Assets subject to credit risk must be assigned a counterparty grade using one of the following methods:
(a) for publicly rated assets refer to paragraphs 2 and 3 of this Attachment;
(b) for non-publicly rated assets secured by a residential mortgage refer to paragraphs 8 to 12 of this Attachment. An asset secured by a residential mortgage comprises an investment held by way of a registered lien, charge or mortgage over residential property. The valuation must have been performed by a qualified valuer. The property cannot be a speculative construction or a property development;
(c) assets other than those referred to in (a) and (b) may be rated using private external ratings or a regulated institution’s own ratings, but only with the prior approval of APRA; or
(d) assets other than those referred to in (a) and (b) that have not been rated using methods approved by APRA must be assigned a counterparty grade of 5.
2. Publicly rated assets are assigned a counterparty grade based on the following tables. The short-term ratings in Table 1 are typically used for assets with original term to maturity of not more than 13 months. For other assets the long-term ratings in Table 2 apply. The credit ratings in Table 1 and Table 2 include structured finance ratings with the (sf) indicator.
3. Where investments are held via a trust that has itself been separately rated by a recognised rating agency, that rating may be applied to all the investments in the trust in lieu of the ratings of the individual trust assets, provided that the trust is treated as a single investment for asset concentration purposes and is not subject to ‘look-through’. When a ‘look-through’ approach is adopted the underlying assets need to be individually rated. If the trust is separately rated, that overall trust rating cannot be applied to the individual underlying assets.
4. For Level 2 insurance groups, APRA may determine the counterparty grade of a non-APRA-authorised reinsurer that:
(a) has no external credit rating; and
(b) is a member of the Level 2 insurance group.
5. A regulated institution must, in general, use the same rating agency for determining all counterparty grades. A regulated institution may depart from this general rule where there are good reasons for doing so, such as under the following circumstances:
(a) where the rating agencies usually monitored by a regulated institution do not issue a solicited credit rating[\[3\]](#_ftn3) for a particular debt obligation and only one other rating agency issues a solicited credit rating for that debt obligation, a regulated institution may use that solicited credit rating; or
(b) where the rating agencies usually monitored by the regulated institution do not issue a solicited credit rating for a particular debt obligation, the credit ratings issued by all other rating agencies listed in the table above must be reviewed and the rule in paragraph 6 of this Attachment must be used to determine the rating agency used to determine the counterparty grade and therefore the credit spreads or default factors to be applied; or
(c) the rule in paragraph 6 of this Attachment may also be applied where a regulated institution monitors multiple rating agencies that provide different solicited credit ratings for a particular debt obligation.
6. For the purposes of paragraph 5 of this Attachment the following rule applies: where a counterparty or debt obligation has solicited credit ratings from multiple rating agencies, the following guidelines must be followed in determining the counterparty grade:
(a) if there are two solicited ratings that correspond to different counterparty grades, the lower counterparty grade must be used for the debt obligation; or
(b) if there are three or more solicited ratings that correspond to different counterparty grades, the ratings corresponding to the second-best of those counterparty grades must be used for the debt obligation.
7. APRA’s written approval must be sought if a regulated institution wishes to use the rating determined by a rating agency not included in the tables above.
8. The counterparty grade for assets secured by residential mortgages (as defined in paragraph 1(b)) of this Attachment) is determined from the following table.
Table 3: Assets secured by residential mortgages
9. ‘Loan to value ratio’ is the ratio of the value of the asset (i.e. loan) to the market value of the collateral. The market value of the collateral is the value at inception or, where a substantive valuation has subsequently been carried out, this subsequent valuation.
10. A standard residential mortgage is defined as a mortgage on an existing residential property where the regulated institution has:
(a) prior to loan approval and as part of the loan origination and approval process, documented, assessed and verified the ability of the borrowers to meet their repayment obligation;
(b) valued any residential property offered as security;
(c) established that any property offered as security for the loan is readily marketable; and
(d) the regulated institution has at all times unequivocal enforcement rights over the mortgaged property (including a power of sale and a right to possession) in the event of default by the borrower.
