ADI acting as a principalADI acting as a principal

ADI acting as a principal

1. When an ADI is acting as a principal in an SFT, its exposure measure must include the sum of the following amounts:
   1. gross SFT assets recognised for accounting purposes[26] (i.e. with no recognition of accounting netting), adjusted as follows:
      1. 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
      2. cash payables and cash receivables in SFTs with the same counterparty may be measured net if all the following criteria are met:
         1. 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;
         2. 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
         3. 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
   2. a measure of counterparty credit risk calculated as the current exposure without a PFE add-on, calculated as follows:
      1. 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]}

1. 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:

1. Ei is the cash lent to a counterparty;

2. this transaction is treated as its own netting set; and

3. the associated cash receivable is not eligible for the netting treatment in paragraph 38(a) of this Attachment.

4. 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.

5. 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:

   1. is legally enforceable in each relevant jurisdiction upon the occurrence of an event of default, regardless of whether the counterparty is insolvent or bankrupt;
   2. 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;
   3. 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
   4. allows for the prompt liquidation or set-off of collateral in the event of default.

6. 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.

7. 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.