RBI/2018-19/196
DBR.No.BP.BC.43/21.01.003/2018-19
June
03, 2019
All Scheduled Commercial Banks
(Excluding Regional Rural Banks)
Dear Sir/Madam,
Large Exposures Framework
Please refer to the instructions
contained in circulars
DBR.No.BP.BC.43/21.01.003/2016-17 dated December 01, 2016 and DBR.No.BP.BC.31/21.01.003/2018-19 dated April 01, 2019 on
“Large Exposures Framework (LEF)”.
2. In order to capture exposures
and concentration risk more accurately and to align the above instructions
with international norms, the following amendments have been incorporated
in the above mentioned instructions:
i) Exclusion of entities
connected with the sovereign from definition of group of connected
counterparties.
ii) Introduction of economic
interdependence criteria in definition of connected counterparties.
iii) Mandatory application of
look-through approach (LTA) in determination of relevant counterparties in
case of collective investment undertakings, securitisation vehicles and
other structures.
3. Revised guidelines
superseding the above mentioned circulars are annexed. These have come into
effect from April 1, 2019 (as was already specified in our LEF circular
dated December 1, 2016), except guidelines in respect of para 2(ii) above
(contained in paragraphs 6.2(b), 6.7, 6.8, 6.9, and 6.10 of the Annex) and non-centrally cleared derivatives
exposures, which will become applicable with effect from April 1, 2020.
Yours faithfully,
(Saurav Sinha)
Chief General Manager-in-Charge
Annex
Large
Exposures Framework
1. Introduction
1.1 A bank’s exposures to its
counterparties may result in concentration of its assets to a single
counterparty or a group of connected counterparties. As a first step to
address the concentration risk, the Reserve Bank, in March 1989, fixed
limits on bank exposures to an individual business concern and to business
concerns of a group. RBI’s prudential exposure norms have evolved since
then and a bank’s exposure to a single borrower and a borrower group was
restricted to 15 percent and 40 percent of capital funds respectively. A
comprehensive policy framework on the subject is consolidated in the Master
Circular – Exposure Norms.
1.2 In January 1991, the Basel
Committee on Banking Supervision (BCBS) issued supervisory guidance on
large exposures, viz., Measuring and Controlling Large Credit Exposures.
Further, the Core Principles for Effective Banking Supervision (Core
Principle 19), published by BCBS in October 2006 (since revised in
September 2012) prescribed that local laws and bank regulations set prudent
limits on large exposures to a single borrower or a closely related group
of borrowers. In order to foster a convergence among widely divergent
national regulations on dealing with large exposures, the BCBS issued the
Standards on ‘Supervisory framework for measuring and controlling large
exposures’ in April 2014. The Reserve Bank has decided to suitably adopt
these standards for banks in India and, accordingly, the instructions on
banks' Large Exposures (LE) are described in the following paragraphs.
2. Scope of application
2.1 Banks must apply LEF at the
same level as the risk-based capital requirements are applied, that is, a
bank shall comply with the LEF norms at two levels: (a) consolidated (Group1) level and (b) Solo2 level.
2.2 The application of the LEF
at the consolidated level implies that a bank must consider exposures of
all the banking group entities (including overseas operations through
branches and subsidiaries), which are under regulatory scope of
consolidation, to counterparties and compare the aggregate of those
exposures with the banking group’s eligible consolidated capital base.
3. Scope of counterparties and
exemptions
3.1 Under the LEF, a bank’s
exposure to all its counterparties and groups of connected counterparties,
excluding the exposures listed below3, will be considered for exposure limits. The exposures
that are exempted from the LEF are listed below:
a. Exposures to the Government
of India and State Governments which are eligible for zero percent Risk
Weight under the Basel III – Capital Regulation framework of the Reserve
Bank of India;
b. Exposures to Reserve Bank of
India;
c. Exposures where the principal
and interest are fully guaranteed by the Government of India;
d. Exposures secured by
financial instruments issued by the Government of India, to the extent that
the eligibility criteria for recognition of the credit risk mitigation
(CRM) are met in terms of paragraph 7.III of this circular;
e. Intra-day interbank exposures;
f. Intra-group exposures4;
g. Borrowers, to whom limits are
authorised for food credit;
h. Banks’ clearing activities
related exposures to Qualifying Central Counterparties (QCCPs), as detailed
in paragraph 10.I of this circular;
i. Deposits maintained with
NABARD on account of shortfall in achievement of targets for priority
sector lending.
3.2 Where two (or more) entities
that are outside the scope of the sovereign exemption are controlled by or
are economically dependent on an entity that falls within the scope of the
sovereign exemption (para 3.1 (a) and 3.1 (b)), and are otherwise not connected,
those entities will not be deemed to constitute a group of connected
counterparties.
