exposures;
non-market related off-balance sheet exposures;
derivative exposures; and
securities financing transaction (SFT) exposures.
Unless otherwise specified in this Attachment, an ADI must follow Australian Accounting Standards in calculating its exposure measure, subject to the following:
physical or financial collateral, guarantees or other credit risk mitigation techniques must not be taken into account by an ADI to reduce the exposure measure;
netting of assets and liabilities is not permitted; and
securitisation exposures which meet the operational requirements for regulatory capital relief, as set out in APS 120, may be excluded from the exposure measure. All other securitisation exposures, including funding-only and synthetic securitisations, must be included in the exposure measure.
APRA may temporarily exclude central bank reserves from the leverage ratio exposure measure in exceptional macroeconomic circumstances. If APRA excludes central bank reserves, it may increase the minimum leverage ratio requirement commensurately to offset the impact of the exclusion. In the event that APRA excludes central bank reserves from the calculation of the exposure measure, an ADI must publicly disclose the impact of the exclusion, as well as its leverage ratio calculated without the benefit of the exclusion.
On-balance sheet exposures
On-balance sheet exposures
On-balance sheet exposures
For the purpose of calculating on-balance sheet assets, an ADI must include all balance sheet assets, including any on-balance sheet collateral for derivatives and SFTs, but excluding on-balance sheet derivatives and SFTs covered by paragraphs 16 to 45 of this Attachment.
Balance sheet assets deducted from Common Equity Tier 1 Capital and Additional Tier 1 Capital for the purposes of regulatory adjustments under APS 111 may be deducted from the exposure measure.
Liability items must not be deducted from the exposure measure, including any gains and losses on fair value liabilities, or accounting value adjustments on derivative liabilities due to changes in an ADI’s own credit risk.
On-balance sheet assets may be included in the exposure measure at their accounting values net of any provisions that have otherwise been deducted from Tier 1 Capital.
Where an ADI holds assets in a fiduciary capacity, these assets may be excluded from the exposure measure provided that the assets meet the accounting criteria for derecognition and, where applicable, the accounting criteria for deconsolidation.
Unsettled trades
Unsettled trades
Unsettled trades
An ADI must account for regular-way purchases or sales of financial assets that have not been settled on the following basis:
ADIs which apply trade date accounting must reverse out any offsetting between cash receivables for unsettled sales and cash payables for unsettled purchases of financial assets. Thereafter, ADIs may offset between those cash receivables and cash payables (irrespective of whether such offsetting is permitted under Australian Accounting Standards) only if all of the following conditions are met:
the financial assets bought and sold that are associated with cash payables and receivables are measured at fair value through the income statement and included in the ADI’s trading book in accordance with Attachment A to APS 116; and
the transactions of the financial assets are settled on a delivery-versus-payment basis; and
ADIs which apply settlement date accounting must apply the treatment set out in paragraphs 12 and 15 of this Attachment.
Cash pooling
Cash pooling
Cash pooling
If an ADI uses cash pooling arrangements which combine the credit and debit balances of several individual participating customer accounts into a single account balance, the ADI may recognise the single account balance in its calculation of the exposure measure if:
the balances are transferred on at least a daily basis; and
the ADI cannot be held liable for the balances on an individual basis upon the transfer, i.e. the ADI can only be held liable for a single claim based on the single account.
If cash pooling arrangements do not meet the conditions set out in paragraph 10 of this Attachment, the individual balances of the participating customer accounts must be reflected separately in the exposure measure.
Non-market-related off-balance sheet exp
Non-market-related off-balance sheet exposures
Non-market-related off-balance sheet exposures
For the purpose of calculating non-market-related off-balance sheet exposures, an ADI must apply credit conversion factors (CCFs) to the gross notional amounts of off-balance sheet items.[14] An ADI must apply the CCFs set out in Table 17 of Attachment C to APS 112.
For any off-balance sheet securitisation exposures, an ADI must apply the relevant CCFs as set out in paragraph 43 of APS 120.
Provisions that have decreased Tier 1 Capital may be deducted from the credit exposure equivalent amount (i.e. the exposure amount after the application of the relevant CCF). However, the resulting off-balance sheet equivalent amount for these exposures cannot be less than zero.
If the exposure amount relates to an unsettled regular-way financial asset purchase (i.e. the commitment to pay) that is accounted for at settlement date, an ADI must apply a CCF of 100 per cent. An ADI may offset commitments to pay for unsettled purchases and cash to be received for unsettled sales provided the following conditions are met:
the financial assets bought and sold that are associated with the cash payables and receivables are included in the ADI’s income statement at fair value and allocated to the ADI’s trading book in accordance with Attachment A to APS 116; and
the transactions of the financial assets are settled on a delivery-versus-payment basis.
Derivative exposures
Derivative exposures
Derivative exposures
For the purpose of calculating the exposure measure, an ADI must apply the specific treatment set out in paragraphs 17 to 36 of this Attachment to any derivatives transaction.
Treatment of derivatives
Treatment of derivatives
Treatment of derivatives
An ADI must calculate its exposures associated with all derivative transactions, including where it sells protection using a credit derivative, as:
exposure measure = 1.4*(RC + PFE)
where:
RC = the replacement cost, calculated according to paragraph 19 of this Attachment; and
PFE = the potential future exposure, calculated according to paragraphs 20 and 21 of this Attachment.
An ADI must calculate its exposure to:
a single derivatives transaction not covered by an eligible bilateral netting agreement by applying the formula in paragraph 17 of this Attachment to each transaction separately; and
derivatives transactions covered by an eligible bilateral netting agreement by applying the formula in paragraph 17 of this Attachment at the netting set level.[15]
For this purpose, an eligible bilateral netting agreement is one that meets the criteria in Attachment H to APS 112. Cross-product netting (i.e. between derivatives and SFTs) is not permitted.
Calculation of the replacement cost
Calculation of the replacement cost
Calculation of the replacement cost
The RC of a transaction or netting set is measured as follows:
RC = max {V - CVMr + CVMp, 0}
where:
V = the market value of the individual derivative transaction, or of the derivative transactions in a netting set;
CVMr = the cash variation margin received that meets the conditions set out in paragraph 23 of this Attachment and for which the amount has not already reduced the market value of the derivative transaction V under Australian Accounting Standards; and
CVMp = the cash variation margin provided by the ADI that meets the conditions set out in paragraph 23 of this Attachment and for which the amount has not already increased the market value of the derivative transaction V under Australian Accounting Standards.
Calculation of the potential future expo
Calculation of the potential future exposure
Calculation of the potential future exposure
The PFE for derivative exposures must be calculated in accordance with Attachment D to APS 180. Specifically,
PFE = m*AddOnaggregate
where:
m= 1; and
AddOnaggregate = the aggregation of all add-on components calculated in accordance with Attachment D to APS 180. The maturity factor used must reflect the treatment for margined and unmargined transactions.
Written options must be included in the leverage ratio exposure measure, even where the exposure at default may be set to zero under APS 180.
Treatment of related collateral
Treatment of related collateral
Treatment of related collateral
Subject to paragraphs 24 and 29 of this Attachment, an ADI:
must not reduce its exposure measure by the amount of any derivatives collateral received from a counterparty; and
must increase its exposure measure by the amount of any derivatives collateral provided by it to a counterparty, where the provision of that collateral has reduced the value of its balance sheet assets under Australian Accounting Standards.
