• PRU 4.13 PRU 4.13 Credit Risk mitigation

    • Guidance

      This Section sets out the principles and methodologies for the recognition of CRM in the calculation of Credit RWA.

    • General Requirements

      • PRU 4.13.1 PRU 4.13.1

        (1) An Authorised Person may not recognise the effects of CRM unless:
        (a) all documentation relating to that mitigation is binding on all relevant parties and legally enforceable in all relevant jurisdictions; and
        (b) the Authorised Person complies with the Rules set out in this Section, as applicable.
        (2) Where the calculation of Credit RWA already takes into account the Credit Risk mitigant, the provisions of this Section do not apply.

        • Guidance

          An Authorised Person should conduct sufficient legal review to verify this and have a well-founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability. The review should cover relevant jurisdictions such as the jurisdiction whose law governs the credit protection or Collateral agreement and the jurisdiction whose law governs the transaction subject to the credit protection or Collateral agreement. There should be sufficient written documentary evidence to adequately support the conclusion drawn and rebut any legal challenge. While an Authorised Person may use either in-house or external legal counsel, it should consider whether or not in-house counsel opinion is appropriate. The senior management of the Authorised Person should ensure that an officer of the Authorised Person who is legally qualified and independent of the parties originating the transaction reviews the legal opinion and confirms that he is satisfied that an adequate review has been completed and that he agrees with the conclusions drawn. The Regulator may request a copy of any documentation to support the CRM used by the Authorised Person.

      • PRU 4.13.2

        Where an Authorised Person uses multiple CRM for a single Exposure, the Authorised Person must divide the Exposure into portions covered by each mitigation and must calculate the Credit Risk-weighted Exposure amount of each portion separately. An Authorised Person must apply the same approach when recognising eligible credit protection by a single protection provider where the eligible credit protection has differing maturities.

      • PRU 4.13.3 PRU 4.13.3

        (1) An Authorised Person must take all appropriate steps to ensure the effectiveness of the CRM arrangements it employs and to address related risks.
        (2) Where an Authorised Person reduces or transfers Credit Risk by the use of CRM, an Authorised Person must employ appropriate and effective policies and procedures to identify and control other risks which arise as a consequence of the transfer.

        • Guidance

          1. The use of techniques to reduce or transfer Credit Risk may simultaneously increase other risks (residual risks) which include legal, operational, liquidity and Market Risks. The Regulator expects an Authorised Person to employ methods to identify and control these risks, including:
          a. strategy;
          b. consideration of the underlying credit;
          c. valuation;
          d. policies and procedures;
          e. systems;
          f. control of roll-off risks; and
          g. management of Concentration Risk arising from the use of CRM and the interaction of such risk with the overall Credit Risk profile of the Authorised Person.
          2. In order to fulfil the above, an Authorised Person should ensure a clearly articulated strategy for the use of CRM as an intrinsic part of the general credit strategy of an Authorised Person.
          3. Where an Exposure is subject to CRM, credit managers should continue to assess the Exposure on the basis of the obligor's creditworthiness. Credit managers should obtain and analyse sufficient financial information to determine the obligor's risk profile and its management and operational capabilities.
          4. Collateral should be revalued frequently, and the unsecured Exposure should also be monitored frequently. Frequent revaluation is prudent, and the revaluation of marketable Securities should occur on at least a daily basis. Furthermore, measures of the potential unsecured Exposure under collateralised transactions should be calculated under stressed and normal conditions. One such measure would take account of the time and cost involved if the obligor or Counterparty were to default and the Collateral had to be liquidated. Furthermore, the setting of limits for collateralised Counterparties should take account of the potential unsecured Exposure. Stress tests and scenario analysis should be conducted to enable the Authorised Person to understand the behaviour of its portfolio of CRM arrangements under unusual market conditions. Any unusual or disproportionate risk identified should be managed and controlled.
          5. Clear policies and procedures should be established in respect of Collateral management, including:
          a. the terms of Collateral agreements;
          b. the types of Collateral and enforcement of Collateral terms (e.g. waivers of posting deadlines);
          c. the management of legal risks;
          d. the administration of agreements (e.g. detailed plans for determining default and liquidating Collateral); and
          e. the prompt resolution of disputes, such as valuation of Collateral or positions, acceptability of Collateral, fulfilment of legal obligations and the interpretation of contract terms.
          6. The policies and procedures referred to under Guidance note 1.d. should be supported by Collateral management systems capable of tracking the location and status of posted Collateral (including re-hypothecated Collateral), outstanding Collateral calls and settlement problems.
          7. Where an Authorised Person obtains credit protection that differs in maturity from the underlying credit Exposure, the Authorised Person should monitor and control its roll-off risks, i.e. the fact that the Authorised Person will be fully exposed when the protection expires, and the risk that it will be unable to purchase credit protection or ensure its capital adequacy when the credit protection expires.
          8. Taking as Collateral large quantities of instruments issued by one obligor creates Concentration Risk. An Authorised Person should have a clearly defined policy with respect to the amount of Concentration Risk it is prepared to run. Such a policy might, for example, include a cap on the amount of Collateral it would be prepared to take from a particular Issuer or market. The Authorised Person should also take Collateral and purchased credit protection into account when assessing the potential concentrations in its overall credit profile.
          9. Notwithstanding the presence of CRM considered for the purposes of calculating Credit RWA amounts, an Authorised Person should continue to undertake a full Credit Risk assessment of the underlying Exposure.