3.3 However, a bank’s exposure
to an exempted entity which is hedged by a credit derivative shall be
treated as an exposure to the counterparty providing the credit protection
notwithstanding the fact that the original exposure is exempted.
3.4 All exempted exposures must
be reported by a bank as required under regulatory reporting specified in
paragraph 4.2 below, if these exposures meet the criteria for definition of
a ‘Large Exposure’ as per para 4.1 below.
4. Definition of a large
exposure and regulatory reporting
4.1. Under the LEF, the sum of
all exposure values of a bank (measured as specified in paragraphs 7, 8, 9
and 10 of this framework) to a counterparty or a group of connected
counterparties (as defined in paragraph 6 below) is defined as a ‘Large
Exposure(LE)’, if it is equal to or above 10 percent of the bank’s eligible
capital base (i.e., Tier 1 capital as specified in paragraph 5.3 below).
4.2. Banks shall report their
Large Exposures to the Reserve Bank of India (RBI), Department of Banking
Supervision, Central Office, (DBS, CO), as per the reporting template given
in Appendix 1. The reporting,
inter-alia, will include the following:
(i) all exposures, measured as
specified in paragraphs 7, 8, 9 and 10 of this framework, with values equal
to or above 10 percent of the bank’s eligible capital (i.e., meeting the
definition of a large exposure as per para 4.1 above);
(ii) all other exposures,
measured as specified in paragraphs 7, 8, 9 and 10 of this framework
without the effect of credit risk mitigation (CRM), with values equal to or
above 10 percent of the bank’s eligible capital base;
(iii) all the exempted exposures
(except intraday inter-bank exposures) with values equal to or above 10
percent of the bank’s eligible capital base;
(iv) 20 largest exposures
included in the scope of application, irrespective of the values of these
exposures relative to the bank’s eligible capital base.
5. The Large Exposure limits
5.1 Single Counterparty: The sum of all the exposure values of a bank to a
single counterparty must not be higher than 20 percent of the bank’s
available eligible capital base at all times. In exceptional cases, Board
of banks may allow an additional 5 percent exposure of the bank’s available
eligible capital base. Banks shall lay down a Board approved policy in this
regard.
5.2 Groups of Connected Counterparties: The sum of all the exposure values of a bank to a
group of connected counterparties (as defined in paragraph 6 of this
circular) must not be higher than 25 percent of the bank’s available
eligible capital base at all times.
5.3 The eligible capital base
for this purpose is the effective amount of Tier 1 capital fulfilling the
criteria defined in the Master Circular on
Basel III – Capital Regulation dated July 1, 2015 (as amended
from time to time) as per the last audited balance sheet. However, the
infusion of capital under Tier I after the published balance sheet date may
also be taken into account for the purpose of Large Exposures Framework.
Banks shall obtain an external auditor’s certificate on completion of the
augmentation of capital and submit the same to the Reserve Bank of India
(Department of Banking Supervision) before reckoning the additions to
capital funds. Further, for Indian Banks, profits accrued during the year,
subject to provisions contained in para 4.2.3.1 (vii) of Master Circular on Basel III – Capital Regulation dated
July 01, 2015 (as amended from time to time), will also be
reckoned as Tier I capital for the purpose of Large Exposures Framework
5.4 The exposures must be
measured as specified in paragraphs 7 -10 ibid. It may be noted that the LE
limits will be modulated in case of certain counterparties as mentioned in
paragraph 10.
5.5 Any breach of the above LE
limits shall be under exceptional conditions beyond the control of the
bank, shall be reported to RBI (DBS, CO) immediately and rapidly rectified.
6. Definition of connected counterparties
6.1 In some cases, a bank may
have exposures to a group of counterparties with specific relationships or
dependencies such that, were one of the counterparties to fail, all of the
counterparties would very likely fail. A group of this sort, referred to in
this framework as a group of connected counterparties, must be treated as a
single counterparty. In this case, the sum of the bank’s exposures to all
the individual entities included within a group of connected counterparties
is subject to the large exposure limit, as mentioned at paragraph 5.2
above, and to the regulatory reporting requirements as specified above.
6.2 Two or more natural or legal
persons shall be deemed to be a group of connected counterparties if at
least one of the following criteria is satisfied:
(a) Control relationship: one of
the counterparties, directly or indirectly, has control over the other(s)
or the counterparties are, directly or indirectly, controlled by a third
party (bank may or may not have exposure towards this third party). In case
of financial problems of the controlling entity, it is highly likely that
the controlling entity could make use of its ability to extract capital
and/or liquidity from the controlled entity, thereby weakening the
financial position of the latter. Financial problems could be transferred
to the controlled entity, with the result that both the controlling entity
and the controlled entity would experience financial problems (domino
effect). From prudential perspective, these type of clients (connected by
control) form a single risk.