Treatment of cash variation margin
Treatment of cash variation margin
Treatment of cash variation margin
An ADI may reduce its exposure measure by treating the cash portion of variation margin exchanged between counterparties as a form of pre-settlement payment, if the following conditions are met:
for trades not cleared through a qualifying central counterparty (QCCP),[16] the cash received by the recipient counterparty must not be segregated. Cash variation margin would satisfy the non-segregation criteria if the recipient counterparty is not subject to any restrictions by law, regulation or agreement on the counterparty’s ability to use the cash received;
variation margin is calculated and exchanged on a daily basis based on mark-to-market valuation of derivatives positions. In order to meet this requirement, derivative positions must be valued daily and cash variation margin must be transferred at least daily to the counterparty;
the cash variation margin is received in a currency specified in the derivatives contract, governing master netting agreement (MNA),[17] credit support annex to the qualifying MNA or as defined by any netting agreement with a central counterparty (CCP);[18]
variation margin exchanged is the full amount that would be necessary to extinguish the mark-to-market exposure of the derivative subject to the threshold and minimum transfer amounts applicable to the counterparty;[19] and
derivatives transactions and variation margins are covered by a single MNA between the legal entities that are the counterparties in the derivatives transaction. The MNA must explicitly stipulate that the counterparties agree to settle on a net basis any payment obligations covered by the MNA, taking into account any variation margin received or provided if a credit event occurs involving either counterparty.
If the conditions in paragraph 23 of this Attachment are met and an ADI:
receives cash variation margin from a counterparty, it may reduce the RC (but not the PFE component) of the exposure amount of the derivative transactions consistent with paragraph 19 of this Attachment; and
provides cash variation margin to a counterparty, it may deduct the resulting receivable from its exposure measure, where the cash variation margin has been recognised as an asset in accordance with Australian Accounting Standards, and instead include the cash variation margin provided in the calculation of the RC consistent with paragraph 19 of this Attachment.
Treatment of clearing services
Treatment of clearing services
Treatment of clearing services
If an ADI acting as a clearing member (CM)[20] offers clearing services to clients, its trade exposures to the CCP must be included in its exposure measure by applying the same treatment as for any other type of derivative transaction. Trade exposures to a CCP arise when the ADI is obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that the CCP defaults.[21]
If an ADI acting as a CM is not contractually obligated to reimburse the client for any losses suffered in the event that a QCCP defaults, the ADI may exclude the resulting trade exposures to the QCCP from its exposure measure.
If a client enters directly into a derivative transaction with a CCP, and an ADI acting as a CM guarantees the performance of the client’s transaction to the CCP, the ADI must calculate its related leverage ratio exposure resulting from the guarantee as a derivative exposure in accordance with paragraphs 17 to 24 of this Attachment, as if it had entered directly into the transaction with the client.
If an entity falls within the Level 2 group of the ADI acting as a CM, trades between that entity and the ADI are eliminated in the course of consolidation and the ADI retains an exposure to the CCP. In this case, the transaction with the CCP will be considered proprietary for the ADI acting as a CM, and the exemption set out in paragraph 26 of this Attachment will not apply.
If an ADI is providing client clearing services, it may use the approach detailed in Attachment D to APS 180 to calculate the RC and PFE of the exposure to the client. In using this approach, the ADI must only include the portion of initial margin received from the client which is subject to appropriate segregation by the ADI.
Additional treatment for written credit
Additional treatment for written credit derivatives
Additional treatment for written credit derivatives
For written credit derivatives, an ADI must apply the additional treatment set out in paragraphs 30 to 36 of this Attachment. For the purposes of this Attachment, written credit derivative refers to a broad range of credit derivatives through which an ADI effectively provides credit protection and is not limited solely to credit default swaps and total return swaps.
To capture the credit exposure to the underlying reference entity, the effective notional amount[22] referenced by a written credit derivative must be included in the exposure measure unless:
the written credit derivative is included in a transaction cleared on behalf of a client of the ADI acting as a CM; and
the transaction meets the requirements of paragraph 26 of this Attachment for the exclusion of trade exposures to the QCCP.
The effective notional amount of a written credit derivative may be reduced in one or both of the following ways:
by any negative change in the fair value amount that has been incorporated into the calculation of Tier 1 Capital with respect to the written credit derivatives; and
by the effective notional amount of an offsetting purchased credit derivative on the same reference name[23] provided the conditions set out in paragraph 33 of this Attachment are satisfied.
An ADI may reduce the effective notional amount through the application of offsetting purchased credit derivatives if the following conditions are satisfied:
the credit protection purchased through credit derivatives is otherwise subject to the same, or more conservative, material terms as those in the corresponding written credit derivative.[24] This ensures that if an ADI provides written credit protection via a credit derivative, it may only recognise offsetting from another purchased credit derivative if the purchased protection is certain to deliver a payment to the ADI in all circumstances;
the remaining maturity of the credit protection purchased through credit derivatives is equal to or greater than the remaining maturity of the written credit derivatives;
the credit protection purchased through credit derivatives is not purchased from a counterparty whose credit quality is highly correlated with the value of the reference obligation(i.e. wrong-way risk);
in the event that the effective notional amount of a written credit derivative is reduced by any negative change in fair value reflected in the ADI’s Tier 1 Capital, the effective notional amount of offsetting credit protection purchased through credit derivatives must also be reduced by any resulting positive change in fair value reflected in Tier 1 Capital; and
the credit protection purchased through credit derivatives is not included in a transaction that has been cleared on behalf of a client and for which the effective notional amount referenced by the corresponding written credit derivative is excluded from the exposure measure under paragraph 26 of this Attachment.
Credit protection purchased on a pool of reference names may only offset credit protection sold on individual reference names if the credit protection purchased is economically equivalent to buying protection separately on each of the individual names in the pool. If the credit protection purchased does not cover the entire pool (i.e. the protection covers only a subset of the pool, as in the case of an nth-to-default credit derivative or a securitisation tranche), no offsetting of credit protection sold on individual reference names is allowed.
Where an ADI purchases credit protection through a total return swap and records the net payments received as net income, but does not record the offsetting deterioration in the value of the written credit derivative (either through reductions in fair value or by an addition to reserves) in Tier 1 Capital, the credit protection must not be used to offset the effective notional amounts of the written credit derivatives.
An ADI may choose to exclude from the netting set for the calculation of PFE the portion of a written credit derivative which is not offset in accordance with paragraph 32 of this Attachment, and for which the effective notional amount is included in the exposure measure.
Securities financing transaction exposur
Securities financing transaction exposures
Securities financing transaction exposures
For the purpose of calculating the exposure measure, an ADI must apply the specific treatment set out in paragraphs 38 to 45 of this Attachment to any SFT exposures.[25]
ADI acting as a principal
ADI acting as a principal
ADI acting as a principal
When an ADI is acting as a principal in an SFT, its exposure measure must include the sum of the following amounts:
gross SFT assets recognised for accounting purposes[26] (i.e. with no recognition of accounting netting), adjusted as follows:
excluding the value of any securities received under an SFT, where the ADI has recognised the securities as an asset on its balance sheet; and
cash payables and cash receivables in SFTs with the same counterparty may be measured net if all the following criteria are met:
transactions have the same explicit final settlement date. Transactions with no explicit end date but which can be unwound at any time by either party to the transaction are not eligible;
the right to set-off the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable both in the normal course of business and in the event of the default, insolvency or bankruptcy of the counterparty; and
the counterparties intend to settle net, settle simultaneously, or the transactions are subject to a settlement mechanism that results in the functional equivalent of net settlement.[27] If there is a failure of the securities leg of a transaction at the end of the window for settlement in the settlement mechanism, then this transaction and its matching cash leg must be split out from the netting set and treated gross; and
a measure of counterparty credit risk calculated as the current exposure without a PFE add-on, calculated as follows:
where a qualifying MNA as defined in paragraphs 40 and 41 of this Attachment is in place, the current exposure (E*) must be set to the greater of zero and the total fair value of securities and cash lent to a counterparty for all transactions included in the qualifying MNA (∑Ei) less the total fair value of cash and securities received from the counterparty for those transactions (∑Ci). This is illustrated in the following formula:
E* = max {0, [∑Ei - ∑Ci]}
where no qualifying MNA is in place, the current exposure for transactions with a counterparty must be calculated on a transaction by transaction basis; that is, each transaction i is treated as its own netting set, as shown in the following formula:
Ei* = max {0, [Ei – Ci]}
Ei* may be set to zero if:
Ei is the cash lent to a counterparty;
this transaction is treated as its own netting set; and
the associated cash receivable is not eligible for the netting treatment in paragraph 38(a) of this Attachment.
