APRA's clean sale and separation requirements are set out in APS 120 Funds Management and Securitisation and related Guidance Notes AGN 120.3 Purchase and Supply of Assets (including Securities Issued by SPVs) (AGN 120.3) and AGN 120.1 Disclosure and Separation. Whenever the clean sale and separation requirements are not met, all the assets, liabilities, revenues and expenses of the SPV are to be consolidated with the ADI’s reported amounts.
Note: ADIs should consult APRA in case of doubt as to whether a subsidiary or controlled entity that engaged in non-financial operations should be consolidated at Level 2 for capital adequacy purposes.
Consolidated ADI group
This refers to the consolidated group of the reporting ADI at Level 2 (i.e. the consolidated banking group level) defined in accordance with Prudential Standard APS 110.
The basis of consolidation required in this form is in accordance with the prudential consolidated ADI group. The prudential consolidated group should also be determined in accordance with Australian accounting standards, notably AASB 127 Consolidated and Separate Financial Statements with the following modifications:
- Include the following:
- all controlled banking entities, securities entities and other financial entities (e.g. finance companies, money market corporations, stockbrokers and leasing companies).
- Exclude subsidiary entities involved in the following business activities:
- insurance businesses (including friendly societies and health funds);
- acting as manager, responsible entity, approved trustee, trustee or similar role in relation to funds management or the securitisation of assets;
- non-financial (commercial) operations; and
- SPVs whose assets have satisfied the clean sale requirements set down in AGN 120.3 (refer Securitisation deconsolidation principle).
Reporting period
This form is to be completed as at the last day of the stated reporting quarter. Locally incorporated banks, Foreign ADIs and Special Service Providers should submit the completed form to APRA within 20 business days after the end of the relevant reporting quarter. Credit Unions, Cairns Penny Savings & Loans Limited, Building Societies and SCCIs should submit the completed form to APRA within 15 business days after the end of the relevant reporting quarter.
Unit of measurement
Banks are asked to complete the form in millions of Australian dollars rounded to one decimal place, and for other ADIs, in whole Australian dollars (no decimal place).
Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates (AASB 121).
The general requirements of AASB 121 for translation are:
- foreign currency monetary items outstanding at the reporting date must be translated at the spot rate at the reporting date;[1]
- foreign currency non-monetary items that are measured at historical cost in a foreign currency must be translated using the exchange rate at the date of the transaction;[2]
- foreign currency non-monetary items that are measured at fair value will be translated at the exchange rate at the date when fair value was determined.
Transactions arising under foreign currency derivative contracts at the reporting date must be prepared in accordance with AASB 139 Financial Instruments: Recognition and Measurement (AASB 139). However, those foreign currency derivatives that are not within the scope of AASB 139 (e.g. some foreign currency derivatives that are embedded in other contracts) remain within the scope of AASB 121.
For APRA purposes equity items must be translated using the foreign currency exchange rate at the date of investment or acquisition. Post acquisition changes in equity are required to be translated on the date of the movement.
As foreign currency derivatives are measured at fair value, the currency derivative contracts are translated at the spot rate at the reporting date.
Exchange differences should be recognised in profit and loss in the period which they arise. For foreign currency derivatives, the exchange differences would be recognised immediately in profit and loss if the hedging instrument is a fair value hedge. For derivatives used in a cash flow hedge, the exchange differences should be recognised directly in equity.
The ineffective portion of the exchange differences in all hedges would be recognised in profit and loss; and
- translation of financial reports of foreign operations.
A foreign operation is defined in AASB 121 as meaning an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity.
- Exchange differences relating to foreign currency monetary items that form part of the net investment of an entity in a foreign operation, must be recognised as a separate component of equity.
- Translation of financial reports should otherwise follow the requirements in AASB 121.
Netting
An ADI may, for capital adequacy purposes, net off-balance sheet claims and obligations arising from market related contracts across both the banking and trading books with a single counterparty that are covered by eligible bilateral netting agreements (refer to AGN 112.3) for qualifying criteria and for details on how to calculate the credit equivalent amount of these contracts.) Netting should not be applied when reporting amounts within the Statement of Derivative Activity.
Definitions
Off-balance sheet
Off-balance sheet exposures are defined as exposures that need to be converted to a loan equivalent amount before they can be risk weighted. Items that were treated as off-balance sheet items for the purpose of this form pre-International Financial Reporting Standards (IFRS) will continue to be treated as off-balance sheet items post-IFRS.
