PRU A4.12 PRU A4.12 The Simplified Approach for Category 2 and 3A Firms
An Authorised Person that applies the Simplified Approach must comply with the requirements of Chapter 4 with the variations as prescribed below:
Central government and Central Bank asset class
PRU A4.12.4 PRU A4.12.4
Subject to Rules A4.12.5 and A4.12.6, an Authorised Person must risk-weight any CR Exposure in the central government and central bank asset class on the basis of the consensus country risk classifications of export credit agencies (referred to in this Section as "ECA") participating in the OECD's "Arrangement on Officially Supported Export Credits" and in accordance with the table below.
Risk weights for the central government and central bank asset class
0–1 2 3 4 to 6 7 Risk Weights 0% 20% 50% 100% 150%
The consensus country risk classification for the purpose of the "Arrangement on Officially Supported Export Credits" is published by the OECD. At the time of the making of these Rules, the classification was available on the website of the OECD on the Export Credit Arrangement web-page of the Trade and Agriculture Directorate (http://www.oecd.org/trade/xcred/cre-crc-current-english.pdf).
An Authorised Person must apply a 0% risk weight to any CR Exposure to any central government or any Central Bank of a GCC member country, which is denominated in the domestic currency, and funded in the domestic currency of that GCC member country.
For any CR Exposure to any other central government or Central Bank which is denominated and funded in the local currency of that jurisdiction, an Authorised Person may apply such risk weights as may be specified by the banking regulator of that jurisdiction.
Bank asset class
An Authorised Person must risk-weight any CR Exposure in the bank asset class on the basis of the consensus ECA country risk classifications as referred to in A4.12.4 for the jurisdictions in which they are incorporated, in accordance with the following table:
Risk weights for the bank asset class
0 or 1 2 3 4 to 6 7 Risk Weights 20% 50% 100% 100% 150%
Corporate asset class
An Authorised Person must apply a 100% risk weight to any CR Exposure in the corporate asset class.
Credit Risk mitigation — Collateral
An Authorised Person may only use the financial Collateral Simplified Approach (FCSA) in its treatment of recognised Collateral for the purposes of calculating the Credit RWA for its Exposures booked in its Non-Trading Book.
PRU A4.12.13(1) For an Authorised Person using the FCSA, eligible financial Collateral comprises:(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 Securities issued by sovereigns (including a central government or Central Bank) of a jurisdiction that that has an ECA country risk score of 4 or better; and(d) any debt Securities issued by a PSE that is treated as a sovereign and is of a jurisdiction that has an ECA country risk score of 4 or better.(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.
Credit Risk mitigation — Guarantees
An Authorised Person may recognise guarantees provided by the following eligible guarantors:(a) the Bank for International Settlements, the International Monetary Fund, the European Central Bank, and the European Commission;(b) the MDBs referred to in Rule 4.12.8;(c) PSEs; and(d) other entities eligible for a CRW of 20% or better and with a lower risk weight than the Counterparty.
For the purpose of calculating the risk weight of a guaranteed Exposure, an Authorised Person must assign the guaranteed portion the risk weight of the eligible guarantors. The uncovered portion of the Exposure must be assigned the risk weight of the underlying Counterparty.
An Authorised Person can apply a 0% risk weight to any portions of Exposures guaranteed by central governments or Central Banks of a GCC member country where the guarantee is denominated in the domestic currency of that country, and the Exposure is funded in that same domestic currency.
An Authorised Person must treat any materiality thresholds on payments below which no payment will be made in the event of loss as retained First Loss Positions and must deduct the full amount from its Capital Resources.