For the purposes of paragraph 38(b) of this Attachment, ‘counterparty’ includes not only the counterparty of the bilateral repurchase transactions, but also triparty repurchase agents that receive collateral in deposit and manage the collateral in the case of triparty repurchase transactions. Securities deposited at triparty repurchase agents are included in the total value of securities and cash lent to a counterparty (E) up to the amount effectively lent to the counterparty in a repurchase transaction. However, excess collateral that has been deposited at triparty agents but that has not been lent out may be excluded.
For the purpose of paragraph 38(b), a bilateral netting agreement for covering SFTs may be recognised as a qualifying MNA on a counterparty by counterparty basis only if it:
is legally enforceable in each relevant jurisdiction upon the occurrence of an event of default, regardless of whether the counterparty is insolvent or bankrupt;
provides the non-defaulting party with the right to terminate and close out in a timely manner all transactions under the agreement upon an event of default, including in the event of insolvency or bankruptcy of the counterparty;
provides for the netting of gains and losses on transactions (including the value of any collateral) terminated and closed out under it so that a single net amount is owed by one party to the other; and
allows for the prompt liquidation or set-off of collateral in the event of default.
Netting across SFT positions held in the banking book and trading book will only be recognised when the netted transactions meet the conditions set out in paragraph 6 of Attachment H to APS 112.
Where an ADI applies sale accounting to an SFT in accordance with Australian Accounting Standards, it must reverse all sales-related accounting entries, and then calculate its exposure as if the SFT had been treated as a financing transaction under those standards (i.e. the ADI must include the sum of amounts in paragraphs 38(a) and 38(b) of this Attachment for such an SFT) for the purposes of determining its exposure measure.
ADI acting as an agent
ADI acting as an agent
ADI acting as an agent
An ADI acting as an agent in an SFT may apply paragraph 38(b) of this Attachment to calculate its exposure measure for the transaction where:
the ADI provides an indemnity or guarantee to a customer or counterparty for any difference between the value of the security or cash that the customer has lent and the value of collateral that the borrower has provided; and
the ADI’s exposure to the transaction is limited to the guaranteed difference between the value of the security or cash its customer has lent, and the value of the collateral the borrower has provided.
Where the ADI is further economically exposed (i.e. beyond the guarantee for the difference) to the underlying security or cash in the transaction, a further exposure equal to the full amount of the security or cash must be included in the exposure measure.
Where an ADI acting as an agent provides an indemnity or guarantee to both parties involved in an SFT (i.e. securities lender and securities borrower), the ADI must calculate its exposure measure separately for each party involved in the transaction.
When an ADI acting as agent in an SFT does not provide an indemnity or guarantee to any of the involved parties, the ADI has no exposure to the SFT, and is not required to include those SFTs in its exposure measure.
Source text: opening excerpt
Sourced from the Federal Register of Legislation (legislation.gov.au), CC BY 4.0.
Attachment A — Risk-based regulatory cap Attachment A — Risk-based regulatory capital ratios
Attachment A – Risk-based regulatory capital ratios
An ADI’s Tier 1 Capital is the sum of its Common Equity Tier 1 Capital and Additional Tier 1 Capital. Its Total Capital is the sum of Tier 1 Capital and Tier 2 Capital. The criteria for inclusion in Common Equity Tier 1 Capital, Additional Tier 1 Capital and Tier 2 Capital are set out in APS 111.
Under APRA’s risk-based capital adequacy framework, an ADI’s capital adequacy is measured by means of risk-based capital ratios calculated by dividing each of its Common Equity Tier 1 Capital, Tier 1 Capital and Total Capital by its total RWA. That is:
Sets out dividend and other capital distribution constraints tied to the CET1 ratio’s position relative to the capital buffer (capital conservation buffer plus any countercyclical buffer). When CET1 sits within the buffer, minimum capital conservation ratios apply that mandate retention of a stated percentage of earnings (Table 1 and Attachment B, paras 1-2). The first quartile requires retention of 100 per cent of earnings and cessation of Tier 1 distributions (Attachment B, Table 1 and para 1).
Prescribes calculation of an ADI-specific countercyclical capital buffer as a weighted average of jurisdictional buffers, weighted by risk-weighted amounts of private sector credit exposures by jurisdiction, on an ultimate risk basis where possible (Attachment C, paras 1-3). APRA can require higher jurisdictional buffers and must be consulted for translating certain trading book charges into instrument risk-weights for geographic allocation (Attachment C, paras 2-4).
Specifies a leverage ratio: Tier 1 capital divided by an exposure measure (Attachment D, para 1). The exposure measure comprises on-balance sheet exposures, non-market-related off-balance sheet exposures, derivative exposures and securities financing transaction (SFT) exposures, calculated in accordance with Australian Accounting Standards except where the Attachment prescribes otherwise (Attachment D, paras 1-2).
Provides detailed treatments for unsettled trades, cash pooling, off-balance-sheet conversion factors, derivatives (including replacement cost and potential future exposure calculations, RC and PFE with a leverage exposure multiplier of 1.4 on RC+PFE), cash variation margin, central counterparty and clearing member exposures, written credit derivatives and SFTs (various paragraphs across Attachment D and subheadings).
The instrument therefore converts multiple prudential building blocks , capital definitions (APS 111), credit risk (APS 112 and 113), operational and market risk (APS 115, 116), securitisation (APS 120), counterparty credit risk (APS 180) and interest rate risk in the banking book (APS 117) , into a set of RWA calculations and a supplemental leverage measure. It also converts buffer positions into mandatory retention of earnings and gives APRA several discretionary supervisory levers (for example to impose limits on buffer-periods, to require higher jurisdictional buffers or to temporarily exclude central bank reserves, Attachment B para 4, Attachment C para 2, Attachment D para 2).
The text supplied contains no explicit criminal or civil penalty regime; instead it articulates measurement rules and APRA’s administrative discretions. The immediate mechanical effects on ADIs will be on capital planning, dividend policy, model development and governance, legal opinions (for netting and enforceability), and accounting and systems to produce the exposure measure elements required by the leverage ratio and by the jurisdictional weighting for the countercyclical buffer.
Main concepts
The instrument rests on a small set of core concepts and linkages that determine capital demand and distributable capacity.
Capital composition and ratios
Common Equity Tier 1, Additional Tier 1 and Tier 2 are governed by APS 111; the instrument uses those numerators to compute three ratios by dividing each by total RWA (Attachment A, paras 1-2). These ratios are the primary prudential metrics for capital adequacy.
Total RWA construction and the IRB floor
For Standardised ADIs total RWA are the sum of APS 112 credit RWA, APS 120 securitisation RWA and an operational risk component that depends on the ADI’s significance (Attachment A, para 3). For non-significant institutions APRA prescribes a standard 10 per cent of credit + securitisation RWA as the operational risk proxy (Attachment A, para 3(c)(i)). For significant institutions the operational and market risk equivalence is produced by converting capital charges into RWA equivalents using a 12.5 multiplier and adding APS 180 counterparty credit RWA (Attachment A, para 3(c)(ii)).