(b) Economic interdependence: if
one of the counterparties were to experience financial problems, in
particular funding or repayment difficulties, the other(s), as a result,
would also be likely to encounter funding or repayment difficulties.
6.3 Banks must assess the
relationship amongst counterparties with reference to (a) and (b)5 above in order to establish the existence of a
group of connected counterparties. In assessing whether there is a control
relationship between counterparties, banks must automatically consider that
the control relationship criterion (paragraph 6.2(a) above) is satisfied if
one entity owns more than 50 percent of the voting rights of the other
entity. In addition, banks must assess connectedness between counterparties
based on control using the following evidences:
a. Voting agreements (e.g.,
control of a majority of voting rights pursuant to an agreement with other
shareholders);
b. Significant influence on the
appointment or dismissal of an entity’s administrative, management or
supervisory body, such as the right to appoint or remove a majority of
members in those bodies, or the fact that a majority of members have been
appointed solely as a result of the exercise of an individual entity’s
voting rights;
c. Significant influence on
senior management, e.g., an entity has the power, pursuant to a contract or
otherwise, to exercise a controlling influence over the management or
policies of another entity (e.g., through consent rights over key
decisions, to decide on the strategy or direct the activities of an entity,
to decide on crucial transactions such as transfer of profit or loss);
d. The above criteria may also
be assessed with respect to a common third party (such as holding company),
irrespective of whether the bank has an exposure to that entity or not;
6.4 Banks are also expected to
refer to criteria specified in the extant accounting standards for further
qualitative guidance when determining control.
6.5 While determining control
relationship, banks should also examine cases where clients have common
owners, shareholders or managers; for example, horizontal groups where an
undertaking is related to one or more other undertakings because they all
have the same shareholder structure without a single controlling
shareholder or because they are managed on a unified basis. This management
may be pursuant to a contract concluded between the undertakings, or to
provisions in the memoranda or articles of association of those
undertakings, or if the administrative management or supervisory bodies of
the undertaking and of one or more other undertakings consist, for the
major part, of the same persons.
6.6 Where control has been
established based on any of the above criteria, a bank may still
demonstrate to the RBI in exceptional cases (e.g., existence of control
between counterparties due to specific circumstances and corporate
governance safeguards) that such control does not necessarily result in the
entities concerned constituting a group of connected counterparties. For
example, in specific cases where a special purpose entity (SPE) that is
controlled by another client (e.g. an originator) is fully ring-fenced and
bankruptcy remote (ie. arrangements exist to the effect that assets of SPE
are not available to lenders of parent undertaking in the event of
insolvency of the parent undertaking) – so that there is no possible
channel of contagion. Hence no single risk exists between the special
purpose entity and the controlling parent entity.
6.7 In establishing
connectedness based on economic interdependence, banks must consider, at a
minimum, the following criteria:
·
Where
50% or more of one counterparty's gross receipts or gross expenditures (on
an annual basis) is derived from transactions with the other counterparty;
·
Where
one counterparty has fully or partly guaranteed the exposure of the other
counterparty, or is liable by other means, and the exposure is so
significant that the guarantor is likely to default if a claim occurs;
·
Where
a significant part of one counterparty’s production/output is sold to
another counterparty, which cannot easily be replaced by other customers;
·
When
the expected source of funds to repay the loans of both counterparties is
the same and neither counterparty has another independent source of income
from which the loan may be serviced and fully repaid;
·
Where
it is likely that the financial problems of one counterparty would cause
difficulties for the other counterparties in terms of full and timely
repayment of liabilities;
·
Where
the insolvency or default of one counterparty is likely to be associated with
the insolvency or default of the other(s);
·
When
two or more counterparties rely on the same source for the majority of
their funding and, in the event of the common provider’s default, an
alternative provider cannot be found - in this case, the funding problems
of one counterparty are likely to spread to another due to a one-way or
two-way dependence on the same main funding source.
Illustrations are provided
in appendix 2.
6.8 There may, however, be
circumstances where some of these criteria do not automatically imply an
economic dependence that results in two or more counterparties being
connected. Provided that the bank can demonstrate that a counterparty which
is economically closely related to another counterparty may overcome
financial difficulties, or even the second counterparty’s default, by
finding alternative business partners or funding sources within an
appropriate time period, the bank does not need to combine these
counterparties to form a group of connected counterparties.
6.9 In order to avoid cases
where a thorough investigation of economic interdependencies will not be
proportionate to the size of the exposures, banks are expected to identify possible
connected counterparties on the basis of economic interdependence in all
cases where the sum of all exposures to one individual counterparty exceeds
5% of the eligible capital base, and not in other cases.
6.10 Relation between
interconnectedness through control and interconnectedness through economic
dependency: Group of counterparties
based on control and economic interdependence are to be assessed
separately. However, there may be situations where the two types of
dependencies are interlinked and could therefore exist within one group of
connected counterparties in such a way that all relevant clients constitute
a single risk. Risk of contagion is present irrespective of type of
connectedness (i.e. control or economic interdependence) between counterparties.