      • PRU 4.13.4

        (1) An Authorised Person must be able to satisfy the Regulator that it has systems in place to manage potential concentration of risk arising from its use of guarantees and Credit Derivatives.
        (2) An Authorised Person must be able to demonstrate how its strategy in respect of its use of CRM techniques, and in particular use of Credit Derivatives and guarantees interacts with its management of its overall risk profile.

    • Collateral

      • Guidance

        In order to recognise the effects of CRM of the types of Collateral set out in Rules 4.13.5 to 4.13.7, an Authorised Person must ensure that the relevant requirements in Rule 4.13.8 are complied with.

      • PRU 4.13.5 PRU 4.13.5

        (1) For an Authorised Person using the FCSA, eligible financial Collateral compomises:
        (a) cash (as well as certificates of Deposit or other similar instruments issued by the Authorised Person) on Deposit with the Authorised Person;
        (b) gold;
        (c) any debt security:
        (i) with an Original Maturity of one year or less that has a short-term Credit Quality Grade of 3 or better as set out in Section 4.12; or
        (ii) with an Original Maturity of more than one year that has a Credit Quality Grade of 4 or better as set out in Section 4.12 if it is issued by a central government or Central Bank, or a Credit Quality Grade of 3 or better as set out in Section 4.12 if it is issued by any other entity;
        (d) any debt security issued by a bank that does not have an external credit assessment by a recognised ECAI if it fulfils the following criteria:
        (i) any debt security which is listed on a regulated exchange;
        (ii) the debt security is classified as senior debt, not subordinated to any other debt obligations of its Issuer;
        (iii) all other rated debt Securities issued by the same Issuer which rank equally with the mentioned debt security have a long term or short term (as applicable) Credit Quality Grade by a recognised ECAI of "3" or better;
        (iv) the Authorised Person is not aware of information to suggest that the issue would justify a Credit Quality Grade of below "3" as indicated in (iii) above; and
        (v) the Authorised Person can demonstrate to the Regulator that the market liquidity of the debt security is sufficient to enable the Authorised Person to dispose the debt security at market price;
        (e) any equity security (including convertible bonds) that is included in a main index; or
        (f) any Unit in a Collective Investment Fund where:
        (i) a price for the units is publicly quoted daily; and
        (ii) at least 90% of the deposited property of the Fund is invested in instruments listed in this Rule.
        (2) Cash-funded CLNs issued by an Authorised Person against Exposures in the Non-Trading Book which fulfil the criteria for eligible Credit Derivatives must be treated as cash collateralised transactions.
        (3) Cash, mentioned in (1)(a), includes cash on Deposit, certificates of Deposit or other similar instruments issued by the Authorised Person that are held as Collateral at a third-party bank in a non-custodial arrangement and that are pledged or assigned to the Authorised Person. This is subject to the pledge or assignment being unconditional and irrevocable. Under the FCSA, the risk weight to be applied to the Exposure covered by such Collateral must be the risk weight of the third-party bank.