For IRB ADIs total RWA are the greater of an IRB-derived aggregation and 72.5 per cent of the Standardised total RWA (Attachment A, para 4). That creates a capital floor that restricts the degree to which IRB modelling can reduce measured risk-weighted assets relative to the standardised approach.
Capital distribution constraint mechanism
Attachment B defines a capital conservation buffer (CB) range which is the capital conservation buffer plus any countercyclical buffer; the CET1 ratio’s position within that range is split into four quartiles and each quartile prescribes a minimum capital conservation ratio expressed as a percentage of earnings that must be retained (Attachment B, Table 1 and para 1). The higher the position in the buffer the lower the retention requirement; the first quartile requires full retention and cessation of Tier 1 distributions (Attachment B, para 1).
Countercyclical capital buffer (CCyB)
An ADI-specific CCyB equals the weighted average of jurisdictional buffers by geographic RWA weights of private sector credit exposures, using ultimate risk location where possible (Attachment C, paras 1-3). Private sector exposures for weighting exclude other ADIs and equivalent overseas deposit-takers, but include other financial institutions (Attachment C, para 2(a)).
Leverage ratio and exposure measure
The leverage ratio is Tier 1 capital divided by an exposure measure that aggregates on-balance sheet exposures, certain off-balance sheet exposures converted by credit conversion factors, derivative exposures calculated using RC and PFE, and SFT exposures (Attachment D, para 1). The exposure measure largely follows Australian Accounting Standards but with explicit prohibitions: credit risk mitigation techniques, collateral and netting cannot reduce the exposure measure unless the Attachment expressly allows it (Attachment D, para 2(a)-(b)).
For derivatives, exposure to a trade or netting set equals 1.4 times (RC + PFE) where RC is measured as max{V − CVMr + CVMp, 0} and PFE follows Attachment D to APS 180 (Attachment D, paras 17-21). Cash variation margin can reduce RC only if strict operational and legal criteria are met (Attachment D, paras 23-24).
Securities financing transactions (SFTs)
SFT exposures for principals include gross SFT assets recognised for accounting purposes plus a measure of counterparty credit risk equal to the current exposure without a PFE add-on (Attachment D, para 38). Netting of cash payables and receivables in SFTs is permitted only where strict same-day transfer, legal enforceability and settlement intention criteria are met (Attachment D, para 38(a)(2)).
Netting and enforceability
Netting and set-off treatments are only recognised where bilateral netting agreements meet enforceability tests in each relevant jurisdiction even on insolvency, timely termination and close-out, single net amount provisions and prompt liquidation or set-off of collateral (Attachment D, para 38(b)). For SFTs and for cross-book netting (banking/trading), additional Attachment H and APS 112 conditions apply (Attachment D, para 38(3), reference).
Discretion and supervisory levers
APRA retains discretion to vary treatments in particular cases: to treat operational risk differently, to require higher CCyBs for particular jurisdictions, to impose limits on time operating within buffer ranges, to temporarily exclude central bank reserves from the leverage exposure measure and to require consultation on VaR translation (Attachment A, paras 3-5; Attachment B, para 4; Attachment C, paras 2 and 4; Attachment D, para 2).
Those are the main mechanical concepts that drive capital requirements, distributable earnings, and the leverage calculation. The instrument builds on and binds together several separate APS modules; compliance therefore requires concurrent application of APS 111, 112, 113, 115, 116, 117, 120 and 180 as referenced throughout.
Who it affects
The instrument applies to ADIs; within that class it draws distinctions that change behaviour for different business models and supervisory categories.
ADI categories and significance
The text differentiates Standardised ADIs and IRB ADIs and further distinguishes significant financial institutions from non-significant ones for operational risk treatment (Attachment A, paras 3-4). The non-significant category is subject to a simple operational risk proxy (10 per cent of credit+securitisation RWA), whereas significant institutions must include APS 180 counterparty RWA plus RWA equivalents of capital charges under APS 115 and 116 using a 12.5 multiplier (Attachment A, para 3(c)). This produces relatively higher measurement complexity for significant or IRB ADIs.
Internal models users
IRB ADIs and ADIs that use internal models for market risk are specifically subject to model-based calculations in places (Attachment A, para 5; Attachment D referencing Attachment D to APS 180 for PFE). IRB ADIs must compute two RWA measures (IRB-derived and Standardised) and use the greater, creating a constraint on model-based capital relief (Attachment A, para 4).
Clearing members and client clearing
ADIs that act as clearing members (CM) are specifically affected by the CCP and client-clearing provisions. Trade exposures to CCPs must be included unless an ADI acting as CM is not contractually liable to reimburse clients for client losses (Attachment D, paras 25-27). If an ADI guarantees a client’s performance to a CCP it must treat the guarantee as a derivative exposure (Attachment D, para 28). The exemption for QCCP exposures is narrowly framed and depends on the ADI’s contractual arrangements with clients (Attachment D, paras 25-27).
Agents and principals in SFTs
ADIs acting as principal in SFTs must include gross SFT assets and a current exposure measure (Attachment D, para 38). ADIs acting purely as agents with no indemnity or guarantee have no exposure to the SFT and do not include such SFTs (Attachment D, para 44). Where an ADI provides an indemnity or guarantee for differences or provides guarantees to both parties, the exposure measure must reflect that guaranteed amount (Attachment D, paras 43-44).
Level 2 groups and overseas exposures
The countercyclical buffer calculation explicitly captures Level 2 purposes: the ADI-specific buffer must cover exposures incurred in relevant jurisdictions across the Level 2 group, even if the exposures are held by non-ADI members (Attachment C, para 3). ADIs with overseas operations must therefore gather RWA by jurisdiction on an ultimate risk basis where possible, using the guarantor’s jurisdiction for allocation (Attachment C, paras 2-3).
Entities excluded or treated differently
The geographic weighting for CCyB excludes ADIs and equivalent overseas deposit-taking institutions from the private sector exposure set (Attachment C, para 2(a)). The leverage exposure measure permits exclusions only where the Attachment explicitly allows them, for example securitisation exposures that meet operational requirements for regulatory capital relief under APS 120 may be excluded from the exposure measure (Attachment D, para 2(c)).
Who pays and who decides
The actors who ultimately pay higher capital costs are ADI shareholders (reduced return on equity) and potentially customers through pricing adjustments. The decisions on buffer impositions, time limits, jurisdictional buffer adjustments, and temporary exclusions are made by APRA under the discretions set out (Attachment B para 4; Attachment C para 2; Attachment D para 2). ADIs must comply with disclosure requirements if APRA excludes central bank reserves (Attachment D, para 2).
In short, the obligations are targeted at ADIs, with amplified compliance and modelling burdens for IRB ADIs, significant institutions, clearing members, and ADIs with cross-jurisdictional private sector credit exposures. Agents in SFTs and entities within Level 2 groups must confirm whether exposures are reportable and perform legal and operational due diligence to determine whether netting, segregation or indemnity arrangements change exposure inclusion.
Key duties and rights
Duties to calculate and report specific capital and exposure metrics
ADIs must calculate CET1, Tier 1 and Total Capital ratios using the capital definitions in APS 111 and total RWA computed in accordance with this Attachment (Attachment A, paras 1-2). The calculation of the ADI-specific countercyclical buffer, and hence its CET1 requirements, must follow the weighted-jurisdiction approach in Attachment C, paras 1-3.
