Financial Sector (Collection of Data) (reporting standard) determination No. 20 of 2009 - GRS 141.0_G (2009) - Listed Equity Holdings and Risk Charge
Consolidation at Level 2 should cover thConsolidation at Level 2 should cover the Level 2 insurance group as defined under GPS 001.
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Listed Equity Holdings and Risk Charge (Level 2 Insurance Group)
Instruction Guide
Introduction
This instruction guide is designed to assist in the completion of GRF 141.0_G Listed Equity Holdings and Risk Charge (Level 2 Insurance Group).
Information on this form is used to calculate part of the Level 2 insurance group’s Investment Risk Capital Charge.
For the purposes of completing this form, only include investments that are included in the aggregate balance disclosed for the asset item 2.2.1 ‘Total listed equity securities (related to GRF_141_0_G)’ and 2.5.7.8 ‘Listed equities’ on GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group). Do not include asset items reported in any of the other asset categories in GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group). Otherwise the asset items will be subject to two investment risk charges.
Investment Risk Charge
The Investment Risk Capital Charge applicable for a Level 2 insurance group’s on-balance sheet Investment/Asset exposures is calculated in accordance with Prudential Standard GPS 111 Capital Adequacy: Level 2 Insurance Group (GPS 111).
The fair value of each applicable asset/asset category is required to be disclosed in the appropriate cell for either Australian business or international business. The aggregate Investment Risk Capital Charge calculated in this form is included in the calculation of the Level 2 insurance group’s minimum capital requirement.
The Investment Risk Capital Charge is calculated based on the fair value of assets disclosed.
Audit requirements
The annual return of GRF 141.0_G Listed Equity Holdings and Risk Charge (Level 2 Insurance Group) required under paragraphs 3 and 5(c) of Reporting Standard GRS 141.0_G must be subject to a limited assurance[2] review by the Group Auditor (see Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups (GPS 311)).
The Group Auditor must prepare a review report on the basis of a limited assurance engagement in accordance with the requirements of GPS 311. Assurance in the review report will be provided in the form of negative assurance. To express negative assurance in the review report, the auditor will use limited procedures to obtain sufficient appropriate evidence. Enquiries of the Level 2 insurance group’s staff and analytical procedures will be the primary tools used to obtain evidence. These procedures will not provide all the evidence that would be required in an audit.
The scope and nature of audit testing required is outlined in the Standard on Assurance Engagement ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information issued by the Auditing and Assurance Standards Board.
Subdivision Consolidation at Level 2 should cover th - Financial Sector (Collection of Data) (reporting standard) determination No. 20 of 2009 - GRS 141.0_G (2009) - Listed Equity Holdings and Risk Charge - Consolidation at Level 2 should cover the Level 2 insurance group as defined under GPS 001. | Zoe
Reporting entities
GRF 141.0_G Listed Equity Holdings and Risk Charge (Level 2 Insurance Group) is to be completed by the parent entity of a Level 2 insurance group as defined under Prudential Standard GPS 001 Definitions (GPS 001).
Consolidation at Level 2 should cover the Level 2 insurance group as defined under GPS 001.
Definitions
For Australian business[3], report insurance business as per APRA-authorised insurer reporting. For international business[4], only report insurance business deemed to be general insurance business.[5] APRA may vary the reporting requirements in relation to Australian or international business where a Level 2 insurance group has applied for such a variation (see adjustments below).
For prudential reporting purposes ‘Level 1 Insurer’ is as defined in GPS 001
Other definitions for data reporting items required by this form have been provided where possible in the instructions under the section headed ‘Specific Instructions’.
Unit of measurement
This form is to be presented in Australian dollars (AUD), rounded to thousands of dollars, with no decimal place.
Amounts denominated in foreign currency are to be converted to AUD in accordance with Australian accounting standards.
Transactions arising under foreign currency derivative contracts at the reporting date must be prepared in accordance with Australian accounting standards.
