• BANK Division 4.5.B BANK Division 4.5.B Collateral

    • BANK 4.5.6 Capital relief from collateral

      (1) A banking business firm is able to obtain capital relief by accepting collateral only if the collateral is eligible financial collateral.
      (2) Collateral may be lodged by the counterparty of the firm holding a credit exposure (or by a third party on behalf of the counterparty).
      (3) The firm must enter into a written agreement with the party lodging the collateral. The agreement must establish the firm’s direct, explicit, irrevocable and unconditional recourse to the collateral.

      Guidance

      In the case of cash collateral, the recourse may be in the form of a contractual right of set-off on credit balances. A common-law right of set-off is, on its own, insufficient to satisfy this rule.
      (4) If collateral is lodged by a third party, the third party must guarantee the counterparty’s obligation to the firm and must indemnify the firm if the counterparty fails to fulfil its obligation. The firm must ensure that the guarantee does not fail for lack of consideration.
      (5) The mechanism by which collateral is lodged must allow the firm to liquidate or take possession of the collateral in a timely way. The firm must take all steps necessary to satisfy the legal requirements applicable to its interest in the collateral.

      Guidance

      1 The firm should have clear and robust procedures for the liquidation of collateral to ensure that the legal conditions for declaring default and liquidating the collateral are observed.
      2 The firm should consider whether, in the event of default, notice to the party that lodged the collateral would be needed before the firm could have recourse to it.
      (6) There must not be a significant positive correlation between the value of the collateral and the credit quality of the borrower.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.7 Eligible financial collateral

      (1) The following are eligible financial collateral if they satisfy the criteria in subrule (2):
      (a) gold bullion;
      (b) cash;

      Note For what is included in cash collateral — see rule 4.5.8.
      (c) debt securities that are assigned, by an ECRA, a rating of:
      (i) for sovereign or non-commercial public sector enterprise securities that are eligible for zero per cent risk-weight — at least BB-;
      (ii) for short-term debt securities — at least A-3/P-3; or
      (iii) for any other securities — at least BBB—;
      (d) subject to subrule (3), debt securities that have not been assigned a rating by an ECRA if:
      (i) the securities are issued by a bank (in or outside the QFC) as senior debt and are listed on a recognised exchange;
      (ii) all rated issues of the same seniority issued by the bank have a credit rating of at least BBB- (for long-term debt instruments) or A-3/P-3 (for short-term debt instruments); and
      (iii) the firm and the holder of the collateral have no information suggesting that the securities should have a rating below BBB- or A-3/P-3;
      (e) equities (including convertible bonds) that are included in a main index;
      (f) tracker funds, mutual funds and undertakings for collective investments in transferable securities (UCITS) if:
      (i) a price for the units is publicly quoted daily; and
      (ii) the funds or UCITS are limited to investing in instruments listed in this subrule;
      (g) equities (including convertible bonds) that are not included in a main index but are listed on a recognised exchange, and funds and UCITS described in paragraph (f) that include such equities.
      (2) For collateral to be eligible financial collateral, it must be lodged for at least the life of the exposure, and must be marked-to-market at least once a month. The release of collateral must be conditional on the repayment of the exposure, but collateral may be reduced in proportion to the amount of any reduction in the exposure.
      (3) Collateral in the form of securities issued by the counterparty or a person connected to the counterparty is not eligible financial collateral.
      (4) Insurance contracts, put options, and forward sales contracts or agreements are not eligible financial collateral.
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 4.5.8 Forms of cash collateral

      Cash collateral, in relation to a credit exposure, means collateral in the form of:

      (a) notes and coins;
      (b) certificates of deposit, bank bills and similar instruments issued by the banking business firm holding the exposure; or
      (c) cash-funded credit-linked notes issued by a banking business firm against exposures in its banking book, if the notes satisfy the criterion for credit derivatives in rule 4.5.16(2).
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.9 Holding eligible financial collateral