The regulated institution must also revalue any property offered as security for such loans when it becomes aware of a material change in the market value of property in an area or region.
11. Loans that are secured by residential properties but fail to meet the criteria detailed in paragraph 10 of this Attachment must be classified as other residential mortgages. Such loans may be reclassified as standard residential mortgages where the borrowers have met their contractual loan repayments to the regulated institution continuously over the previous 36 months.
12. LMI refers to lenders mortgage insurance. ‘>40% LMI’ refers to mortgages where insurance cover has been obtained for all realised losses up to at least 40 per cent of the higher of the original loan amount and outstanding loan amount (if higher than the original loan amount). Such insurance must be with a lenders mortgage insurer that is regulated by APRA.
Attachment D
Level 2 insurance groups
A Level 2 insurance group is:
(a) where there is no authorised NOHC and an insurer has controlled entities, the consolidation of the insurer and its controlled entities, subject to paragraphs 2 to 4 (inclusive) of this Attachment; or
(b) where there is an authorised NOHC, the consolidation of the authorised NOHC and its controlled entities, subject to paragraphs 2 to 4 (inclusive) of this Attachment; or
(c) where there is no authorised NOHC and an insurer does not have controlled entities, the consolidation of the insurer and any entity that meets the following criteria:
(i) the entity is subject to control by an entity or group of related entities that are the same or very similar to the entity or group of related entities that control the insurer;
(ii) the entity conducts insurance business or business related to insurance business[4]; and
(iii) APRA determines, in writing, that the entity is to be consolidated.
However, APRA may, in writing, determine that a group that meets subparagraph (a) or (b) is not to be treated as a Level 2 insurance group.
For the purposes of the prudential supervision of insurance groups at Level 2, all entities conducting insurance business (subject to paragraphs 3 and 4 of this Attachment), both regulated and unregulated, within the insurance group must be consolidated. Consolidation at Level 2 must be in accordance with the requirements of the Australian Accounting Standards for the production of consolidated financial statements except where APRA determines under paragraph 3 that an additional entity is to be consolidated or where an entity is to be treated as a non-consolidated subsidiary under paragraph 4.
APRA may, in writing, determine that an entity is to be consolidated, despite that entity not being a controlled entity of the insurer or authorised NOHC, if:
(a) the entity is subject to control by an entity or group of related entities that are the same or very similar to the entity or group of related entities that control other members of the Level 2 insurance group; and
(b) it conducts insurance business or business related to insurance business.[5]
The following types of controlled entities are to be treated as ‘non-consolidated subsidiaries’[6] (unless APRA, in writing, determines otherwise):
(a) prudentially regulated entities that are neither insurers nor entities carrying on international business;
(b) entities acting as manager, responsible entity, approved trustee, trustee or similar role in relation to funds management (including superannuation or pension fund business);
(c) entities involved in non-financial (commercial) operations;
(d) securitisation special purpose vehicles to which assets and/or liabilities have been transferred in accordance with any prudential standard made under section 32 of the Act; and
(e) an entity that APRA has determined, in writing, is to be deconsolidated because APRA is satisfied that its principal business is not related to any insurance business of the group or is immaterial to the group’s total business.
Subject to paragraph 6, the parent entity of a Level 2 insurance group is:
(a) where the Level 2 insurance group is headed by an authorised NOHC, the authorised NOHC; and
(b) where the Level 2 insurance group is headed by an insurer, the insurer.
Note: ‘authorised NOHC’ does not refer to the holding company of a wider corporate group which includes the Level 2 insurance group where the holding company has not been authorised under the Act as a NOHC.
APRA may, in writing, determine that a different entity within a Level 2 insurance group (which must be an insurer, authorised NOHC or a subsidiary of an insurer or authorised NOHC) is the parent entity of that group.
APRA may apply transition arrangements to a Level 2 insurance group in respect of entities that would otherwise be consolidated within the group. APRA may agree, in writing, upon these arrangements with such Level 2 insurance groups on a case-by-case basis to allow a transition period before these entities are required to be consolidated within a Level 2 insurance group.