Materiality
GRF 141.0_G Listed Equity Holdings and Risk Charge (Level 2 Insurance Group) is to be prepared based on the concept of materiality as applied in Australian accounting standards subject to APRA’s discretion. APRA’s discretion is likely to apply in instances where the application of materiality criteria is not suitable for prudential reporting purposes.
Reporting period
Level 2 insurance groups are required to report the information in the reporting form. This information is to be reported on three occasions in a Level 2 insurance group’s financial year. A Level 2 insurance group is required to submit:
semi-annual return which is to be completed in respect of each half year from the start of the financial year of the Level 2 insurance group; and
an audited annual return which will be based on a limited assurance review by the Group Auditor (see Audit requirements).
The financial information requested in this form is to be reported as at the last day of the reporting period on a financial year to date basis of the Level 2 insurance group.
Reporting lag
Submission times for Level 2 reporting forms are as follows (in accordance with 141.0_G Listed Equity Holdings and Risk Charge):
The semi-annual return is to be lodged within three months after the end of the reporting period.
The audited annual return is to be lodged within four months after the end of the reporting period.
Adjustments
The parent entity of a Level 2 insurance group may apply in writing to APRA to vary the reporting requirements of GRF 141.0_G Listed Equity Holdings and Risk Charge in relation to that Level 2 insurance group. APRA may, at its discretion approve such an application in writing.
International business
Level 2 insurance groups are required to report financial data on both Australian and international exposures. ‘Australian Business’[6] means insurance business carried on by any Level 1 insurer within a Level 2 insurance group. ‘International Business’[7] is insurance business carried on by an entity within the group that is not authorised under the Insurance Act 1973.[8] This treatment is different to the requirements of AASB 1023 ‘General Insurance Contracts’ and other Australian accounting standards. For entities which are not insurers within the Level 2 insurance group, listed equity holdings are to be reported as:
‘Australian business’ when they are held by an entity incorporated in Australia; and
‘International business’ where they are held by an entity incorporated outside of Australia.
Inter-region elimination
The value of inter-region transactions, which are eliminated on consolidation, need to be reported as negative values under ‘Inter-region elimination’.
Basis of preparation
In completing this form unless otherwise specifically stated below, it is recommended that Level 2 insurance groups follow the Australian accounting standards where possible, regarding the interpretation, recognition and measurement of investments notably AASB 1023 ‘General Insurance Contracts’. Unlike at Level 1, APRA will accept the notion of assets backing insurance liabilities for the Level 2 insurance group, provided these assets represent all assets controlled and managed by the group to support insurance liabilities. Investments backing general insurance liabilities must be measured at fair value.[9] Additionally, this form allows the reporting of information on a ‘look-through’ basis which is not available under Australian accounting standards. Refer to section on ‘look-through’ basis below.
The total value of item 1.1 ‘Total listed equities - direct holdings’ disclosed in this form must agree to the total reported in item 2.2.1 of GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group). The total value of item 1.2 ‘Total listed equities - Indirectly held - 'Look-through basis' disclosed on this form must agree to the amount reported in item 2.5.7.8 of GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group).
Derivative instruments that are used to hedge listed equity investments are to be included in this form. Derivatives are as defined in AASB 139 ‘Financial Instruments: Recognition and Measurement’.
The investment risk capital charge for a derivative is determined as the sum of the equity market risk component, the equity basis risk component and the counterparty risk component. The equity market risk component and the equity basis risk components only apply to derivatives over listed equities, and are covered by this form. Any counterparty risk component for derivatives over listed equities is calculated under item 6.3 on GRF 110.0_G Minimum Capital Requirement (Level 2 Insurance Group).
Where the Level 2 insurance group holds derivatives over listed equities, the investment risk capital charge applicable to all holdings of listed equities is replaced with the equity market risk component (refer to Prudential Standard GPS 114 Capital Adequacy: Investment Risk Capital Charge (GPS 114)). The equity market risk component is equal to 16 per cent of the absolute value of the net exposure to listed equities and derivatives over listed equities (where the derivatives exposure for options is calculated on a delta-weighted basis).