The chain of contagion leading to possible default of all entities
concerned is the relevant factor for the grouping and needs to be assessed
in each individual case. Illustrations are given in appendix 3.
6.11 Banks shall frame Board
approved policies for determining connectedness using the criteria
mentioned above. The policies are subject to supervisory scrutiny.
7. Values of exposures
7.I General measurement
principles
7.1 Under the proposed LE
Framework, an exposure to a counterparty will constitute both on and
off-balance sheet exposures included in either the banking or trading book
and instruments with counterparty credit risk. Definitions and measurements
of such exposures are given in this section.
7.II Definitions of exposure
values under the LE Framework
7.2 Banking book on-balance
sheet non-derivative assets: The
exposure value is defined as the accounting value of the exposure6. As an alternative, a bank may consider the exposure
value gross of specific provisions and value adjustments.
7.3 Banking book and trading
book OTC derivatives (and any other instrument with counterparty credit
risk): The exposure value for
instruments which give rise to counterparty credit risk and are not
securities financing transactions, should be determined as per the extant
instructions as prescribed by the Reserve Bank (on exposure at default) for
the counterparty credit risk7.
7.4 Securities financing
transactions (SFTs): Banks
should use the method they currently use for calculating their risk-based
capital requirements against SFTs.
7.5 Banking book “traditional”
off-balance sheet commitments: For
the purpose of the LEF, off-balance sheet items will be converted into
credit exposure equivalents through the use of credit conversion factors
(CCFs) by applying the CCFs set out for the Standardised Approach for
credit risk for risk-based capital requirements, with a floor of 10
percent.
7.III Eligible credit risk
mitigation (CRM) techniques
7.6 Eligible credit risk
mitigation techniques for LE Framework purposes are those that meet the
minimum requirements and eligibility criteria for the recognition of
unfunded credit protection8 and
financial collateral that qualify as eligible financial collateral under
the Standardised Approach for credit risk for risk-based capital
requirement purposes.
7.7 Other forms of collaterals
that are only eligible under the Internal-Ratings based (IRB) Approach
(receivables, commercial and residential real estate and other collateral)
are not eligible to reduce exposure values for LEF purposes.
7.8 A bank must recognise an
eligible CRM technique in the calculation of an exposure whenever it has
used this technique to calculate the risk-based capital requirements,
provided it meets the conditions for recognition under the LEF.
7.9 Treatment of maturity
mismatches in CRM: In
accordance with provisions set out in the paragraphs 5.17 and 7 of ‘Master
Circular – Basel III Capital Regulations’, hedges with maturity mismatches
will be recognised only when their original maturities are equal to or
greater than one year and the residual maturity of a hedge is not less than
three months.
7.10 If there is a maturity
mismatch in respect of credit risk mitigants (collateral, on-balance sheet
netting, guarantees and credit derivatives) recognised in the risk-based
capital requirement, the adjustment of the credit protection for the
purpose of calculating large exposures will be determined using the same
approach as in the risk-based capital requirement9.
7.11 On-balance sheet netting: Where a bank has in place legally enforceable
netting arrangements for loans and deposits, it may calculate the exposure
values for LE purposes according to the calculation it uses for capital
requirements purposes – i.e., on the basis of net credit exposures subject
to the conditions set out in the approach to on-balance sheet netting in
the risk-based capital requirement10.
7.IV. Recognition of CRM
techniques in reduction of original exposure
7.12. Under the LEF, a bank may
reduce the value of the exposure to the original counterparty by the amount
of the eligible CRM technique (except for cases mentioned in paragraph 7.14
below) recognised for risk-based capital requirements purposes. This
recognised amount is:
·
the
value of the protected portion in the case of unfunded credit protection;
·
the
value of the collateral as recognized in calculation of the counterparty
credit risk exposure value for any instruments with counterparty credit
risk, such as OTC derivatives;
·
the
value of the collateral adjusted after applying the required haircuts, in
the case of financial collateral. The haircuts used to reduce the
collateral amount are the supervisory haircuts under the comprehensive
approach11 as specified under risk
based capital requirements.
7.V Recognition of exposures to
CRM providers
7.13 Where a bank reduces its
exposure to the original counterparty on account of an eligible CRM
instrument provided by another counterparty (CRM provider) with respect to
that exposure, it must also recognise an exposure to the CRM provider. The
amount assigned to the CRM provider will be the amount by which the
exposure to the original counterparty is reduced (except in the cases
defined in paragraph 7.14 below). It is clarified that any CRM instrument
(e.g. SBLC/BG from Head Office/other overseas branch) from which CRM
benefits like shifting of exposure/ risk weights etc are not derived, may
not be counted as an exposure on the CRM provider.