Dividend and distribution constraints
An ADI must apply minimum capital conservation ratios when its CET1 ratio sits within the CB range. Table 1 prescribes mandatory retention of a percentage of earnings corresponding to buffer quartiles; in the first quartile the ADI must retain 100 per cent of earnings and cease all Tier 1 distributions (Attachment B, Table 1 and para 1). Earnings are defined as distributable profits calculated prior to the deduction of elements subject to distribution restrictions and calculated after the tax that would have been reported had none of the distributable items been paid (Attachment B, para 2). An ADI with no positive earnings and CET1 less than the sum of PCR plus CB must not make positive net distributions (Attachment B, para 2).
Measurement duties and prohibitions
For the leverage exposure measure, ADIs must follow Australian Accounting Standards unless the Attachment specifies otherwise. However, ADIs must not take into account collateral, guarantees or other credit risk mitigation techniques to reduce the exposure measure, and netting of assets and liabilities is not permitted except where the Attachment expressly allows it (Attachment D, para 2(a)-(b)). Securitisation exposures may be excluded only if they meet the operational requirements for regulatory capital relief set out in APS 120 (Attachment D, para 2(c)).
Derivatives and variation margin
ADIs must calculate derivative exposures as 1.4 times (RC + PFE), with RC = max{V − CVMr + CVMp, 0} and PFE calculated according to Attachment D to APS 180 (Attachment D, paras 17-21). ADIs may reduce RC by cash variation margin only if strict conditions are met, including daily exchange, non-segregation (for non-QCCP trades), fulfilment of mark-to-market practices and a single master netting agreement that stipulates net settlement on default (Attachment D, paras 23-24).
SFT and netting duties
For SFTs, ADIs acting as principal must include gross assets and a current exposure measure that recognises netting of cash payables and receivables only if the transactions share explicit final settlement dates, legal enforceability of set-off, and settlement intention/settlement mechanism criteria are satisfied (Attachment D, para 38(a)(2)). Bilateral netting agreements for SFTs must be legally enforceable in relevant jurisdictions, permit prompt liquidation of collateral and allow netting upon event of default, including insolvency (Attachment D, para 38(b)).
Consultation and disclosure rights/duties
ADIs must consult APRA on translating VaR and other trading book charges into instrument risk-weights for geographic allocation when calculating ADI-specific CCyB (Attachment C, para 4). If APRA excludes central bank reserves from the exposure measure under exceptional macroeconomic circumstances, APRA may increase leverage minimums, and ADIs must publicly disclose the impact of the exclusion and their leverage ratio calculated without the exclusion (Attachment D, para 2).
APRA discretion and supervisory impositions
APRA may impose restrictions on capital distributions even where an ADI’s CET1 is above the capital conservation buffer (Attachment B, para 3). APRA may limit the period an ADI can operate within the buffer (Attachment B, para 4) and may require ADIs to apply higher CCyBs for particular jurisdictions (Attachment C, para 2).
Rights implicit in the text
ADIs retain the right to use internal models for certain market risk calculations (Attachment A, para 5) and may apply some exclusions to the exposure measure where expressly permitted (e.g. securitisation exposures meeting APS 120 operational requirements, Attachment D, para 2(c)). ADIs can also elect to treat some trades using settlement date accounting or trade date accounting treatments as set out (Attachment D, Unsettled trades paras 1-2), affecting exposure measurement if they meet the conditions.
These duties combine prescriptive measurement rules with supervisory discretions. The obligations are precise on calculation methods (multipliers, aggregation, CCF use, RC/PFE formulas) but leave APRA flexibility to impose case-specific measures and require consultation on model-to-standard translations.
Penalties and enforcement
The supplied text does not specify statutory penalties, criminal sanctions or civil fines within these Attachments. Instead the text sets out measurement and distribution rules and records multiple supervisory discretions that APRA may exercise. Where the Attachment prescribes prohibitions (for example distribution restrictions when CET1 sits within the buffer, Attachment B, paras 1-2) the practical enforcement mechanisms are administrative: APRA can impose restrictions on capital distributions, limit the period an ADI may operate within the buffer, and require corrective action. Those powers are present in the operational content of the Attachments (Attachment B paras 3-4; Attachment C paras 2-4; Attachment D para 2).
Forms of supervisory enforcement implicit in the text
Distribution restrictions: An ADI that falls within buffer quartiles has a statutory duty to retain specified percentages of earnings (Attachment B, Table 1 and para 1). Failure to comply would, in practice, expose the ADI to APRA supervisory action to prevent further distributions and to require remediation. The text itself requires cessation of Tier 1 distributions in the first quartile (Attachment B, para 1).
Administrative discretion: APRA may impose limits on how long an ADI may operate within the buffer (Attachment B para 4) and may impose restrictions on distributions even where CET1 is above the buffer (Attachment B para 3). APRA can also adjust CCyB for jurisdictions and temporarily exclude central bank reserves from leverage exposures (Attachment C para 2; Attachment D para 2). These are exercised via supervisory determinations rather than criminal process in the text.
Disclosure as a regulatory lever: If APRA excludes central bank reserves from the exposure measure it may require public disclosure of the exclusion’s impact and the leverage ratio without the exclusion (Attachment D para 2). That disclosure requirement is a reputational and market discipline enforcement mechanism.
Model and calculation oversight: For the CCyB translation of trading book VaR, ADIs must consult with APRA (Attachment C para 4). Where an ADI uses internal models (for market risk or IRB), APRA retains a role to accept or otherwise those approaches and to impose a standardised floor (Attachment A, paras 4-5). Non-acceptance or failure to meet model standards would trigger supervisory measures.
Limitations of the text for enforcement details
The Attachments do not set out fines, injunctions or other court-based sanctions. They also do not provide a full catalogue of APRA’s statutory powers; those reside elsewhere in the prudential framework and APRA’s governing statute. Therefore, while the Attachments prescribe obligations and give APRA discretion, the explicit penalty mechanics and process (notice, review rights, appeal mechanisms) are not described here.
Practical implication
For ADIs, the effective penalties for non-compliance are supervisory: restriction of distributions, imposition of higher capital requirements, correction plans and public disclosure. Those remedies can substantially affect an ADI’s capital management, funding costs and market reputation even in the absence of statutory monetary penalties in the Attachments themselves.
How it interacts with other laws
This instrument is an integrated part of APRA’s prudential framework and explicitly cross-references multiple prudential standards and accounting law.
Cross-references within the prudential framework
Capital definitions and regulatory adjustments: The numerators for the CET1, Tier 1 and Total Capital ratios are defined in APS 111; the Attachments require calculation in accordance with APS 111 (Attachment A, para 1). ADIs must therefore read APS 111 alongside these Attachments to determine what items are included or excluded from capital.
Credit risk, securitisation, IRB and counterparty credit rules: The construction of total RWA relies on APS 112 (standardised credit risk), APS 113 (IRB), APS 120 (securitisation), and APS 180 (counterparty credit), as set out in Attachment A (paras 3-4). The operational risk and market risk capital charges are drawn from APS 115 and APS 116 and converted into RWA-equivalents using a 12.5 multiplier (Attachment A, paras 3(c)(ii) and 4(a)(v)).
APS 117 link: For IRB ADIs, capital charges for interest rate risk in the banking book under APS 117 are included in the 12.5 multiplier calculations (Attachment A, para 4(a)(v)).
Interaction with accounting law
Attachment D requires ADIs to follow Australian Accounting Standards in calculating the exposure measure unless the Attachment specifies otherwise (Attachment D para 2). It also sets specific carve-outs to accounting treatments: collateral and guarantees must not be taken into account to reduce the exposure measure except where the Attachment allows, and netting of assets and liabilities is generally not permitted (Attachment D para 2(a)-(b)). This imposes a regulatory overlay on top of accounting treatment that may produce regulatory-accounting mismatches.