The equity basis risk component applies only to derivatives over listed equities for which the notional equity position is negative and will be a specified percentage of the absolute value of the notional equity position. The percentage is the lesser of eight per cent and 16 x (100 per cent – overlap percentage). The overlap percentage measures the effectiveness of the hedge between the derivative and the physical portfolio it is being used to hedge and is equal to the sum of the lesser of A and B for each stock in that portfolio where:
(a) A is the stock’s proportionate weight in that portfolio; and
(b) B is the stock’s proportionate weight in the index on which the derivative is based.
A derivative that is not being used to hedge a portfolio will have a basis risk percentage of eight per cent. A portfolio may consist of one or more stocks.
The equity market risk component and the equity basis risk components are to be calculated in this form, regardless of whether they are held directly or indirectly (where the Level 2 insurance group has elected to apply the look-through basis for indirectly held listed equities).
Securities purchased (sold) under agreements to resell (repurchase) and stock lending/borrowing
Treatment is to be consistent with AASB 139 ‘Financial Instruments: Recognition and Measurement’. Where the transferee of the security effectively receives a lender’s rate of return, or a return that does not correlate with ownership of the securities (i.e. the risks and rewards of ownership of the underlying securities is not effectively transferred), these transactions are to be accounted for as collateralised borrowing or lending activities.
Under this method of accounting for transactions that satisfy the above, do not adjust (i.e. increase or decrease) the physical investment security holdings/portfolios (interest rate and equity investments) for the securities that are subject to these agreements. For the required prudential treatment for securities meeting the above conditions, refer to treatment as noted in the instructions for GRF 300.0 Statement of Financial Position (Level 2 Insurance Group).
Securities transacted not settled (i.e. trade date accounting)
For the purpose of the APRA forms, include market related securities that are recorded on a trade date basis and transacted in accordance with accepted financial market settlements periods. These do not constitute forward asset purchases on off balance sheet business.
Securities listed on a recognised exchange
It will generally be appropriate to treat an exchange organisation as ‘recognised’ where it meets the following criteria:
it is subject to authorisation, licensing or other means of recognition by a government or other competent authority;
it has rules, issued or approved, by the government or other competent authority defining the conditions:
for the operation of the exchange;
for access to the exchange; and
that must be satisfied by a contract before it can be dealt on the exchange;
it has a clearing mechanism that provides for contracts dealt through the exchange;
it functions regularly;
the exchange has a prudent and frequent margining system where relevant;
the exchange requires settlement on a particular day as applicable;
members of the exchange are themselves subject to supervision by the exchange or a competent authority; and
the operations of the exchange in turn are supervised by government or other competent authority.
Look-through basis
GPS 111 allows the Level 2 insurance group to apply the Investment Capital Factors to the underlying assets of the trust rather than to the overall value of its holdings in the trust. This is known as the ‘look-through’ basis. This treatment is different to the requirements of the Australian accounting standards. For assets of an insurer or its ELE held under a trust (other than a cash management trust), the Level 2 insurance group may apply the Investment Capital Factors applicable to the underlying assets (including derivatives) of the trust, if the Level 2 insurance group has information on the underlying assets.
APRA may require a Level 2 insurance group to apply different Investment Capital Factors to different components of a hybrid instrument (with both equity and debt features such as embedded derivatives).
Where the Level 2 insurance group has elected to apply the look-through basis to calculate the investment risk capital charge and the underlying assets of the trust includes listed equities, then the investment capital charge associated with the Level 2 insurance group’s share of the listed equities are to be calculated in this form.
Investment capital factor %
This column discloses the appropriate investment capital factor for the asset type in accordance with GPS 111.
Investment risk charge
This column will calculate the appropriate investment risk charge in accordance with GPS 111.
Specific instructions
The following provides guidelines to facilitate in the specific disclosure of listed equity related investments held by the Level 2 insurance group.