        • Guidance

          1. For the purposes of Rule 4.13.5 and 4.13.6, eligible financial Collateral excludes any T1 Capital instrument or T2 Capital instrument issued by any entity in the Financial Group of the Authorised Person, which is held by the Authorised Person or any of its Financial Group entities as Collateral.
          2. For an Authorised Person using Units of a Fund under the FCSA approach, the use or potential use by that Fund of Derivative instruments solely to hedge Investments listed in Rule 4.13.5 should not preclude the Units in that Fund from being recognised as eligible financial Collateral.

      • PRU 4.13.6

        For an Authorised Person using the FCCA, eligible financial Collateral comprises:

        (a) any instrument listed in Rule 4.13.5;
        (b) any equity Security (including a convertible bond) that is traded on a regulated exchange; and
        (c) any Unit in a Collective Investment Fund which invests in equity Securities referred to in (b), where:
        (i) a price for the Units is publicly quoted daily; and
        (ii) at least 90% of the deposited property of the Fund is invested in instruments listed in this Rule and Rule 4.13.5.

      • PRU 4.13.7 PRU 4.13.7

        In the case of any Counterparty Risk Exposures in Rules 4.13.5 and 4.13.6 arising from an SFT which are included in the Trading Book, eligible financial Collateral includes all instruments which an Authorised Person may include in its Trading Book.

        • Guidance

          For an Authorised Person using Units of a Fund under the FCSA approach, the use or potential use by that Fund of Derivative instruments solely to hedge Investments listed in Rule 4.13.5 should not preclude the Units in that Fund from being recognised as eligible financial Collateral.

    • Requirements for Recognition of Collateral

      • PRU 4.13.8

        An Authorised Person must ensure that the following requirements are complied with before it recognises the effects of CRM of any Collateral:

        (a) the legal mechanism by which Collateral is pledged, assigned or transferred must confer on the Authorised Person the right to liquidate or take legal possession of the Collateral, in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the Counterparty (and, where applicable, of the custodian holding the Collateral);
        (b) the Authorised Person has taken all steps necessary to fulfil those requirements under the law applicable to the Authorised Person's interest in the Collateral for obtaining and maintaining an enforceable security interest by registering it with a registrar or for exercising a right to net or set off in relation to title transfer Collateral;
        (c) the credit quality of the Counterparty and the value of the Collateral do not have a material positive correlation;
        (d) Securities issued by the Counterparty or any Closely Related Counterparty are not eligible;
        (e) the Authorised Person has implemented procedures for the timely liquidation of Collateral to ensure that any legal conditions required for declaring default of Counterparty and liquidating the Collateral are observed, and that the Collateral can be liquidated promptly; and
        (f) where the Collateral is held by a custodian, the Authorised Person has taken reasonable steps to ensure that the custodian segregates the Collateral from its own assets.

    • Guarantees

      • PRU 4.13.9 PRU 4.13.9

        (1) An Authorised Person may recognise the effects of CRM of a guarantee only if it is provided by any of the following entities:
        (a) central government or Central Bank;
        (b) MDB referred to in Rule 4.12.8;
        (c) International Organisations referred to in Rule 4.12.9;
        (d) PSE;
        (e) banks and Securities firms which qualify for inclusion in bank asset class; or
        (f) any other entity that has a Credit Quality Grade "3" or above.
        (2) An Authorised Person must not recognise the effects of CRM of a guarantee unless all of the following requirements are complied with:
        (a) the guarantee is an explicitly documented obligation assumed by the guarantor;
        (b) the guarantee represents a direct claim on the guarantor;
        (c) the extent of the credit protection cover is clearly defined and incontrovertible;
        (d) other than in the event of non-payment by the Authorised Person of Money due in respect of the guarantee if applicable, there is an irrevocable obligation on the part of the guarantor to pay out a pre-determined amount upon the occurrence of a credit event, as defined under the guarantee;
        (e) the guarantee does not contain any clause, the fulfilment of which is outside the direct control of the Authorised Person, that:
        (i) would allow the guarantor to cancel the guarantee unilaterally;
        (ii) would increase the effective cost of the guarantee as a result of deteriorating credit quality of the underlying Exposure;
        (iii) could prevent the guarantor from being obliged to pay out in a timely manner in the event that the underlying obligor fails to make any payment due; or
        (iv) could allow the maturity of the guarantee agreed ex-ante to be reduced ex-post by the guarantor;
        (f) the Authorised Person is able in a timely manner to pursue the guarantor for any monies outstanding under the documentation governing the transaction on the default of, or non-payment by, the underlying obligor without first having to take legal action to pursue the underlying obligor for payment; and
        (g) the guarantee covers all types of payments that the underlying obligor is expected to make under the documentation governing the transaction, except in the case of accrued interest, accrued expenses or fees outstanding, where these are deemed immaterial.