7.14 When the credit protection
takes the form of a credit default swap (CDS) and either the CDS provider
or the referenced entity is not a financial entity, the amount to be
assigned to the credit protection provider is not the amount by which the
exposure to the original counterparty is reduced but will be equal to the
counterparty credit risk exposure value calculated according to the
Standardised Approach – Counterparty Credit Risk (SA-CCR), once the
guidelines in the matter are finalised by the RBI. Till such time, the
banks may follow the extant method as prescribed by the RBI for the
counterparty credit risk in the Master Circular – Basel III Capital
Regulation.
For the purpose of this
paragraph, financial entities comprise:
i.
Regulated
financial institutions, defined as a parent and its subsidiaries where any
substantial legal entity in the consolidated group is supervised by a
regulator that imposes prudential requirements consistent with
international norms. These include, but are not limited to, prudentially
regulated insurance companies, broker/dealers, banks;
and
ii.
Unregulated
financial institutions, defined as legal entities whose main business
includes: the management of financial assets, lending, factoring, leasing,
provision of credit enhancements, securitisation, investments, financial
custody, central counterparty services, proprietary trading and other
financial services activities identified by supervisors.
7.VI Calculation of exposure
value for Trading Book positions
7.15 A bank must add any
exposures to a counterparty arising in the trading book to any other
exposures to that counterparty that lie in the banking book to calculate
its total exposure to that counterparty. The exposures considered here
correspond to concentration risk associated with the default of a
single counterparty for exposures included in the trading book.
Therefore, a bank’s exposures to financial instruments issued by
counterparties not exempted under this Framework will be governed by the LE
limit, but concentrations in a particular commodity or currency will not
be.
7.16 The exposure value of straight
debt instruments and equities will be equal to the market value of the
exposure12.
7.17 Instruments such as swaps,
futures, forwards and credit derivatives13 must be converted into positions following the
risk-based capital requirements14.
These instruments should be decomposed into their individual legs. Only
transaction legs representing a bank’s exposures to the counterparty within
the scope of the large exposures framework should be considered15 for calculating a bank’s total exposure to that
counterparty.
7.18 In the case of credit
derivatives that represent sold protection, the exposure will be to the
referenced name, and it will be the amount due in case the respective
referenced name triggers the instrument, minus the absolute value of the
credit protection16. For credit-linked notes (CLNs)17, the protection seller bank will be required to
consider its positions both in the bond of the note issuer and in the
underlying referenced by the note.
7.19 The measures of exposure
values of options (primarily meant for credit and equity options, where
permitted) under this framework differ from the exposure values used for
risk-based capital requirements. The exposure value of option under this
framework will be based on the change(s) in option prices that would result
from a default of the respective underlying instrument. The exposure value
for a simple long call option would therefore be its market value and for a
short put option would be equal to the strike price of the option minus its
market value. In the case of short call or long put options, a default of
the underlying would lead to a profit (i.e., a negative exposure) instead
of a loss, resulting in an exposure of the option’s market value in the
former case and equal the strike price of the option minus its market value
in the latter case. The resulting positions in all cases should be
aggregated with those from other exposures. After aggregation, negative net
exposures shall be treated as zero.
7.20 Exposure values of banks’
investments in transactions (i.e., index positions, securitisations, hedge
funds or investment funds) must be calculated applying the same rules as
for similar instruments in the banking book (see paragraphs under 8.3 to
8.10).
7.VII Offsetting long and short
positions in the trading book
7.21 Offsetting between long and
short positions in the same issue: Banks
may offset long and short positions in the same issue (two issues are
defined as the same if the issuer, coupon, currency and maturity are
identical). Consequently, banks may consider a net position in a specific
issue for the purpose of calculating a bank’s exposure to a particular
counterparty.
7.22 Offsetting between long and
short positions in different issues: Positions
in different issues from the same counterparty may be offset only when the
short position is junior to the long position, or if the positions are of
the same seniority.
7.23 Similarly, for positions
hedged by credit derivatives, the hedge may be recognised provided the
underlying of the hedge and the position hedged fulfil the provision of
paragraph 7.22 above (the short position is junior or of equivalent
security to the long position).
7.24 In order to determine the
relative seniority of positions, securities may be allocated into broad
buckets of degrees of seniority (for example, “Equity”, “Subordinated Debt”
and “Senior Debt”).
7.25 The banks that find it
excessively burdensome to allocate securities to different buckets based on
relative seniority, should not recognise offsetting of long and short
positions in different issues relating to the same counterparty in
calculating exposures.
7.26 Offsetting short positions
in the trading book against long positions in the banking book: Netting across the banking and trading books is
not permitted.
7.27 Net short positions after
offsetting: When the result of the
offsetting is a net short position with a single counterparty, this net
exposure need not be considered as an exposure for the purpose of LEF.