Interaction with insolvency and contract law
Netting and set-off for SFTs and derivatives are only recognised where bilateral netting agreements are legally enforceable in each relevant jurisdiction upon an event of default, including insolvency (Attachment D, para 38(b)(i)). The requirement that netting be enforceable "regardless of whether the counterparty is insolvent or bankrupt" requires legal opinions and analysis of local insolvency law to support regulatory netting recognition. This brings insolvency regimes and contract enforceability directly into regulatory capital measurement.
Interaction with cross-border regulatory regimes
The CCyB calculation instructs ADIs to use an ultimate risk basis and to apply the jurisdiction where the guarantor resides (Attachment C para 3). For Level 2 purposes the ADI-specific CCyB covers exposures across the Level 2 group even if business is undertaken by a group member that is not itself an ADI (Attachment C para 3). APRA may require an ADI to apply a higher buffer for a particular jurisdiction than the regulator in that jurisdiction has set (Attachment C para 2). That creates potential mismatches between APRA’s insistence and overseas regulators’ determinations.
Interaction with clearing and central counterparties
The treatment of clearing exposures depends on contractual obligations between ADIs, clients and CCPs. Whether an ADI acting as CM is contractually obligated to reimburse clients for CCP losses determines whether trade exposures to a CCP must be included (Attachment D paras 25-26). This means contractual law, CCP rules and membership agreements interact with the leverage exposure rules.
Interaction with disclosure regimes
If APRA excludes central bank reserves from the leverage exposure measure, the ADI must publicly disclose the impact and its leverage ratio without the exclusion (Attachment D para 2). That interacts with securities law and disclosure obligations to markets, requiring coordination between prudential reporting and public filings.
Practical consequence
Compliance requires ADIs to operate at the intersection of prudential standards (APS suite), Australian Accounting Standards, contract and insolvency law, cross-border supervisory coordination and disclosure regimes. Legal opinions, governance, reconciliations between accounting and regulatory measurement, and dialogue with APRA are necessary to map exposures into the prescribed RWA and exposure measure frameworks.
Amendment history
The supplied text does not include any express amendment history, repeal dates, earlier versions, transitional provisions or schedules showing prior amendments. The Attachments are presented as operative texts without annotations showing insertion or amendment dates.
Implication of absence of amendment history in the supplied text
Legal and compliance teams cannot rely on the supplied document alone to determine its legislative or prudential vintage, amendments over time, or transitional relief that may apply to ADIs. The absence of amendment metadata in this extract means verification against authoritative sources (APRA's current prudential standard registers and legislative instruments) is necessary to ensure practitioners are working with the current text and any recent variations.
Where the Attachments refer to other prudential standards (APS 111, 112, 113, 115, 116, 117, 120, 180) those standards themselves may be subject to amendment. Because the Attachments incorporate or require reference to those standards, any changes to the referenced APS documents will have immediate effect on how these Attachments operate in practice. Without a change log in the supplied text, practitioners should assume cross-referenced materials must be checked for amendments.
Practical compliance advice implied by missing amendment history
Obtain the latest consolidated versions of the Attachments and each referenced APS, and confirm the operative dates and any transitional arrangements. Confirm whether APRA has issued supervisory statements, FAQs, regulatory determinations or transitional timelines that modify application or timing, particularly for IRB floors, the leverage ratio, or the countercyclical buffer.
Seek confirmation from APRA or a current legislative register for any temporary measures that may affect exposure measurement (for example temporary exclusions of central bank reserves under Attachment D para 2) because the Attachments contemplate discretionary, time-limited measures.
In short, the document as provided contains no explicit amendment history; for operational use it must be reconciled with APRA’s public instruments and any current amendments, transitional rules or supervisory guidance.
Litigation history
The material provided contains no litigation history, no references to judicial decisions, no administrative appeals and no enforcement proceedings related to the Attachments. There are no named cases or reported disputes in the text to illustrate how the rules have been litigated or interpreted by courts or tribunals.
Implications of the absence of litigation references
The absence of litigation or appellate authority in the supplied text means there is no precedent within this extract for how ambiguities (for example in the enforceability of bilateral netting agreements across jurisdictions, or the scope of APRA’s discretion to impose additional buffer requirements) might be adjudicated. Practitioners must therefore rely on statutory interpretation of the Attachments, APRA guidance, and general administrative law principles rather than an internal litigation record.
Where the instrument requires legal determinations , for example, whether a bilateral netting agreement is legally enforceable in each relevant jurisdiction upon an event of default including insolvency (Attachment D, para 38(b)(i)) , ADIs will need independent legal opinions. The absence of litigation examples means those opinions cannot be cross-checked against judicial interpretation in this text.
Practical steps in light of no litigation history
Commission jurisdictional legal opinions to support recognition of netting, set-off and enforceability claims, and document the legal basis for the positions taken to APRA.
Maintain records of APRA consultations and any supervisory determinations where APRA exercises discretion (for example requiring higher jurisdictional buffers or excluding central bank reserves temporarily), because absent public litigation guidance those supervisory records may be critical if disputes proceed to administrative review or court.
In summary, the supplied Attachments contain no litigation history; practitioners must prepare around legal and interpretative risk through proactive documentation, legal opinions and supervisory engagement.
Gotchas
The text contains numerous technical traps and operational constraints that can produce material capital consequences if overlooked.
IRB floor and model constraint
IRB ADIs must use the greater of their IRB-derived total RWA and 72.5 per cent of the Standardised total RWA (Attachment A, para 4(b)). This is a hard floor that can materially increase measured RWA for IRB users relative to model outputs and limit the expected capital relief from IRB models. The "72.5 per cent" figure is a precise threshold; small calculation differences or misallocation of exposures to jurisdictions could create breaches.
Operational risk proxies and significance split
Standardised ADIs that are non-significant may use a 10 per cent operational risk proxy, while significant financial institutions must use risk-weighted credit exposures (APS 180) plus 12.5 times capital charges for operational, market and counterparty credit risk (Attachment A, para 3). Misclassifying significance or failing to include the APS 115/116/180 capital charges as RWA equivalents will understate total RWA.
1.4 multiplier on derivatives exposures
The leverage exposure measure multiplies (RC + PFE) by 1.4 (Attachment D, para 17). This increases derivative-related exposures above pure replacement or PFE measures and can be particularly punitive for businesses with extensive derivative books even where risk-weighted capital treatments differ. Written options must be included in the leverage exposure measure even where the exposure at default under APS 180 may be zero (Attachment D, para 21(1)).
Limited recognition of collateral and netting
Except where the Attachment permits, ADIs must not reduce their exposure measure by collateral, guarantees or other credit risk mitigation (Attachment D, para 2(a)). Netting is prohibited except where the Attachment expressly allows it and subject to enforceability tests (Attachment D, paras 2(b), 38(b)). Legal enforceability must be tested in each relevant jurisdiction on insolvency, which can require expensive multi-jurisdictional legal opinions (Attachment D, para 38(b)(i)).
Strict variation margin criteria
Cash variation margin reduces RC only if stringent operational and contractual criteria are met: non-segregation (for non-QCCP trades), daily marking and daily transfers, currency matching, full amount of margin and a single MNA stipulating net settlement on default (Attachment D, para 23). If any condition fails, the ADI cannot reduce RC, enlarging leverage exposures for margined portfolios.
SFT grossing and current exposure
For SFTs, ADIs acting as principals must include gross SFT assets and a current exposure without PFE (Attachment D, para 38). Sale accounting must be reversed for exposure measurement and treated as financing (Attachment D, para 38(4)). Triparty collateral and excess collateral treatments require careful operational mapping (Attachment D, para 38(1)-(2)).