        • Guidance

          1. Rule 4.13.9(2)(e) does not include any guarantee with a cancellation clause where it is provided that any obligation incurred or transaction entered into prior to any cancellation, unilateral or otherwise, continues to be guaranteed by the guarantor.
          2. The guarantee payments may be in the form of the guarantor making a lump sum payment of all monies to the Authorised Person or the guarantor assuming the future payment obligations of the Counterparty covered by the guarantee, as specified in the relevant documentation governing the guarantee.

      • PRU 4.13.10

        In addition to the requirements in Rule 4.13.9, where an Authorised Person has an Exposure that is protected by a guarantee or that is counter-guaranteed by a central government or Central Bank, a regional government or local authority or a PSE claims on which are treated as claims on the central government in whose jurisdiction they are established, a MDB or an international organisation to which a 0% risk weight is assigned under Section 4.12, an Authorised Person may treat the Exposure as being protected by a direct guarantee from the central government or Central Bank in question, provided the following requirements are complied with:

        (a) the counter-guarantee covers all Credit Risk elements of the Exposure;
        (b) both the original guarantee and the counter-guarantee comply with all the requirements for guarantees set out in this Section, except that the counter-guarantee need not be direct and explicit with respect to the original Exposure; and
        (c) the Authorised Person is able to satisfy the Regulator that the cover is robust and that nothing in the historical evidence suggests that the coverage of the counter-guarantee is less than effectively equivalent to that of a direct guarantee by the entity in question.

    • Credit Derivatives

      • PRU 4.13.11

        (1) An Authorised Person may recognise the effects of CRM of a Credit Derivative only if it is provided by any of the following entities:
        (a) central government or Central Bank;
        (b) MDB referred to in Rules 4.12.7 to 4.12.9;
        (c) International Organisations referred to in Rule 4.12.9;
        (d) PSE;
        (e) banks and Securities firms which qualify for inclusion in bank asset class; or
        (f) any other entity that has a Credit Quality Grade "3" or better.
        (2) An Authorised Person may recognise the effects of CRM of only the following types of Credit Derivatives:
        (a) credit default swaps;
        (b) Total Return Swaps;
        (c) CLNs which are cash funded; and
        (d) instruments that are composed of, or are similar in economic substance, to one or more of the Credit Derivatives in (a) to (c).

      • PRU 4.13.12 PRU 4.13.12

        An Authorised Person must not recognise the effects of CRM of any Credit Derivative unless all of the following requirements are complied with:

        (a) the terms and conditions of any credit protection obtained via a Credit Derivative must be set out in writing by both the Authorised Person and the provider of credit protection;
        (b) the Credit Derivative must represent a direct claim on the provider of credit protection;
        (c) the extent of the credit protection cover is clearly defined and incontrovertible;
        (d) other than in the event of non-payment by the Authorised Person of Money due in respect of the Credit Derivative, there is an irrevocable obligation on the part of the provider of the credit protection to pay out a pre-determined amount upon the occurrence of a credit event, as defined under the Credit Derivative contract;
        (e) the Credit Derivative contract must not contain any clause, the fulfilment of which is outside the direct control of the Authorised Person, that:
        (i) would allow the provider of credit protection to cancel the credit protection cover unilaterally;
        (ii) would increase the effective cost of the credit protection cover as a result of deteriorating credit quality of the underlying Exposure;
        (iii) could prevent the provider of credit protection from being obliged to pay out in a timely manner in the event that the underlying obligor fails to make any payment due; or
        (iv) could allow the maturity of the credit protection agreed ex-ante to be reduced ex-post by the provider of credit protection;
        (f) the credit events specified by the contracting parties must at a minimum cover:
        (i) failure to pay the amounts due under terms of the underlying Exposure that are in effect at the time of such failure (with a grace period, if any, that is closely in line with the grace period in the underlying Exposure);
        (ii) bankruptcy, insolvency or inability of the underlying obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and
        (iii) restructuring of the underlying Exposure involving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. charge-off, specific provision or other similar debit to the profit and loss account);
        (g) the Credit Derivative must not terminate prior to the maturity of the underlying Exposure or expiration of any grace period required for a default on the underlying Exposure to occur as a result of a failure to pay;
        (h) a robust valuation process to estimate loss reliably must be in place in order to estimate loss reliably for any Credit Derivative that allows for cash settlement. There must be a clearly specified period for obtaining post-credit event valuations of the underlying obligation;
        (i) where the right or ability of the Authorised Person to transfer the underlying Exposure to the credit protection provider is required for settlement, the terms of the underlying Exposure must provide that any required consent to such transfer may not be unreasonably withheld;
        (j) the identity of the parties responsible for determining whether a credit event has occurred must be clearly defined. This determination must not be the sole responsibility of the credit protection provider. The Authorised Person must have the right or ability to inform the credit protection provider of the occurrence of a credit event; and
        (k) the underlying obligation and the reference obligation specified in the Credit Derivative contract for the purpose of determining the cash settlement value or the deliverable obligation or for the purpose of determining whether a credit event has occurred may be different only if:
        (l) (i) the reference obligation ranks pari passu with or is junior to the underlying obligation; and
        (ii) the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.