8. Treatment of specific
exposure types
8.1 This section covers
exposures for which a specific treatment is deemed necessary.
Interbank Exposures
8.2 The interbank exposures,
except intra-day interbank exposures, will be subject to the large exposure
limit of 25% of a bank’s Tier 1 capital (also refer to paragraph 10.III).
In stressed circumstances, RBI may accept a breach of an interbank limit ex
post, in order to help ensure stability in the interbank market.
Collective Investment
Undertakings (CIUs), securitisation vehicles and other structures -
adoption of “Look Through Approach” (LTA)
8.3 There are cases when a
structure lies between the bank and its exposures, that is, the bank
invests in structures which themselves have exposures to assets underlying
the structures (hereafter referred to as the “underlying assets”). Such
structures include funds18,
securitisations and other structures19 with underlying assets. Banks must assign such
exposure amount, i.e., the amount invested in a particular structure, to
specific counterparties of the underlying assets following the LTA
described below. Illustrative example is provided in Appendix 4.
8.4 A bank may assign the
exposure amount to the structure itself, defined as a distinct
counterparty, if it can demonstrate that the bank’s exposure amount to each
underlying asset of the structure is smaller than 0.25% of its eligible
capital base, considering only those exposure to underlying assets that
result from the investment in the structure itself and using the exposure
value calculated according to paragraph 8.9 and 8.10. In this case, a bank
is not required to look through the structure to identify the underlying
assets.
8.5 A bank must look through the
structure to identify those underlying assets for which the underlying
exposure value is equal to or above 0.25% of its eligible capital base. In
this case, the counterparty corresponding to each of the underlying assets
must be identified so that these underlying exposures can be added to any
other direct or indirect exposure to the same counterparty. The bank’s
exposure amount to the underlying assets that are below 0.25% of the bank’s
eligible capital base may be assigned to the structure itself (i.e. partial
look-through is permitted).
8.6 If a bank is unable to
identify the underlying assets of a structure:
a) where the total amount of a
bank’s exposures to a structure does not exceed 0.25 per cent of its
eligible capital base, it must assign the total exposure amount to the
structure itself, as a distinct counterparty.
b) Otherwise (i.e. if the
exposure to the structure equals or exceeds 0.25 per cent of its eligible
capital base), it must assign this total exposure amount to the ‘unknown
client’.
The large exposure limit will
apply on the aggregate of all such exposures to ‘unknown clients’ as if
they are a single counterparty.
8.7 Where the LTA is not
required (para 8.4 above), a bank must nevertheless be able to demonstrate
that regulatory arbitrage considerations have not influenced the decision
whether to look through or not – e.g. that the bank has not circumvented
the large exposure limit by investing in several individually immaterial
transactions with identical underlying assets.
8.8 If LTA need not be applied,
a bank’s exposure to the structure must be the nominal amount it invests in
the structure.
8.9 Any structure where
all investors rank pari passu (e.g., CIU) - When the LTA is
required according to the paragraphs above, the exposure value assigned to
a counterparty is equal to the pro rata share that the bank holds in the
structure multiplied by the value of the underlying asset in the structure.
Thus, a bank holding a ?1 investment in a structure, which invests in 20
assets each with a value of ? 5, must assign an exposure of ? 0.05 to each
of the counterparties. An exposure to such counterparty must be added to
any other direct or indirect exposures the bank has to that counterparty.
8.10 Any structure with
different seniority levels among investors (e.g. securitisation vehicles) -
When the LTA (in terms of paragraphs above) is required for an investment
in a structure with different levels of seniority, the exposure value to a
counterparty should be measured for each tranche within the structure,
assuming a pro rata distribution of losses amongst investors in a single
tranche. To compute the exposure value to the underlying asset, a bank
must:
i. first, consider the lower of
the value of the tranche in which the bank invests and the nominal value of
each underlying asset included in the underlying portfolio of assets
ii. second, apply the pro rata
share of the bank’s investment in the tranche to the value determined in
the first step above.
9. Identification of additional
risks
9.1 While taking exposures to
structures, banks should identify such third parties which may constitute
an additional risk factor and which are inherent in the structure itself
rather than in the underlying assets. Such a third party could be a risk
factor for more than one structure that a bank invests in. Examples of
roles played by third parties include originator, fund manager, liquidity
provider and credit protection provider. RBI as a part of its pillar 2
supervisory review and evaluation process will look into this aspect and if
required specify a specific course of action which may either include
reduction in exposure or raising of additional capital.
9.2 It is conceivable that a
bank may consider multiple third parties to be potential drivers of
additional risk. In this case, the bank must assign the exposure resulting
from the investment in the relevant structures to each of the third
parties.
