Financial Sector (Collection of Data) (reporting standard) determination No. 5 of 2010 - GRS 160.0 (2010) - Derivative Activity and Risk Charge
Reporting Form GRF 160.0Reporting Form GRF 160.0
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calculates the required capital charge associated with an insurer’s exposure to derivative financial instruments and is based on the Prescribed Method set out in Prudential Standard GPS 114 Capital Adequacy: Investment Risk Capital Charge (GPS 114); and
collects information on derivative activities and exposures.
Audit requirements
The form relating to authorised insurance entities and reinsurance entities is required to be subject to audit review and testing.
The scope and nature of audit testing required is outlined in the applicable Auditing and Assurance Standards Board Guidance Statement issued by the Auditing and Assurance Standards Board.
Information provided in the form in respect of a financial year of an insurer forms part of the insurer’s ‘yearly statutory accounts’ within the meaning of section 3 of the Insurance Act 1973 (the Act). This means that:
the completed form for the financial year must be audited by the Appointed Auditor of the insurer (see paragraph 49J(1)(a) of the Act);
the insurer must make such arrangements as to enable the auditor to do this (subsection 49J(2));
the auditor must give the insurer a certificate relating to the completed form (and other completed forms that are part of the insurer’s yearly statutory accounts), which must contain statements of the auditor’s opinion on the matters required by the prudential standards to be dealt with in the certificate (subsection 49J(3)); and
the certificate must be lodged with APRA as provided for in the prudential standards (paragraph 49L(1)(a)), namely by the due date for lodging the form in respect of the financial year for the insurer.
Reporting entity
This form is to be completed for the following reporting entities:
Branch insurers of a foreign parent insurer (reference to licensed insurer in the form means total operations of the branch, excluding the parent operations);
Authorised insurance entities, including mutual entities (reference to licensed insurer in the form means total operations of the licensed entity); and
Authorised reinsurance entities (reference to licensed insurer in the form means total operations of the licensed entity).
Definitions
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
The form is to be completed in Australian currency, rounded in thousands of dollars with no decimal place. Amounts denominated in a currency other than Australian 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[2] outstanding at the reporting date must be translated at the spot rate[3] at the reporting date.
Foreign currency non-monetary items[4] that are measured at historical cost in a foreign currency must be translated using the exchange rate at the date of the transaction.
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.
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.
Reporting period
Insurers are required to report the information in the reporting form on a quarterly and annual basis.
The quarterly information is to be completed in respect of each quarter based on the financial year of the insurer, not the calendar year.
The annual information is to be completed in respect of the financial year of the insurer.
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 insurer.
Reporting lag
This form must be lodged for each of the reporting units within the number of business days after the end of the quarter as set out in Reporting Standard GRS 160.0 Derivative Activity and Risk Charge.
Related parties
Where this term is used or referenced in these forms, related parties is to be interpreted consistently with its definition and meaning as contained in AASB 124 ‘Related Party Disclosures’ (AASB 124).
In accordance with AASB 124, related party means a party that directly or indirectly through one or more intermediaries:
(a) controls, is controlled by or is under common control with, the entity (this includes parents, subsidiaries and fellow subsidiaries);
(b) has significant influence over the entity or has joint control over the entity; or
(c) is an associate (as defined in AASB 128 ‘Investments in Associates’) of the entity; or
(d) is a joint venture in which the entity is a venturer (see AASB 131 ‘Interests in Joint Ventures’); or
(e) is a member of the key management personnel of the entity or its parent; or
(f) is a close member of the family of any individual referred to in (a), (b) or (e); or
(g) is an entity that its controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (e) or in (f); or
(h) is a post-employment benefit plan for the benefit of the employees of the entity, or of any entity that is a related party of the entity.
Specific instructions
Derivative financial instruments
Derivatives expose insurers to a full range of investment risks, even though in many cases there may be no, or only a small initial outlay. Insurers must set aside capital to cover the investment risk of these transactions particularly where derivatives are used for reasons other than to hedge an underlying physical position.
Where the insurer has derivatives over listed equities, the investment risk capital charge is applied on a portfolio basis and consists of the equity market risk component and equity basis risk component. Any counterparty risk component on the derivatives is still captured on this form. The equity market risk component and the equity basis risk components are to be calculated under GRF 140.1 Investments – Direct Equity Holdings and Risk Charge.
Where an insurer elects to apply the investment capital factors to the underlying assets held under a trust and the trust holds derivatives, then those derivatives should be reported in this form where required.
Derivatives are generally defined as those instruments/contracts, where the value is based on other products, either financial or real, and/or on prices associated with financial products.
Derivative contracts involve:
Future delivery, receipt or exchange of financial items such as cash or another derivative instrument, or
Future exchange of real assets for financial items where the contract may be tradeable and has a market value.
The contracts can either be binding on both parties (e.g. as with a currency swap) or subject to the exercise by one party of a right contained in the contract (as with options).