        • Guidance

          1. An Authorised Person should not recognise the effects of CRM of a Total Return Swap if it purchases credit protection through a Total Return Swap and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the underlying asset that is protected (either through reductions in its marked-to-market value or by an addition to reserves).
          2. The Regulator would generally consider the requirements in (f) to have been complied with even if the requirements are not specifically set out so long as the obligations of the credit protection provider under the Credit Derivative contract would include those requirements.
          3. The Regulator would generally consider the cash settlement methodology provided in the ISDA Credit Derivatives Definitions as satisfying the requirement for obtaining post-credit event valuations of the underlying obligation.

    • Currency mismatches

      • PRU 4.13.13

        (1) In the case where there is a currency mismatch between the credit protection and the underlying Exposure, an Authorised Person must reduce the amount of the Exposure deemed to be protected by applying a haircut, as follows:
        Protected portion GA = G (1- HFX)
        where:
        (a) G = notional amount of the credit protection; and
        (b) HFX = haircut appropriate for currency mismatch between the credit protection and underlying obligation Exposure based on a ten-business day holding period, assuming daily mark-to-market.
        (2) An Authorised Person must determine HFX in the following manner:
        (a) if the Authorised Person uses standard supervisory haircuts, HFX is 8%; and
        (b) if the Authorised Person uses own-estimate haircuts, it must estimate HFX according to Rules A4.3.6 to A4.3.26 in App4 based on a ten-business day holding period, assuming daily mark-to-market.
        (3) If the credit protection is not marked-to-market daily, HFX must be scaled in accordance with Rule A4.3.25.

    • Maturity Mismatches

      • PRU 4.13.14

        An Authorised Person may recognise the effects of CRM for an Exposure where there is a Maturity Mismatch only if the Credit Risk mitigant has an Original Maturity of at least one year and a residual maturity of more than three months. For the purposes of calculating Credit RWA, a Maturity Mismatch occurs when the residual maturity of the Credit Risk mitigant is less than that of the underlying Exposure.

      • PRU 4.13.15

        (1) An Authorised Person must determine the maturity of the underlying Exposure and the maturity of the Credit Risk mitigant conservatively. The residual maturity of the underlying Exposure must be gauged as the longest possible remaining time before the Counterparty is scheduled to fulfil its obligation, taking into account any applicable grace period.
        (2) In the case of Credit Risk the mitigant, embedded Options which may reduce the term of the credit protection must be taken into account so that the shortest possible residual maturity is used. Where a call is at the discretion of the protection seller, the residual maturity will be at the first call date. If the call is at the discretion of the Authorised Person but the terms of the arrangement at origination of the Credit Derivative contain a positive incentive for the Authorised Person to call the transaction before contractual maturity, the remaining time to the first call date will be deemed to be the residual maturity.

      • PRU 4.13.16 PRU 4.13.16

        (1) An Authorised Person must calculate the value of the CRM adjusted for any Maturity Mismatch (referred to as "PA"), using the following formula:
        PA = P(t-0.25)/(T-0.25)
        where -
        (a) P = value of the credit protection (e.g. Collateral amount, guarantee amount) adjusted for any haircuts;
        (b) t = min (T, residual maturity of the Credit Risk mitigant) expressed in years; and
        (c) T = min (5, residual maturity of the Exposure) expressed in years.
        (2) For residual maturity of the Exposure in the case of a basket of Exposures with different maturities, an Authorised Person must use the longest maturity of any of the Exposures as the maturity of all the Exposures being hedged.