10. Exposures to and among
certain specific counterparties
10.I Exposures to Central
Counterparties
10.1 Banks’ exposures to QCCPs20 related to clearing activities will be exempted
from the LE framework. However, these exposures will be subject to the
regulatory reporting requirements as defined in paragraph 4.2.
10.2 The definition of QCCP for
the purpose of this Framework is the same as that used for risk-based
capital requirement purposes. A QCCP is an entity that is licensed to
operate as a CCP (including a license granted by way of confirming an
exemption), and is permitted by the appropriate regulator/overseer to
operate as such with respect to the products offered. This is subject to
the provision that the CCP is based and prudentially supervised in a
jurisdiction where the relevant regulator/overseer has established, and
publicly indicated that it applies to the CCP on an ongoing basis, domestic
rules and regulations that are consistent with the CPSS-IOSCO Principles
for Financial Market Infrastructures.
10.3 In the case of non-QCCPs,
banks must measure their exposure as a sum of both the clearing exposures
described in paragraph 10.5 and the non-clearing exposures described in
paragraph 10.7, and the same will be subject to the LE limit of 25 percent
of the eligible capital base.
10.4 The concept of connected
counterparties described in paragraph 6 does not apply in the context of
exposures to CCPs that are specifically related to clearing activities.
10.5 Calculation of exposures
related to clearing activities: Banks
must identify exposures to a CCP related to clearing activities and sum
together these exposures. Exposures related to clearing activities are
listed in the table below together with the exposure value to be used:
Trade exposures
|
The exposure value of trade
exposures must be calculated using the exposure measures prescribed in
other parts of this framework for the respective type of exposures.
|
Segregated initial margin
|
The exposure value is 021.
|
Non-segregated initial margin
|
The exposure value is the
nominal amount of initial margin posted.
|
Pre-funded default fund
contributions
|
Nominal amount of the funded
contribution
|
Unfunded default fund
contributions
|
The exposure value is 0
|
10.6 Regarding exposures subject
to clearing services (the bank acting as a clearing member or being a
client of a clearing member), the bank must determine the counterparty to
which exposures must be assigned by applying the provisions of the
risk-based capital requirements.
10.7 Other exposures: Other types of exposures that are not directly
related to clearing services provided by the CCP, such as equity stake22, funding facilities, credit facilities, guarantees
etc., must be measured according to the rules set out in this framework, as
for any other type of counterparty. These exposures will be added together
and be subjected to the LE limit.
10. II. Exposures to NBFCs
10.8 Exposure Ceilings proposed
under LE Framework
(i) Exposures to NBFCs: Banks’
exposures to a single NBFC will be restricted to 15 percent of their
eligible capital base. However, based on the risk perception, more
stringent exposure limits in respect of certain categories of NBFCs may be
considered.
(ii) Banks’ exposures to a group
of connected NBFCs or group of connected counterparties having NBFCs in the
group will be restricted to 25 percent of their Tier I Capital.
10.9 The above exposure limits
are subject to all other instructions in relation to banks’ exposures to
NBFCs.23
10.III Large exposures rules for
global systemically important banks (G-SIBs) and domestic systemically
important banks (D-SIBs)
10.10 The LE limit applied to a
G-SIB’s exposure to another G-SIB is set at 15 percent of the eligible
capital base.
10.11 The LE limit of a non
G-SIB in India to a G-SIB in India or overseas will be 20 percent of the
eligible capital base.
10.12 For above paragraphs, the
limit applies to G-SIBs as identified by the Basel Committee and published
annually by the FSB. When a bank becomes a G-SIB, it must apply the 15
percent exposure limit to another G-SIB within 12 months from the date of
becoming G-SIB, which is the same time frame within which a bank that has
become a G-SIB would need to satisfy its higher loss absorbency capital requirement.
Similarly, when a counterparty bank becomes G-SIB, banks may apply limits
as indicated in para 10.10 or 10.11, as applicable, within 12 months from
the date of counterparty bank becoming G-SIB. For the purpose of computing
exposure limits under LEF, Indian branches of foreign G-SIBs will not be
considered as G-SIBs. Accordingly, for Indian branches of foreign G-SIBs,
exposure limit on a G-SIB, including their head office24, will be 20% of eligible capital base and exposure
limit on any other bank (i.e. not G-SIB) will be 25% of eligible capital
base. Similarly, for Indian branches of foreign non-GSIBs, exposure limit
on a non-GSIB, including their head office24, will
be 25% of eligible capital base and exposure limit on a G-SIB will be 20%
of eligible capital base.
10.13 The Reserve Bank has
issued the Framework for dealing with Domestic Systemically Important Banks
(D-SIBs) on July 22, 2014 and discloses names of the banks classified as
D-SIBs on an annual basis. There is no separate exposure limit applicable
to D-SIBs and they will continue to be governed by interbank exposure
limits under the LEF.
