• 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.