Countercyclical buffer geographic allocation
ADI-specific CCyB weights are based on risk-weighted amounts of private sector credit exposures by jurisdiction on an ultimate risk basis use the guarantor’s jurisdiction (Attachment C, paras 1-3). Using booking location instead of ultimate risk location, or incorrectly classifying counterparties as ADIs when they should be counted, will distort the weighted average and potentially lead to undercapitalisation relative to APRA expectations.
Cash pooling conditional recognition
Cash pooling recognition in the exposure measure requires daily transfers and that the ADI cannot be held liable on an individual account basis following transfer (Attachment D, Cash pooling paras 1-2). If arrangements do not meet the criteria, individual balances must be reflected separately, which can increase the exposure measure.
Distributed earnings and tax reconciliation
Earnings for distribution restriction purposes are distributable profits calculated before deduction of elements subject to the restriction, but after reversing out the tax that would have been reported had distributions not been made (Attachment B, para 2). Firms must construct tax-neutral earnings figures; mistakes can produce misapplication of the retention rules.
APRA discretion creating uncertainty
APRA may impose limits on periods to operate within the buffer, impose restrictions even where CET1 is above the buffer and temporarily exclude central bank reserves from the leverage exposure measure while raising the leverage minimum (Attachment B para 3-4; Attachment D para 2). These discretions create regulatory uncertainty and require ongoing dialogue with APRA.
Consultation requirements
For translating certain trading book charges into instrument risk-weights for CCyB geographic allocation, ADIs must consult APRA (Attachment C, para 4). This is not merely a paper exercise; inadequate consultation could result in APRA requiring recalculation or imposing a different approach.
Netting across books
Netting across SFT positions in banking and trading books is recognised only when conditions in Attachment H to APS 112 are met (Attachment D, para 38(3)). Practitioners must check Attachment H for additional criteria.
Collectively these "gotchas" show the instrument favours prescriptive measurement and conservative recognition over wide allowance for contractual or accounting mitigants. Operational, legal and model governance weaknesses can quickly manifest as materially higher regulatory exposures.
How to comply
This section provides a practical checklist and concrete steps, aligned to the obligations in the Attachments, for ADIs to achieve compliance.
Governance and policy
Update capital adequacy and leverage policies to reflect CET1, Tier 1 and Total Capital ratio calculations as set out (Attachment A, paras 1-2), including an explicit policy for how distributable earnings are calculated for Attachment B purposes (Attachment B, para 2).
Establish board-level reporting that maps CET1 ratio position against the CB and the associated minimum conservation ratios (Attachment B, Table 1). Include triggers for ceasing Tier 1 distributions in the first quartile.
Model and calculation integrity
Reconcile IRB-derived RWA and Standardised RWA calculations to identify whether the 72.5 per cent floor applies (Attachment A, para 4). Maintain model governance documentation and validation evidence for IRB, APS 180 counterparty calculations and any internal market risk models (Attachment A, para 5).
For significant institutions, ensure capital charge calculations under APS 115 and APS 116 are available and converted to RWA equivalents using the 12.5 multiplier as required (Attachment A, paras 3(c)(ii), 4(a)(v)).
Legal opinions and contractual documentation
Obtain jurisdictional legal opinions to support enforceability of bilateral netting agreements and qualified master netting agreements in each relevant jurisdiction for derivatives and SFT netting recognition (Attachment D, para 38(b)(i)). Guarantee that MNAs explicitly permit net settlement and cover variation margin and close-out netting.
Review clearing member contracts and client agreements to ensure clarity on whether the ADI is contractually obliged to reimburse clients for CCP losses; where obligations exist, ensure the exposures are included in the exposure measure as required (Attachment D, paras 25-28).
Accounting and reconciliations
Reconcile Australian Accounting Standards positions with regulatory exposure measures. Identify items that may be deducted from Tier 1 capital but may also be excluded from the exposure measure (Attachment D, para 1.2), and ensure appropriate reconciliations.
For unsettled trades, establish whether the ADI uses trade date or settlement date accounting and apply the treatment in the Attachment (Attachment D, Unsettled trades paras 1-2).
Systems and data
Implement systems able to produce RWA by jurisdiction on an ultimate risk basis for CCyB weighting, including identification of guarantor jurisdiction rather than booking location (Attachment C, paras 1-3). Ensure trading book VaR and specific risk charges can be mapped into instrument risk-weights for geographic allocation, in consultation with APRA (Attachment C, para 4).
Build exposure-measure workflows to calculate on-balance sheet exposures, off-balance sheet conversion with CCFs per APS 112 Table 17 (Attachment D, Off-balance sheet para 1), derivative RC and PFE per Attachment D to APS 180, and SFT gross assets and current exposures (Attachment D, paras 17-21, 38).
Operational procedures for margin, segregation and cash pooling
For cash variation margin to reduce RC, ensure daily marking-to-market and daily transfers, non-segregated receipt for non-QCCP trades, matching currency requirements and a single MNA that provides for net settlement on default (Attachment D, paras 23-24). Document the margin policies and test operational reliability.
For cash pooling recognition, ensure daily transfers and single-claim liability in documentation and systems (Attachment D, Cash pooling paras 1-2).
Disclosure and contingency planning
Prepare public disclosure templates to be used if APRA excludes central bank reserves from the leverage exposure measure; the ADI must disclose the exclusion’s impact and the leverage ratio without the exclusion (Attachment D para 2).
Include capital contingency plans that model the impact of being in each buffer quartile on distributable earnings, and have pre-approved capital-raising and retention strategies to avoid breaches of Attachment B retention requirements (Attachment B, paras 1-2).
APRA engagement and consultation
Engage in early consultation with APRA for: (a) any intended use of internal models for market risk or PFE calculations (Attachment A, para 5; Attachment D referencing Attachment D to APS 180); (b) development of approaches to translate VaR and other charges into instrument risk-weights for CCyB allocation (Attachment C, para 4); and (c) any requests to treat exposures or reserve exclusions temporarily (Attachment D para 2).
Maintain a record of consultations and APRA determinations that justify deviations, as APRA may impose or require higher jurisdictional buffers (Attachment C para 2).
Legal and tax calculations for earnings
Implement the specific earnings calculation for distribution restrictions: distributable profits before deduction of elements subject to restriction, calculated after reversing out the tax that would have been reported had distributions not been made (Attachment B, para 2). Coordinate legal, tax and treasury functions to produce this figure with audit trails.
Audit, validation and stress testing
Validate models and exposure calculations through internal audit and independent validation. Stress test leverage and RWA outcomes under scenarios that affect counterparty value, liquidity, margin calls and cross-jurisdictional exposures to understand the capital and distribution consequences.
Following these steps will not eliminate supervisory discretion risk, but it will place an ADI in a position to demonstrate compliance with calculation methods and to engage with APRA proactively where discretionary treatments are contemplated or required.
Part On-balance sheet exposuresOn-balance sheet exposures
Total RWA are calculated in accordance with paragraph 3 or paragraph 4 of this Attachment.