11. Implementation date and
transitional arrangements
All aspects of the LE Framework
except guidelines with reference to economic interdependence criteria and
non-centrally cleared derivatives exposures, (both of which are applicable
from April 1, 2020), are applicable in full with effect from April 1, 2019
(as was already specified in our LEF circular dated December 1, 2016) and
the exposure norms applicable to single/group of connected counterparties
are no longer applicable from that date25. Banks must adjust their exposures so as to comply with
the LE limit with respect to their eligible capital base by the date of
implementation. Accordingly, for aspects applicable from April 01, 2020,
prior to this date, banks should avoid taking any additional
exposure/reduce exposure in cases where their exposure is at or above the
exposure limit prescribed under this Framework. While non-centrally cleared
derivatives exposures are exempt till March 31, 2020, banks must compute these
exposures separately and report to the Department of Banking Regulation on
quarterly basis.
1 This requires
that banks shall apply LE framework at the consolidated group level, after
consolidating the assets and liabilities of its subsidiaries / joint
ventures / associates (including overseas operations through bank’s branches)
etc., except those engaged in insurance and any non-financial activities
2 Banks shall
apply LE framework at the standalone level also (including overseas
operations through branches), which should measure the exposures to a
counterparty based on its standalone capital strength and risk profile
3 The exemptions
available under the Master Circular on Exposure Norms not listed herein
will cease to exist under the LE Framework.
4 Intra-group
exposures will continue to be governed by the circular dated
February 11, 2014 on “Guidelines on Management of Intra-Group Transactions
and Exposures”.
5 Banks are
required to assess connectedness based on economic interdependence from
April 01, 2020.
6 Net of
specific provisions and value adjustments.
7 Refer to
Master Circular – Basel III Capital Regulation, as amended from time to
time
8 Unfunded
credit protection refers collectively to credit derivatives and guarantees
the treatment of which is described in paragraphs 5.17 & 7.5
respectively (The standardised approach – credit risk mitigation) of
the Master Circular – Basel III Capital Regulations dated July 1,
2015
9 Refer to the
Master Circular on Basel III Capital Regulations
10 Paragraph 7.4
of the Master Circular on Basel III Capital Regulation.
11 Paragraph
7.3.4 of Master Circular on Basel III Capital Regulations.
12 As provided in
terms of our RBI Master Circular – Exposure norms / Master Circular on
Prudential Norms for Classification, Valuation and Operation of Investment
Portfolio by Banks.
13 CDS is the
only credit derivative allowed under our extant guidelines and banks do not
have direct exposures to the equity derivatives. It is clarified that restrictions
on dealing with certain type of instruments, assets and derivatives etc.,
which are currently in place shall continue to be applicable even if the
guidelines contained in this circular contains references to the same.
14 Refer Master
Circular - Basel III Capital Regulations
15 At present,
banks are not permitted to have exposures to equity derivatives, however,
for the sake illustration, a future on stock X, for example, is decomposed
into a long position in stock X and a short position in a risk-free
interest rate exposure in the respective funding currency, or a typical
interest rate swap is represented by a long position in a fixed and a short
position in a floating interest rate exposure or vice versa.
16 In the case
that the market value of the credit derivative is positive from the
perspective of the protection seller, such a positive market value would
also have to be added to the exposure of the protection seller to the
protection buyer (counterparty credit risk; see paragraph 7.3 of this
circular). Such a situation could typically occur if the present value of
already agreed but not yet paid periodic premiums exceeds the absolute
market value of the credit protection.
17 CLNs are not
permitted to be issued by banks in India under the extant RBI guidelines.
18 such as mutual
funds, venture capital funds, alternative investment funds
19 such as
investment in security receipts, real estate investment trusts,
infrastructure investment trusts
20 For
designation of CCPs as QCCPs please refer to circular
DBOD.No.BP.BC.82/21.06.217/2013-14 dated January 7, 2014 on Banks' Exposure to Central
Counterparties (CCPs) - Interim Arrangements,
21 When the
initial margin (IM) posted is bankruptcy-remote from the CCP – in the sense
that it is segregated from the CCP’s own accounts, eg when the IM is held
by a third-party custodian – this amount cannot be lost by the bank if the
CCP defaults; therefore, the IM posted by the bank can be exempted from the
large exposure limit.
22 If equity
stakes in a CCP are deducted from the capital on which the large exposure
limit is based, these must not be included as exposure to the CCP.
23 As contained
in Master Circular – Exposure Norms/ Master Circular - Bank finance to
NBFCs
24 Including
other overseas branches/subsidiaries
25 The LE
Framework is applicable to a bank’s counterparties and does not address
other types of concentration risks such as sectoral exposures. As such, the
extant instructions contained in the RBI Master Circular – Exposure norms,
will continue to be applicable, except to the extent superseded by the
provisions of this Framework.
|