The counterparty in a derivative contract is the party assuming the credit risk. For exchange-traded contracts, credit risk is transferred or assumed by the exchange clearing house. For over the counter (OTC) contracts (e.g. derivative contracts customised for the insurer by a bank), the other party to the contract (seller or buyer) is the counterparty.
Derivative products/contracts are not limited to but include the following:
Options (including call and put options; exchange-traded and over-the-counter options; interest-rate, bullion, commodity and equity options; warrants);
Interest rate swaps;
Cross-currency interest-rate swaps;
Foreign exchange swaps;
Foreign exchange forwards;
Futures (i.e. bank bill, bond, equity); and
Forward rate agreements.
If the units are held in a related entity of the insurer (i.e. a dedicated investment management entity for the Insurer), the Insurer may apply to APRA to have such entities approved as part of its Extended Licensed Entity (ELE). This is set out in GPS 114. Once approved by APRA, this will allow the insurer to look through the legal structures involved and to consolidate the balance sheet of the related entity with its own for the purposes of determining the investment risk capital charge.
Any associated derivative balances relating to the insurers investment securities/portfolio that is contracted by the related entity must also be recognised by the licensed insurer.
Exclude:
Derivative margin accounts, which hold deposits lodged with an exchange or clearing house as collateral to cover adverse movements in market prices. These balances are to be reported at item 1 “Deposits or placements with (i.e. money market type deposits / placements)” in GRF 140.0: Investments – Direct Interest Rate Holdings and Risk Charge.
Repurchase/Resale agreements despite their similarity to a FRAs and/or swaps.
Part 1: Aggregate value of all derivative financial instruments other than exchange traded derivatives by contract type, residual maturity, position and counterparty rating grade
This section of the form requires all derivative contract positions of the reporting insurer (except for derivatives traded on recognised futures and options exchanges which are subject to daily marked-to-market), according to the contract type, into residual maturity bands, by long or short position and by counterparty rating grade. Insurers should choose the applicable derivative contracts from the drop-down menu within the form:
Contract type
From the drop-down menu, choose the contract type for all derivative financial instruments (other than exchange traded derivatives) held by the insurer:
Residual maturity refers to the time remaining from the reporting date to the maturity date of the derivative financial contract.
From the drop-down menu, choose the appropriate residual maturity of the corresponding derivative financial instrument:
Less than 1 year
1 year to less than 5 years
5 years or more
Position
For each derivative exposure reported, from the drop-down menu, choose whether the instrument is a long or a short position.
Long position
Short position
Counterparty rating grade
For each derivative exposure reported, from the drop-down menu, choose the appropriate counterparty grade of the derivative contract. The counterparty grades align with the grades specified in GPS 114.
Principal amount
Note: Always record this value as positive, even for short positions in derivative financial instruments.
Principal amount for the purpose of this form refers to the face value or notional principal amount of the derivative financial contract.
Record the aggregate face value or notional principal amount (always positive) of the derivative exposure/position separated into net long or net short positions, for each of the items listed. Amount is to be rounded to thousands of Australian dollars. The notional principal amount of a contract is the reference amount used to calculate payment streams between counterparties to a contract.
Mark to Market Value
Record the aggregate mark to market value of the derivative exposure/position separated into net long or net short positions, for each of the items listed. Amount is to be rounded to thousands of Australian dollars.
Mark to market value (or replacement cost) represents the difference between:
the price of entering into a new contract to replace the original contract; and
the price of the original contract excluding transaction costs.
Potential exposure add-on Factors %
The potential exposure add-on factors as specified in GPS 114 are:
Residual Maturity
Interest Rate Contracts
Foreign Exchange & Gold Contracts
Equity Contracts
Precious Metal Contracts (except gold)
Other Contracts
Less than 1 yr
Nil
1.0%
6.0%
7.0%
10.0%
1 year to less than 5 yrs
0.5%
5.0%
8.0%
7.0%
12.0%
More than 5 yrs
1.5%
7.5%
10.0%
8.0%
15.0%
Asset equivalent
Do not enter a value in this column. The form automatically calculates the asset equivalent value of the derivative exposure. This is calculated based on the Prescribed Method set out in GPS 114, and is the sum of the:
Positive mark-to-market value (or replacement cost) of the derivative position (refer below); plus
A potential exposure add-on.
Current mark-to-market value of the derivative position
The current mark-to-market value of a derivative is only applicable where the position has a positive replacement value to the insurer. If the current mark-to-market value of the position is negative or zero, the value is not included in the calculation, as the calculation of the asset equivalent amount is trying to capture the credit risk value of the derivative position to the insurer.
A potential exposure add-on
The potential exposure add-on for a derivative position is determined by multiplying the notional principal amount of the derivative contract by the appropriate credit conversion factors outlined in the table above. This component of the calculation is required for all derivatives regardless of whether the derivative contract has a positive, zero or negative mark-to-market value.
Investment Capital Factor %
The investment capital factors are specified in GPS 114. These are based on the rating of the counterparty to the derivative contract.
Investment Risk Capital Charge
Do not enter a value in this column. This column automatically calculates the appropriate investment capital charge based on the information entered. The capital charge is calculated by multiplying the asset equivalent value by the investment capital factor applicable for each counterparty grade.
