• BANK Division 4.5.A BANK Division 4.5.A General

    • BANK 4.5.1 Introduction

      A banking business firm is able to obtain capital relief by using CRM techniques. CRM techniques must be viewed as complementary to, rather than a replacement for, thorough credit risk assessment.

      Note Under rule 4.4.2, if a claim or asset to which a risk-weight must be applied is secured by eligible financial collateral or guarantee (or there is a mortgage indemnity insurance, or a credit derivative instrument or netting agreement) this Part on credit risk mitigation may be used to reduce the credit risk capital requirement of the firm.

      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.2 Choice of CRM techniques

      (1) CRM techniques include:
      (a) accepting collateral, standby letters of credit and guarantees;
      (b) using credit derivatives or other derivative instruments;
      (c) using netting agreements; and
      (d) purchasing insurance.
      Note Credit risk mitigation using collateral and guarantees is usually dealt with at the time credit is granted. In contrast, credit derivatives and netting agreements are often used after the credit is granted, or used to manage the firm's overall portfolio risk.
      Guidance
      1 A banking business firm should not rely excessively on collateral or guarantees to mitigate credit risk. While collateral or guarantees may provide secondary protection to the firm if the counterparty defaults, the primary consideration for credit approval should be the counterparty's repayment ability.
      2 A banking business firm that provides mortgages at high loan-to-value ratios should consider the need for alternative forms of protection against the risks of such lending, including mortgage indemnity insurance, to protect itself against the risk of a fall in the value of the property.
      (2) In choosing a CRM technique, the firm must consider:
      (a) the firm's knowledge of, and experience in using, the technique;
      (b) the cost-effectiveness of the technique;
      (c) the type and financial strength of the counterparties or issuers;
      (d) the correlation of the technique with the underlying credits;
      (e) the availability, liquidity and realisability of the technique;
      (f) the extent to which documents in common use (for example, the ISDA Master Agreement) can be adopted; and
      (g) the degree of recognition of the technique by financial services regulators.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.3 Requirements — CRM techniques

      (1) A banking business firm’s credit risk management policy must set out the conditions under which CRM techniques may be used. The policy must enable the firm to manage CRM techniques and the risks associated with their use.
      (2) The firm must analyse the protection given by CRM techniques to ensure that any residual credit risk is identified, measured, evaluated, managed and controlled or mitigated.
      (3) If the firm accepts collateral, its policy must state the types of collateral that it will accept, and the basis and procedures for valuing collateral.
      (4) If the firm uses netting agreements, it must have a netting policy that sets out its approach. The netting policy must provide for monitoring netting agreements and must enable the firm to monitor and report netted transactions on both gross and net bases.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.4 Obtaining capital relief

      (1) To obtain capital relief, the CRM technique and every document giving effect to it must be binding on all parties and enforceable in all the relevant jurisdictions.

      Example

      When accepting eligible financial collateral, a banking business firm must ensure that any necessary legal procedures have been followed, to ensure that the collateral can be enforced.

      Note Under rule 4.2.2, a firm's credit risk management policy must establish effective credit risk administration to monitor documents, legal covenants, contractual requirements, and collateral and other CRM techniques.
      (2) A banking business firm must review the enforceability of a CRM technique that it uses. The firm must have a well-founded legal basis for any conclusion about enforceability, and must carry out further reviews to ensure that the technique remains enforceable.

      Guidance

      A banking business firm should consider whether independent legal opinion should be sought on the enforceability of documents. The documents should be before the firm enters into a contractual obligation or releases funds.
      (3) The effects of a CRM technique must not be double-counted. The firm is not allowed to obtain capital relief if:
      (a) the risk-weight for the claim or asset is based on an issue-specific rating; and
      (b) the ECRA that determined the rating had taken the technique into consideration in doing so.
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 4.5.5 Standard haircuts to be applied

      (1) A banking business firm must use the standard haircuts (expressed in percentages) set out in this rule in any calculation relating to credit risk mitigation. The haircuts are applied after risk mitigation to calculate adjusted exposures and are intended to take into account possible future price fluctuations.
      (2) In table 4.5.5A:

      other issuers include banks, corporates, and public sector enterprises that are not treated as sovereigns.

      sovereign includes a multilateral development bank, and a non-commercial public sector enterprise, that has a zero per cent risk-weight.

      Table 4.5.5A Haircuts for debt securities

      column 1 item column 2 credit rating for debt securities column 3 residual maturity % column 4 sovereigns % column 5 other issuers %
      1 AAA to AA-/A-1 (long-term and short-term) <1 year 0.5 1
      >1 year, <5 years 2 4
      > 5 years 4 8
      2 A+ to BBB-/ A-2/A-3/P-3 (long-term and short-term) and unrated bank securities that are eligible financial collateral <1 year 1 2
      >1 year, < 5 years 3 6
      > 5 years 6 12
      3 BB+ to BB- (long-term) All 15 Not applicable
      4 securities issued by the State of Qatar or the Qatar Central Bank <1 year 1 Not applicable
      >1 year, < 5 years 3 Not applicable
      >5 years 6 Not applicable

      Note    Table 4.5.5A item 3, column 5: securities rated BB+ or below are eligible financial collateral only if issued by a sovereign or non-commercial public sector enterprise — see rule 4.5.7 (1) (c) (i).

      Table 4.5.5B Haircuts for other assets

      column 1 item column 2 description of assets column 3 haircut %
      1 main index equities (including convertible bonds) and gold 15
      2 other equities (including convertible bonds) listed on a recognised exchange 25
      3 units in listed trusts, undertakings for collective investments in transferable securities (UCITS), mutual funds and tracker funds highest haircut applicable to any security in which the entity can invest
      4 cash collateral denominated in the same currency as the collateralised exposure 0
      (3) If a CRM technique (other than a guarantee) and the exposure covered by it are denominated in different currencies (that is, there is a currency mismatch between them), the haircut that applies is:
      (a) if the mismatched currencies are both pegged to the same reference currency, or 1 of them is pegged to the other — 0; or
      (b) in any other case — 8%.
      (4) If there is a currency mismatch between a guarantee and the exposure covered by it, the amount of the exposure that is covered must be reduced using the following formula:

      Gx(1 — Hfx)

      where:
      G is the nominal amount of the guarantee.
      Hfx is the haircut appropriate for the currency mismatch between the credit protection and the underlying obligation, as follows:

      (a) if the guarantee is revalued every 10 business days — 8%;
      (b) if the guarantee is revalued at any longer interval — the factor H calculated using the formula in subrule (5); or
      (c) if the mismatched currencies are both pegged to the same reference currency, or if 1 of them is pegged to the other — 0.
      (5) If the guarantee is revalued at intervals longer than 10 business days, the 8% haircut must be scaled up using the following formula:



      where:
      H is the scaled-up haircut.
      N is the number of business days between revaluations.
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).