        • Guidance

          The positive incentive for an Authorised Person to call the transaction before contractual maturity as referred in Rule 4.13.15 would be, for example, a situation wherein there is a step-up in cost in conjunction with a call feature or where the effective cost of cover remains the same even if credit quality remains the same or increases.

    • On-balance sheet Netting

      • PRU 4.13.17

        (1) An Authorised Person may recognise as eligible the Netting of an on-balance sheet Exposure against an offsetting on-balance sheet item if the related Netting agreement meets the condition in Rule 4.13.19.
        (2) Eligibility for Netting is limited to reciprocal cash balances between the Authorised Person and its Counterparty. Only loans and Deposits of the Authorised Person may be subject to a modification of their Credit RWAs as a result of an on-balance sheet Netting agreement.

      • PRU 4.13.18

        (1) Assets (loans) and liabilities (Deposits) subject to recognised on-balance sheet Netting are to be treated as cash Collateral using the formula in A4.3.6, under which an Authorised Person may use zero haircuts for Exposure and Collateral.
        (2) When a currency mismatch exists, an Authorised Person must apply the standard supervisory haircut of 8% for currency mismatch.
        (3) When a Maturity Mismatch exists between the off-setting items, an Authorised Person must apply the Rules 4.13.14 to 4.13.16 to address the Maturity Mismatch.
        (4) Net credit Exposure, after taking into account recognised Netting, will be subject to the applicable CRW for the Counterparty.

      • PRU 4.13.19 PRU 4.13.19

        For an Authorised Person to recognise an on-balance sheet Netting agreement for the purposes of Rule 4.13.17, all of the following conditions must be satisfied:

        (1)
        (a) both the on-balance sheet Exposure (asset) and the offsetting on-balance sheet item (liability) are owing between the Authorised Person and the same Counterparty;
        (b) the Authorised Person nets the on-balance sheet Exposure (asset) and the offsetting on-balance sheet item (liability) in a way that is consistent with its legal rights against the Counterparty;
        (c) a legal right of set-off exists;
        (d) the agreement between the Authorised Person and the Counterparty does not contain a Walkaway Clause;
        (e) the Netting provided for in the agreement between the Authorised Person and the Counterparty is effective and enforceable in the event of default, bankruptcy, liquidation or other similar circumstances affecting either the Counterparty or the Authorised Person;
        (f) the on-balance sheet Exposure (asset) and the offsetting on-balance sheet item (liability) are monitored, controlled and managed on a net basis; and
        (g) the potential for roll-off Exposure is monitored and controlled where there is a Maturity Mismatch; and
        (2) it has, in respect of each relevant jurisdiction, a written and reasoned legal opinion which:
        (a) has been provided by an external source of legal advice of appropriate professional standing;
        (b) confirms that the requirements of (1)(a)-(e) are met for all relevant jurisdictions; and
        (c) is kept under review to ensure that it remains correct and up to date in the event of changes to the relevant laws.

        • Guidance

          1. An Authorised Person should assess whether any qualifications, assumptions or reservations contained in the legal opinion cast doubt upon the enforceability of the Netting agreement. If, as a result of the qualifications, assumptions or reservations, there is material doubt about the enforceability of the agreement, the Authorised Person should assume that the requirements for Netting have not been met.
          2. An Authorised Person using a standard form Netting agreement and a supporting legal opinion should ensure that the relevant requirements in Rules 4.13.17 to 4.13.19 are met. A standard form Netting agreement is a form of agreement which is prepared by a reputable, internationally recognised industry association and is supported by its own legal opinion. Where additional clauses are added to a standard form Netting agreement, the Authorised Person should satisfy itself that the amended Netting agreement continues to meet the legal and contractual requirements in Rules 4.13.17 to 4.13.19. For instance, in such cases, an Authorised Person may wish to obtain a second legal opinion to confirm that the relevant requirements in Rules 4.13.17 to 4.13.19 are still satisfied.
          3. App4 sets out the calculation of the PFCE arising from OTC Derivative contracts, on a net basis.