Principal amount
This refers to the face value or gross amount of a given off-balance sheet transaction and not fair values. Absolute values should be reported and netting may only be applied as described above.
Fair value
The fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable and willing parties in an arm’s length transaction. The fair value should be able to be determined through observation of similar transactions, quoted market prices, independent valuations or if there is no readily observable market, through the ability to liquidate the investment or through assessing the net present value of future cash flows.
Record the aggregate fair (or market) value of the derivative exposure/position by summing the absolute fair value of each exposure, for each of the items listed.
For the purposes of valuing derivative exposures, for this form, fair value should represent an estimate of the amount, which could be expected to be received from the disposal of the derivative instrument in an orderly market, ignoring transaction costs. It is not necessarily related to the nominal value of the derivative.
Market value is defined for accounting purposes as a subset of fair value, where fair value means the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction, and is determined as follows:
(i) the quoted market price in an active and liquid market (i.e. market value); or
(ii) when there is infrequent activity in a market, the market is not well established, small volumes are traded relative to the asset or liability to be valued, or a quoted market price is not available – an estimate of a price for the asset or liability in an active and liquid market.
Credit equivalent amount
Non-market related off-balance sheet transactions
The credit equivalent amount is calculated by multiplying the transaction’s principal amount by the relevant credit conversion factor as set out within the Specific Instructions section of this guide (or refer to Attachment A of AGN 112.2). The purpose of applying a credit conversion factor is to convert these off-balance sheet transactions that give rise to credit exposures into on-balance sheet credit equivalents. Credit derivative transactions in the banking book are classified as “non-market related off-balance sheet transactions”.
Market related off-balance sheet contracts
These include all market related contracts held in the banking and trading books that give rise to off-balance sheet credit risk. The credit equivalent amount of these contracts, whether held in the banking or trading book, must be determined by using the current exposure (or “mark-to-market”) method. However, for interest rate, foreign exchange and gold contracts held in the banking book, the original exposure (or “rule-of-thumb”) method may be used with APRA’s prior approval. Details on how to calculate the credit equivalent amount of these contracts under the two methods are set out in AGN 112.2. For market-related contracts covered by eligible bilateral netting agreements, refer to AGN 112.3 for details on how to calculate the credit equivalent amount of these contracts. Credit derivative transactions in the trading book are classified as “market related off-balance sheet transactions”.
Risk weighted amount
The risk weighted amount of a given off-balance sheet transaction that gives rise to credit exposure is calculated by multiplying the transaction’s credit equivalent amount by the risk weight (refer Attachment A of AGN 112.1) applicable to the counterparty or type of assets or where relevant, the eligible guarantor or collateral security as appropriate.
Where an off-balance sheet claim on a counterparty is secured against eligible collateral and/or guarantee recognised by APRA (refer AGN 112.1), the secured portion of the claim (i.e. the credit equivalent amount) should be weighted according to the risk weight appropriate to the collateral and/or the guarantor. The unsecured portion of the claim must be weighted according to the original counterparty.
The maximum risk weight that will be applied to the credit equivalent amount of an off-balance sheet credit exposure arising from a market related transaction (including netted market-related transactions) is 50%.
Trading book
Each ADI intending to operate a trading book will agree with APRA a trading book policy statement specifying which activities constitute trading and therefore belong in the trading book. An ADI’s trading book consists of positions in financial instruments, including derivative products and other off-balance sheet instruments, that:
- are held for short-term resale;
- are taken on by the ADI with the intention of benefiting in the short-term from actual and/or expected differences between their buying and selling prices, or from other price or interest rate variations;
- arise from broking and market making; or
- are taken in order to hedge other elements of the trading book.
Whether a transaction should be included in an ADI’s trading book depends on the intent with which the transaction was undertaken. Positions may be considered as being held with a trading intent if:
- they are marked-to-market on a daily basis as part of the internal risk management processes. APRA recognises that good risk management practices may dictate that some non-traded positions are marked-to-market on a regular basis – such positions need not necessarily be included in the trading book;
- the position-takers have autonomy in entering into transactions (in marketable instruments) within predetermined limits; or
- the positions satisfy any other criteria which the ADI applies to the composition of its trading book on a consistent basis.
Banking book
The banking book consists of all business not included in the trading book. This includes derivatives used to hedge financial assets and financial liabilities (in existence or anticipated to be acquired or funded) that are not included in the trading book.
Specific instructions
Section A: Statement of Derivative Activity
The Statement of Derivative Activity is for information purposes. It is not directly used for the calculation of credit equivalent amounts for market-related transactions as it does not allow for those contracts covered by eligible bilateral netting agreements. It should be noted that “non-market related” information is requested relating to credit derivatives in the banking book.