1. Listed equities
1.1 Total listed equities– Direct holdings
The information submitted in this form is used to calculate the part of the investment risk capital charge on listed equity investments for the Level 2 insurance group. Guidance on what is considered to be listed equity for the purposes of the prudential standards is outlined below.
Report the fair value of equity securities that are listed on a recognised exchange and held directly by the Level 2 insurance group.
Listed equities include:
Preference shares;
Securities (stock) lent or sold under repurchase agreements.
Exclude:
Rights, options and warrants over listed equities. These are to be taken into account in calculating the derivative position.
Securities borrowed or purchased under resale agreements.
Subordinated Debt instruments. Such instruments are to be reported in GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group).
Units in listed or unlisted trusts as the investment capital charge calculated here is for equity investment securities only. Where the Level 2 insurance group elects to apply the look-through basis for a unit trust, then the relevant listed equity ‘look-through’ amount is to be reported in item 1.2 of this form. However, where the insurer has elected not to apply the look-through basis for the unit trust then the amount is to be reported in GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group).
1.2 Total listed equities – Indirectly held – ‘Look-through’ basis
Report the amount of listed equities that are indirectly held through a listed or unlisted trust and where the Level 2 insurance group has elected to apply the ‘look-through’ basis. This amount should correspond with item 2.5.7.8 of GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group).
1.3 Derivative position
Record the exposure to the notional value of equities via derivatives here.
Balances in derivative margin accounts, which hold deposits lodged with an exchange or clearing house as collateral to cover adverse movements in market prices, are to be reported in GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group).
This form captures only the equity market risk component and the basis risk component for equity derivative positions. Where instruments are not traded on futures and options exchanges which are subject to daily mark-to-market and margin payments the counterparty risk component must be recorded on GRF 110.0_G Minimum Capital Requirement (Level 2 Insurance Group).
Level 2 insurance groups are required to calculate the derivative position over listed equities outside the reporting forms. The calculation of the derivative position is required to be submitted to APRA as supplementary information for each reporting period in a format developed by the Level 2 insurance group. The reporting supplement is to be submitted to the Level 2 insurance group’s APRA Responsible Supervisor.
A short position is to be recorded as a positive amount and a long position as a negative amount.
1.4 Absolute value of the net exposures to listed equities (Equity market risk component)
Where a Level 2 insurance group holds derivatives over listed equities, the Investment Risk Capital charge applicable to all holdings of listed equities is to be replaced with the equity market risk component (refer to paragraph 45 of GPS 114). The equity market risk component is equal to 16 per cent of the absolute value of the net exposure to listed equities and derivatives over listed equities (where the derivative exposure for options is calculated on a delta-weighted basis).
The form will automatically calculate the absolute value of the net exposures to listed equities (Sum of (Item 1.1 + Item 1.2) less Item 1.3).
1.5 Absolute value of notional equity position of derivatives (Basis risk component)
The equity basis risk component applies only to derivatives over listed equities for which the notional equity position is negative, and will be a specified percentage of the absolute value of the notional equity position. The percentage is the lower of eight per cent and 16 x (100 per cent - overlap percentage). The overlap percentage measures the effectiveness of the hedge between the derivative and the physical portfolio it is being used to hedge and is equal to the sum of the lower of A and B for each stock in that portfolio where:
A is the stock’s proportionate weight in the portfolio; and
B is the stock’s proportionate weight in the index on which the derivative is based.
A derivative that is not being used to hedge a portfolio will have a basis risk percentage of eight per cent. A portfolio may consist of one or more stocks.
Record the amount of absolute value of the notional equity position of derivatives and the applicable investment risk capital charge (basis risk component).
Level 2 insurance groups are required to calculate the absolute value of the notional equity position and the applicable investment risk capital factor (i.e. specified percentage) outside the reporting forms. The calculations are required to be submitted to APRA as supplementary information for each reporting period in a format developed by the Level 2 insurance group. The reporting supplement is to be submitted to the Level 2 insurance group’s APRA supervisor
Listed equity holdings risk charge
The total investment risk charge for listed equity holdings is calculated automatically.