Standardised ADIs must calculate total RWA as the sum of:
RWA determined in accordance with Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112);
RWA determined in accordance with Prudential Standard APS 120 Securitisation (APS 120); and
unless APRA determines otherwise in a particular case, either:
for non-significant financial institutions, 10 per cent of the sum of RWA calculated under sub-paragraphs 3(a) and 3(b) of this Attachment as RWA for operational risk; or
for significant financial institutions, risk-weighted credit exposures calculated under Prudential Standard APS 180 Capital Adequacy: Counterparty Credit Risk (APS 180) and 12.5 times the sum of the capital charges determined under Prudential Standard APS 115 Capital Adequacy: Standardised Measurement Approach to Operational Risk (APS 115), Prudential Standard APS 116 Capital Adequacy: Market Risk (APS 116) and APS 180.[9]
IRB ADIs must calculate total RWA as the greater of:
the sum of:
RWA determined in accordance with APS 112 for those asset classes where an IRB ADI is required to use the standardised approach to credit risk, or where APRA has approved partial use;
RWA determined in accordance with Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk (APS 113);
RWA determined in accordance with APS 120;
risk-weighted credit exposures calculated under APS 180;[10] and
12.5 times the sum of the capital charges determined under APS 115, APS 116, APS 180 and Prudential Standard APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book (APS 117);[11] or
72.5 per cent of total RWA calculated in accordance with paragraph 3 of this Attachment.[12]
For the purpose of paragraph 4(b) of this Attachment, an IRB ADI may determine its market risk capital charge using its internal model approach, rather than the standard method set out in APS 116.
Attachment B — Constraints on capital di Attachment B — Constraints on capital distributions
Attachment B – Constraints on capital distributions
Capital distribution constraints apply when an ADI’s Common Equity Tier 1 Capital ratio is within the capital buffer (CB) range (consisting of the capital conservation buffer plus any countercyclical capital buffer). The CB range is divided into four quartiles for the purposes of determining the minimum capital conservation ratios, as set out in Table 1.
Table 1: Minimum capital conservation ratios
Common Equity Tier 1 Capital ratio
Minimum capital conservation ratios (expressed as a percentage of earnings)
Within first quartile of bufferPCR to ≤ (PCR + 0.25CB)
100
Within second quartile of buffer> (PCR + 0.25CB) to ≤ (PCR + 0.50CB)
80
Within third quartile of buffer> (PCR + 0.50CB) to ≤ (PCR + 0.75CB)
60
Within fourth quartile of buffer> (PCR + 0.75CB) to ≤ (PCR + CB)
40
Above top of buffer> (PCR + CB)
0
The minimum capital conservation ratios in Table 1 represent the percentage of earnings that an ADI must not distribute if its Common Equity Tier 1 Capital ratio falls within the corresponding quartile. If the Common Equity Tier 1 Capital ratio falls within the first quartile, the ADI must also cease all Tier 1 Capital distributions.
Earnings are defined for the purposes of this Attachment as distributable profits calculated prior to the deduction of elements subject to the restriction on distributions. Earnings are calculated after the tax that would have been reported had none of the distributable items been paid. As such, any tax impact of making such distributions is reversed out. An ADI that does not have positive earnings and has a Common Equity Tier 1 Capital ratio less than the sum of its Common Equity Tier 1 PCR plus the capital conservation buffer must not make positive net distributions.
Payments made by an ADI that do not result in a depletion of Common Equity Tier 1 Capital are not considered to be distributions for the purposes of this Attachment. APRA may impose restrictions on capital distributions even where an ADI’s Common Equity Tier 1 Capital ratio is above the capital conservation buffer.
APRA may impose limits on the period in which an ADI may operate within the capital conservation buffer range, on a case-by-case basis.
Attachment C — Countercyclical capital b Attachment C — Countercyclical capital buffer
Attachment C – Countercyclical capital buffer
An ADI must calculate the ADI-specific countercyclical capital buffer requirement as the weighted average of the jurisdictional countercyclical capital buffers that apply in jurisdictions in which the ADI has exposures.
The weighting applied to the jurisdictional countercyclical capital buffer in each jurisdiction will be the risk-weighted amount of an ADI’s private sector credit exposures in that jurisdiction, divided by the risk-weighted amount of the ADI’s private sector credit exposures across all jurisdictions, where:
private sector credit exposures are:
on-balance sheet assets, off-balance sheet exposures and on- and off-balance sheet securitisation and resecuritisation exposures determined under APS 112, APS 113 or APS 120, as relevant; and
exposures for which an ADI calculates a trading book capital charge for specific risk, including equity specific risk, interest rate specific risk, incremental risk, securitisation and resecuritisation under APS 116,
to private sector counterparties, excluding ADIs (and equivalent overseas deposit-taking institutions) but including other financial institutions; and
the risk-weighted amount of an ADI’s private sector credit exposures is the sum of:
the risk-weighted assets for the assets and exposures in paragraph 2(a)(i) of this Attachment; and
the risk-weighted equivalent trading book capital charges for exposures in paragraph 2(a)(ii) of this Attachment.
When determining the jurisdiction to which a private sector credit exposure relates, ADIs must use an ultimate risk basis, where possible. An ADI must use the jurisdiction where the guarantor of the exposure resides, not where the exposure has been booked.
APRA may require an ADI to apply a higher countercyclical capital buffer for a particular jurisdiction than may be determined by the regulator in that jurisdiction.
For Level 2 purposes, the ADI-specific countercyclical capital buffer must cover all exposures incurred in relevant jurisdictions, even though the business may be undertaken by a member of the Level 2 group that is not itself an ADI or equivalent overseas deposit-taking institution.
For the Value-at-Risk (VaR) for specific risk, the incremental risk charge and the comprehensive risk measurement charge included in calculating the ADI-specific countercyclical capital buffer, an ADI must consult with APRA to develop an approach that would translate these charges into individual instrument risk-weights that would then be allocated to the geographic location of the specific counterparties that make up the charge.
Attachment D — Leverage ratio Attachment D — Leverage ratio
Attachment D – Leverage ratio
An ADI must calculate its leverage ratio as follows:
Tier 1 Capital is determined in accordance with APS 111; and
the exposure measure is determined in accordance with this Attachment and is calculated as the sum of:[13]
on-balance sheet exposures;
non-market related off-balance sheet exposures;
derivative exposures; and
securities financing transaction (SFT) exposures.
Unless otherwise specified in this Attachment, an ADI must follow Australian Accounting Standards in calculating its exposure measure, subject to the following:
physical or financial collateral, guarantees or other credit risk mitigation techniques must not be taken into account by an ADI to reduce the exposure measure;
netting of assets and liabilities is not permitted; and
securitisation exposures which meet the operational requirements for regulatory capital relief, as set out in APS 120, may be excluded from the exposure measure. All other securitisation exposures, including funding-only and synthetic securitisations, must be included in the exposure measure.
APRA may temporarily exclude central bank reserves from the leverage ratio exposure measure in exceptional macroeconomic circumstances. If APRA excludes central bank reserves, it may increase the minimum leverage ratio requirement commensurately to offset the impact of the exclusion. In the event that APRA excludes central bank reserves from the calculation of the exposure measure, an ADI must publicly disclose the impact of the exclusion, as well as its leverage ratio calculated without the benefit of the exclusion.
For the purpose of calculating on-balance sheet assets, an ADI must include all balance sheet assets, including any on-balance sheet collateral for derivatives and SFTs, but excluding on-balance sheet derivatives and SFTs covered by paragraphs 16 to 45 of this Attachment.
Balance sheet assets deducted from Common Equity Tier 1 Capital and Additional Tier 1 Capital for the purposes of regulatory adjustments under APS 111 may be deducted from the exposure measure.
Liability items must not be deducted from the exposure measure, including any gains and losses on fair value liabilities, or accounting value adjustments on derivative liabilities due to changes in an ADI’s own credit risk.
On-balance sheet assets may be included in the exposure measure at their accounting values net of any provisions that have otherwise been deducted from Tier 1 Capital.
Where an ADI holds assets in a fiduciary capacity, these assets may be excluded from the exposure measure provided that the assets meet the accounting criteria for derecognition and, where applicable, the accounting criteria for deconsolidation.
Unsettled trades Unsettled trades
Unsettled trades
An ADI must account for regular-way purchases or sales of financial assets that have not been settled on the following basis:
ADIs which apply trade date accounting must reverse out any offsetting between cash rec
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