Recognition of Credit Risk mitigations
For the purposes of this Section, an Authorised Person may reduce the value of its Exposures, at its discretion, by any one or more of the following:(a) the amount of any specific provision made, where the provision relates to the risk of a credit loss occurring on that Exposure and is not held as part of a general provision or reserve against its Credit Risks;(b) Netting its claims on and liabilities to a Counterparty, provided that the conditions in Section 4.13 of CRM are met;(c) the amount of Collateral held against its Exposures, where that Collateral is of a type listed based on the FCSA and FCCA approaches and meeting the requirements under Section 4.13;(d) the amount of any eligible guarantees as permitted under Section 4.13.9;(e) the value of a Credit Derivative, where the Credit Derivative is an instrument included in Rule 4.13.11 and the transaction meets the conditions set out in that Section; and(f) the effects of transactions transferring Credit Risks from the Authorised Person to another party through securitisation, provided that the conditions in Section 4.14 are met.
An Authorised Person intending to utilise any of the provisions contained in Section 4.13 (CRM) for the purposes of reducing Exposure values should have in place policies and procedures addressing the following:(a) risks arising from Maturity Mismatches between Exposures and any credit protection on those Exposures;(b) the Concentration Risk arising from the application of CRM techniques, including indirect Large Exposures — for example to a single Issuer of Securities taken as Collateral; and(c) the conduct of stress testing on CRM taken as Collateral.
Where an Authorised Person has availed itself of the reductions to Exposure values as set out in A4.11 the Authorised Person must calculate the Exposure as a percentage of its Capital Resources on both a gross and net basis.
An Authorised Person that avails itself of the reduction in its Exposure value through the application of Rule A4.11 must conduct periodic stress tests on its Exposures against the realisable value of any Collateral considered under with the FCSA or FCCA.
PRU 4.15.16 PRU 4.15.16
Where the value of the Collateral under the stress scenario is lower than the value applied under Rule 4.15.12 the lower value should be used when determining the Exposure value for the purposes of this Section.
Such stress tests should include market value changes of underlying Collateral, risks relating to liquidity and realisation of such Collateral in stress scenarios. An assessment of the impact of any such changes on the Exposure value and the capital position of the Authorised Person should be conducted. Stress testing of these positions should be conducted at least once a year.
PRU 4.15.17 PRU 4.15.17
An Authorised Person must document its policy for the use of any of the exclusions in Rule 4.15.12.
Such policy should include risks such as Maturity Mismatches, stress testing of Collateral values, indirect Exposures arising from CRM, such as mitigation provided on Exposures by the same Counterparty.