ADIs should report all derivative activity within the banking and trading books in the principal amount and fair value columns. Netting as described above should not be applied.
While not intended as an exhaustive list, derivative instruments may include the following.
Column 1: Interest rate contracts
Include:
- single currency interest rate swaps;
- basis swaps;
- forward rate agreements;
- interest rate futures;
- interest rate options purchased; and
- any other instruments of a similar nature.
Column 2: Foreign exchange contracts (including contracts involving gold)
Include:
- cross currency swaps (including cross currency interest rate swaps);
- forward foreign exchange contracts;
- currency futures;
- currency options purchased;
- hedge contracts; and
- any other instruments of a similar nature.
Outstanding spot transactions should be treated as forward foreign exchange contracts.
Column 3: Equity contracts
Include:
- swaps;
- forwards;
- futures;
- purchased options/warrants; and
- similar derivative contracts based on individual equities or equity indices.
Column 4: Other derivative contracts
Include:
- swaps;
- forwards;
- purchased options;
- similar derivative contracts based on precious metals such as gold, silver, platinum and palladium;
- energy contracts;
- agricultural contracts;
- base metals (such as aluminium, copper and zinc);
- other non-precious metal commodity contracts; and
- and any contracts covering other items, that give rise to credit risk.
This category also includes all credit derivatives in the banking and trading book (see section on Reporting of credit derivatives below).
ADIs may refer to APRA where they are unclear as to which category is appropriate for a particular derivative when reporting the principal amount and fair value of that derivative.
Note: ADIs should not generally enter into contracts at off-market prices. This includes historical rate rollovers on foreign exchange contracts. If any contracts are undertaken at off-market prices, ADIs should contact APRA to discuss the reasons for such actions and to agree the capital (and other prudential) treatment of these transactions. APRA will need to be persuaded as to the need for dealing at off-market rates. As a starting point, where an ADI deals at off-market rates, the whole of that transaction is no longer subject to the maximum risk weight applied to an off-balance sheet market-related contract with a corporate counterparty, and will receive, unless otherwise agreed with APRA, a 100% risk weight.
Section B: Market-related off-balance sheet transactions
In this section, ADIs are to report, for capital adequacy purposes, the principal amount and credit equivalent amount of market-related off-balance transactions in the trading and banking books. Credit equivalent is to be calculated separately for interest rate contracts, foreign exchange contracts, equity contracts, other contracts and credit derivatives in the trading book (see section on Reporting of credit derivatives below).
An ADI may net claims and obligations arising from market-related contracts across both the banking and trading books with a single counterparty if covered by eligible bilateral netting agreements (refer to AGN 112.3 for details on how to calculate the credit equivalent amount of these contracts).
Report only those contracts that give rise to off-balance sheet credit exposures in the credit equivalent amount column. ADIs may refer to APRA where they are unclear as to which category is appropriate for a particular market-related transaction when calculating the credit equivalent amount of that transaction for capital adequacy purposes.
Exemption from capital weighting is permitted for:
- foreign exchange (except gold) contracts that have an original maturity of 14 calendar days or less; and
- instruments traded on futures and options exchanges that are subject to daily mark-to-market and margin payments.
Market risk charge of market-related contracts held in the trading book will be captured under the Market Risk Form.
Section C: Non-market-related off-balance sheet transactions
Report all non-market related off-balance sheet transactions that give rise to credit exposures.
The categories of non-market related off-balance sheet transactions and their accompanying credit conversion factors are as follows:
1.1 Direct credit substitutes - 100%
Any irrevocable off-balance sheet obligations that carry the same credit risk as a direct extension of credit, such as an undertaking to make a payment to a third party in the event that a counterparty fails to meet a financial obligation, or an undertaking to a counterparty to acquire a potential claim on another party in the event of default by that party, constitutes a direct credit substitute (i.e. the risk of loss depends on the creditworthiness of the counterparty or the party on that a potential claim is acquired).
Include:
- potential credit exposures arising from the issue of guarantees and credit derivatives (credit derivatives in the banking book where protection is sold – see section on Reporting of credit derivatives below);
- confirmation of letters of credit;
- issue of standby letters of credit serving as financial guarantees for loans, securities and any other financial liabilities; and
- and bills endorsed under bill endorsement lines (but are not accepted by, or have the prior endorsement of, another ADI).