      (1) Eligible financial collateral must be held by:
      (a) the banking business firm;
      (b) a branch (in or outside the QFC) of the firm;
      (c) an entity that is a member of the financial group of which the firm is a member;
      (d) an independent custodian; or
      (e) a central counterparty.
      (2) The holder of cash collateral in the form of a certificate of deposit or bank bill issued by a banking business firm must keep possession of the instrument while the collateralised exposure exists.
      (3) If the collateral is held by an independent custodian or central counterparty, the firm must take reasonable steps to ensure that the holder segregates the collateral from the holder’s own assets.
      (4) If collateral is held by a branch of a banking business firm and the branch is outside the QFC, the agreement between the firm and the party lodging the collateral must require the branch to act in accordance with the agreement.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.10 Risk-weight for cash collateral

      (1) A banking business firm may apply a zero per cent risk-weight to cash collateral if the collateral is held by the firm itself.
      (2) The firm may apply a zero per cent risk-weight to cash collateral held by another member of the financial group of which the firm is a member if the agreement between the firm and the party lodging the collateral requires the holder of the collateral to act in accordance with the agreement.
      (3) If cash collateral is held by a bank under a non-custodial arrangement, and the collateral is lodged with the firm under an agreement that establishes the firm’s irrevocable and unconditional recourse to the collateral, the exposure covered by the collateral (after any necessary haircuts for currency risk) may be assigned the risk-weight of the bank.
      (4) If cash collateral is held by an independent custodian (other than a central counterparty), the risk-weight of the holder of the collateral must be used. However, the firm may apply a zero per cent risk-weight to notes and coins held by an independent custodian.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.11 Risk-weight for claims

      (1) The secured part of a claim must be risk-weighted at whichever is the higher of 20% or the risk-weight applicable to the eligible financial collateral. However, a risk-weight lower than 20% may be applied to the secured part if rule 4.5.12 applies.

      Note Under this rule, 20% risk-weight is the minimum that can be applied to the secured part of the claim. A risk-weight of less than 20% is allowed only for some transactions — see rule 4.5.12.
      (2) The unsecured part of the claim must be weighted at the risk-weight applicable to the original counterparty.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.12 Risk-weights less than 20%

      (1) A zero per cent risk-weight may be applied to a collateralised transaction if:
      (a) there is no currency mismatch; and
      (b) any one of the following applies:
      (i) the collateral is in the form of sovereign securities that are eligible for zero per cent risk-weight;
      (ii) the collateral is in the form of cash collateral on deposit with the banking business firm; or
      (iii) if the collateral is in the form of non-commercial public sector enterprise securities:
      (A) the securities are eligible for zero per cent risk-weight; and
      (B) the market value of the collateral has been discounted by 20%.
      (2) A zero per cent risk-weight may be applied to an over the counter derivative transaction if there is no currency mismatch and the transaction is fully collateralised by cash and marked-to-market daily.
      (3) A 10% risk-weight may be applied to an over the counter derivative transaction to the extent that the transaction is collateralised by sovereign or non-commercial public sector enterprise securities that are eligible for zero per cent risk-weight.
      Amended by QFCRA RM/2015-3 (as from 1st January 2016).

    • BANK 4.5.13 BANK 4.5.13 Valuing collateral

      Collateral accepted by a banking business firm must be valued at its net realisable value, taking into account prevailing market conditions. That value must be monitored at appropriate intervals, and the collateral must be regularly revalued.

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

      • BANK 4.5.13 Guidance

        1 The net realisable value of some collateral may be readily available (for example, collateral that is marked-to-market regularly). Other collateral may be more difficult to value and may require knowledge and consideration of prevailing market conditions.
        2 The method and frequency of monitoring and revaluation depend on the nature and condition of the collateral (see rule 4.5.7 (2)). For example, securities accepted as collateral are usually marked to market daily.
        Amended by QFCRA RM/2015-3 (as from 1st January 2016).