Risk Charge for:
Interest Rate Contracts
Foreign Exchange and Gold Contracts
Equity Contracts
Precious Metal Contracts (excluding Gold)
Other Market-Related Contracts
Do not enter a value in these fields as they are automatically calculated. This is the total capital charge calculated for each contract type.
Total Derivatives Activity Risk Charge
Do not enter a value in this field as this is automatically calculated. This is the total capital charge calculated for all contract types, based on the aggregate value of all derivative financial instruments other than exchange traded derivatives.
Part 2: Total Contracts
Total Derivative Exposure Classified into the following:
(Note: Capital charge is not calculated on these products, but the aggregate value is required for the first 2 columns of each type of derivative market/type).
Total 'Over the Counter' derivative financial instruments
These refer to derivative contracts that are not traded on a recognised exchange. Instead these contracts are transacted between individual counterparties (e.g. most commonly a bank). The details of a derivative contract can be negotiated between the contracting parties.
1.1 Forwards, Swaps, Other
1.2 Bought Option Positions:
(Note: do not include options in the form of credit derivatives, these are separately disclosed).
Report option positions where the insurer has purchased an option position (i.e. a call or put option) and has the right but not the obligation to exercise the option against the writer and request delivery or sale of the underlying security or cash settlement. Disclose bought option exposures into the following:
1.2.1 Call option
Right but not the obligation of the holder of the option to require the writer of the option to sell the underlying security/asset to the holder.
1.2.2 Put option
Right but not the obligation of the holder of the option to require the writer of the option to buy the underlying security/asset from the holder.
1.3 Written (sold) Option Positions:
(Note: Do not include options in the form of credit derivatives, these are separately disclosed.)
Report option positions where the insurer has written/sold option positions (i.e. call or put options), and as a result has the obligation to deliver or purchase the underlying product of the option or settle in cash, if exercised by the holder of the option position sold by the insurer. Disclose sold option exposures into the following:
1.3.1 Call option
Obligation but not the right of the writer of the option to sell the underlying security/asset to the holder of the option.
1.3.2 Put option
Obligation but not the right of the writer of the option to buy the underlying security/asset from the holder.
Credit Derivatives
(Note: do not include options based on financial market products/indexes, these are separately disclosed)
Report credit derivative option positions where the insurer is:
(i) providing credit protection; or
(ii) purchasing credit protection.
Note: This disclosure is only required for “Other Market-related contracts”.
Total exchange traded derivative financial instruments: Derivatives traded on futures and options exchanges subject to daily mark-to-market & margin payments.
These refer to derivative contracts that are transacted on a recognised futures or options exchange (e.g. in Australia the Sydney Futures Exchange) and are subject to daily mark-to-market and margin payment. These contracts are transacted in standardised parcels. The clearing house effectively becomes the counterparty to all derivative positions.
Record the aggregate principal and mark to market value for each contract type (i.e. Interest Rate Contracts, Equity Contracts).
Total derivative financial instrument exposure, which is in relation to the following:
3.1 Investment portfolio
Record the aggregate principal and mark to market value of derivative exposures that relate to the investment portfolio, either as hedging a component of the underlying investment portfolio (i.e. fixed interest or equities) or as an outright investment.
3.2 Other assets
Record the aggregate principal and mark to market value of derivative exposures that are in relation to assets other than those included in the investment portfolio of the insurer (see point above), i.e. used for the purpose of hedging asset returns/values.
3.3 Claims Liabilities
Record the aggregate principal and mark to market value of derivative exposures that relate to the insurer’s claims liabilities (e.g. hedging the currency movement on a claim liability denominated in a currency other than Australian currency).
3.4 Debt Funding/Borrowings
Record the aggregate principal and mark to market value of derivatives that relate to specific debt/borrowings of the insurer (e.g. hedging the interest rate risk or currency risk associated with the borrowings).
3.5 Other
Record the aggregate principal and mark to market value of derivatives that relate to other items not specifically listed above (i.e. hedging the currency risk associated with an anticipated purchase).
Total Derivative financial instruments which are with the following related parties:
4.1 Parent entity
Disclose holdings of derivatives that are purchased from or sold to the parent entity of the licensed insurer.
4.1.1 Controlled entities / Other branches of the parent entity
For Branches, this line item is to be interpreted as amounts in relation to ‘Other branches of the parent entity’, and for licensed insurance entities as amounts in relation to ‘Controlled entities’.
Disclose holdings of derivatives that are purchased from or sold to controlled entities of the licensed insurer.
4.2 Associates / Joint venture
Disclose holdings of derivative securities that are purchased from or sold to Associates or Joint Ventures of the licensed insurer. Associates and Joint Ventures are defined in accordance with AASB 131 ‘Interests in Joint Ventures’ and AASB 128 ‘Investments in Associates’.
4.3 Other related parties
Disclose holdings of derivative instruments that are purchased from or sold to any other related entity of the reporting insurer not disclosed above.