1.2 Performance-related contingencies - 50%
Contingent liabilities that involve an irrevocable obligation to pay a third party in the event that a counterparty fails to fulfill or perform a contractual non-monetary obligation, such as delivery of goods by a specified date, etc (i.e. the risk of loss depends on a future event that is not directly related to the creditworthiness of the counterparty involved).
Include:
- issue of performance bond;
- bid bonds;
- warranties;
- indemnities; and
- standby letters of credit in relation to a non-monetary obligation of a counterparty under a particular transaction.
1.3 Trade-related contingencies - 20%
Contingent liabilities arising from trade-related obligations that are secured against an underlying shipment of goods.
Include:
- documentary letters of credit issued;
- acceptances on trade bills;
- shipping guarantees issued; and
- any other trade-related contingencies.
1.4 Sale & repurchase agreements (“Repos”) – 100%
This relates to arrangements whereby an ADI sells a loan, security or other asset to another party with a commitment to repurchase the asset at an agreed price on an agreed future date.[3] Any assets acquired by an ADI under reverse repos (i.e. purchase and resale agreements) are to be treated as collateralised loans to the counterparty.[4]
1.5 Assets sold with recourse - 100%
Include:
- any asset sales (to the extent that such assets are not included in on-balance sheet) by an ADI where the holder of the asset is entitled to “put” the asset back to the ADI within an agreed period or under certain prescribed circumstances, e.g. deterioration in the value or credit quality of the asset concerned.[5]
1.6 Forward asset purchases - 100%
Include:
- commitments to purchase at a future date and on pre-arranged terms; and
- a loan, security or other asset from another party, including written put options on specified assets with the character of a credit enhancement.[6]
Where an ADI purchasing the asset has an unequivocal right to substitute cash settlement in place of accepting delivery of the asset, and the price on settlement is calculated with reference to a general market price indicator (and not to the financial condition of any specific entity), the purchase may be treated as a market-related off-balance sheet transaction.
Written put options expressed in terms of market rates for currencies or financial instruments bearing no credit risk are excluded from risk assets.
1.7 Partly paid shares and securities - 100%
Include:
- any amounts owing on the uncalled portion of partly paid shares; and
- securities held by an ADI, that represent commitments with certain draw down by the issuer at a future date.[7]
1.8 Placements of forward deposits - 100%
This relates to any agreement between an ADI and another party whereby the ADI will place a deposit at an agreed rate of interest with that party at a predetermined future date.
1.9 Note issuance and revolving underwriting facilities - 50%
This involves arrangements whereby a borrower may draw down funds up to a prescribed limit over a predefined period by making repeated note issues to the market, and where, should the issue prove unable to be placed in the market, the unplaced amount is to be taken up or funds made available by an ADI being committed as an underwriter of the facility.
1.10 Other commitments
1.10.1. Commitments with certainty of drawdown – 100%
1.10.2. Commitments (e.g. undrawn formal standby facilities and credit lines, balances available for withdrawal under redraw facilities on term loans) with a residual maturity of:
(i) 1 year or less - 0%.
(ii) over 1 year - 50%.
1.10.3. Commitments that can be unconditionally revoked at any time without notice (e.g. undrawn overdraft and credit card facilities providing that any outstanding unused balance is subject to review at least annually) - 0%
1.10.4. Irrevocable standby commitments provided under APRA’s approved industry support arrangements - 0%
The amount of undrawn commitment to be included in calculating an ADI’s off-balance sheet non-market-related credit exposures is the maximum unused portion of the commitment that could be drawn during the remaining period to maturity. The drawn portion of a commitment forms part of an ADI’s on-balance sheet credit exposure.
Irrevocable commitments to provide off-balance sheet facilities should be assigned credit conversion factors appropriate to the underlying facilities. For example, an irrevocable commitment for six months to provide a guarantee in support of a counterparty attracts the 100% credit conversion factor applicable to the guarantee.
The residual maturity of an undrawn commitment is the time remaining until the commitment will be completely extinguished by being terminated or maturing, or can be unconditionally cancelled by an ADI or be fully drawn. With regard to irrevocable commitments to provide off-balance sheet facilities, the residual maturity is the period up until the associated facility expires. For example, an irrevocable commitment with a remaining maturity of 6 months to provide a commitment to provide finance with a 9-month term is deemed to have a residual maturity of 15 months.
All commitments are to be included in the capital adequacy ratio calculation regardless of whether or not they contain “material adverse change” clauses or any other provisions that are intended to relieve an ADI of its obligations under certain conditions.
1.11 For any non-market related off-balance sheet transactions that give rise to credit risk but are not specifically identified above, an ADI should consult APRA on the appropriate credit conversion factor to be used for calculating the credit equivalent amount of that particular transaction for capital adequacy purposes.
Reporting of credit derivatives
Credit derivatives are to be reported as specified above. Below is a summary of all instances within this form that involves the reporting of credit derivatives.
- Credit derivatives in the trading book where protection is purchased
This should be reported in two parts of this form: first, under the "Statement of Derivative Activity - Trading Book” in the row titled “Credit derivatives – Bought protection" (information purposes); and, second, under "Market-Related Off-Balance Sheet Transactions” in the row titled “Credit derivatives – bought protection in the trading book” (capital adequacy purposes). The principal amounts of these items should only differ if netting is applied for capital adequacy purposes as described above.
- Credit derivatives in the trading book where protection is sold
This should be reported in two parts of this form: first, under the "Statement of Derivative Activity - Trading Book” in the row titled “Credit derivatives - Sold protection" (information purposes); and, second, under "Market-Related Off-Balance Sheet Transactions” in the row titled “Credit derivatives – sold protection in the trading book" (capital adequacy purposes). The principal amounts of these items should only differ if netting is applied for capital adequacy purposes as described above.
- Credit derivatives in the banking book where protection is purchased
This should be reported under "Statement of Derivative Activity - Banking Book” in the row titled “Credit derivatives - Bought protection". This is for information purposes only and is not used in the calculation of capital. This item should not be reported in any other part of this form as no capital is held against credit derivatives in the banking book where protection is purchased.
- Credit derivatives in the banking book where protection is sold
This should be reported in two parts of this form: first, under "Statement of Derivative Activity - Banking Book” in the row titled “Credit derivatives - Sold protection" (information purposes); and, second, under "Non-Market Related Off-Balance Sheet Transactions” in the row titled “Credit derivatives - sold protection in the banking book” (capital adequacy purposes). Seeing that credit derivatives in the banking book are classified as non-market related transactions and hence do not qualify for netting (capital adequacy purposes), the principal amounts of these items should be identical.
Section D: Other off-balance sheet transactions
Off-balance sheet liquidity support facilities
- Off-balance sheet liquidity support facilities
This section captures information on liquidity support facilities contracted by the ADI to supplement its liquidity management practices.
Column 1: Approved balance available
Include:
- the total approved balance of the facility.
Column 2: Undrawn balance available
Include:
- the balance of the facility that has not been used or drawn down by the ADI at the reporting date.
1.1. Standby facilities
These facilities are approved and committed to the ADI. These generally require written notice by the ADI to trigger draw down (access to the funds).
1.1.1 Facilities with same day draw down
Include:
- those standby facilities that can be drawn down (funds accessed) on the same day that notice is given by the ADI of its intention to draw down on the standby facility.
1.1.2 Facilities with two-five day draw down
Include:
- those standby facilities that can be drawn down (funds accessed) within two-five days after notice is given by the ADI of its intention to draw down on the standby facility (i.e. a two-five day waiting period).
1.1.3 Facilities with greater than five days draw down
Include:
- those standby facilities that can be drawn down (funds accessed) five days after notice is given by the ADI of its intention to draw down on the standby facility (i.e. a five day waiting period).
1.2. Bill acceptance/discount facilities
These are another form of liquidity/funding. The funding is provided to the ADI by a facility that discounts bills (e.g. bank accepted bills). Principle and interest (discount) owing on the bill is repaid or ‘rolled over’ by the ADI on maturity of the bill.
1.3. Letter of credit facilities
This is an irrevocable and unconditional undertaking by an ADI to repay principle and interest of a loan in the event of default.
1.4. Overdrafts
These are accounts that may be overdrawn up to limits agreed to with an ADI.
1.5. Other liquidity support facilities
All other off-balance sheet liquidity support facilities contracted for the ADIs use that are not included in the categories above.
1.6.1 Facilities with related entities
Report liquidity support facilities that are provided by related entities.
- Value of charge/security that has been granted over assets of the ADI
2.1 Fixed charge
A fixed charge is a form of security provided to the lender relating to a specific asset or assets. A fixed charge will generally limit the ability of the ADI to deal with those assets (i.e. investment securities).
2.2 Floating charge
This is a charge where the creditor’s charge or claim is not lodged over a particular asset, but is fixed on a specific asset or assets only if the default occurs. This process is called crystallisation of the charge. A floating charge leaves the debtor free to buy, sell and vary the assets until such time the charge is crystallised.