• BANK Division 4.5.E BANK Division 4.5.E Netting agreements

    • BANK 4.5.17 BANK 4.5.17 Capital relief from netting agreements

      (1) A banking business firm is able to obtain capital relief from a netting agreement with a counterparty only if the agreement is an eligible netting agreement.
      (2) A banking business firm that has entered into a netting agreement must consistently net all the transactions included in the agreement. The firm must not selectively pick which transactions to net.
      (3) The following kinds of transactions may be netted:
      (a) on-balance-sheet loans and deposits, but only if:
      (i) the firm is able to determine at all times the assets and liabilities that are subject to netting under the agreement; and
      (ii) the deposits satisfy the criteria for eligible financial collateral;
      (b) securities financing transactions;

      Note Securities financing transactions are not included as part of market-related transactions.
      (c) over the counter derivative transactions.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 4.5.17 Guidance

        A netting agreement may include the netting of over the counter derivative transactions:

        •   across both the banking and trading books of a banking business firm (if the netted transactions satisfy the criteria in rule 4.5.23); and
        •   across different market-related products to the extent that they are recognised as market-related transactions.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.18 Criteria for eligible netting agreements

      (1) To be an eligible netting agreement, a netting agreement:
      (a) must be in writing;
      (b) must create a single obligation covering all transactions and collateral included in the agreement and giving the banking business firm the following rights:
      (i) the right to terminate and close-out, in a timely way, all the transactions included in the netting agreement;
      (ii) the right to net the gains and losses on those transactions (including the value of any collateral) so that the firm either has a claim to receive, or an obligation to pay, only the net sum of the close-out values of the individual transactions;

      Note For forward contracts, swaps, options and similar derivative transactions, this right will include the positive and negative mark-to-market values of the individual transactions.
      (iii) the right to liquidate or set-off collateral if either party to the agreement fails to meet its obligations because of default, liquidation, bankruptcy or other similar circumstances;
      (c) must not be subject to a walkaway clause; and
      (d) must be supported by a written and reasoned legal opinion that complies with rules 4.5.20 to 4.5.22.
      (2) A banking business firm must not recognise a netting agreement as an eligible netting agreement if it becomes aware that a financial services regulator of the counterparty is not satisfied that the agreement is enforceable under the laws of the regulator's jurisdiction. This rule applies regardless of any legal opinion obtained by the firm.
      (3) A netting agreement is not an eligible netting agreement if there is doubt about its enforceability.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.19 Legal opinion must cover transaction

      (1) A banking business firm must ensure that a netted transaction is covered by an appropriate legal opinion.
      (2) In calculating the net sum due to or from a counterparty, the firm must exclude netted transactions for which it has not obtained a satisfactory legal opinion applicable in the relevant jurisdiction. An excluded transaction must be reported on a gross basis.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.20 Conclusion about enforceability

      (1) For rule 4.5.18 (1) (d), the legal opinion must conclude that, in the event of default, liquidation, bankruptcy or other similar circumstances of a party to the netting agreement, the banking business firm's claims and obligations are limited to the net sum calculated under the netting agreement in accordance with the applicable law.

      Guidance

      The Regulatory Authority expects the legal opinion to deal with the issue of which of the following laws applies to the netting:
      •    the law of the jurisdiction in which the counterparty is incorporated or formed (or, in the case of an individual, resides)
      •    if an overseas branch of the counterparty is involved — the law of the jurisdiction in which the branch is located
      •    the law that governs the individual transactions
      •    the law that governs any contract or agreement necessary to give effect to the netting.
      (2) In particular, the legal opinion must conclude that, in the event of insolvency or external administration of a counterparty, a liquidator or administrator of the counterparty will not be able to claim a gross amount from the banking business firm while only being liable to pay a dividend in insolvency to the firm (as separate money flows).

      Guidance

      In some countries, there are provisions for the authorities to appoint an administrator to a troubled bank. Under statutory provisions applying in those countries, the appointment of an administrator might not constitute a ground for triggering a netting agreement. Such provisions do not prevent the recognition of an affected netting agreement if the agreement can still take effect if the bank under administration does not meet its obligations as they fall due.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.21 Requirements — legal opinion

      (1) Before a banking business firm uses a legal opinion to support a netting agreement, the firm:
      (a) must ensure that the opinion is not subject to assumptions or qualifications that are unduly restrictive;
      (b) must review the assumptions about the enforceability of the agreement and must ensure that they are specific, factual and adequately explained in the opinion; and
      (c) must review and assess the assumptions, qualifications and omissions in the opinion to determine whether they give rise to any doubt about the enforceability of the agreement.
      (2) The firm must have procedures to monitor legal developments and to ensure that its netting agreements continue to be enforceable. The firm must update the legal opinions about the agreements, as necessary, to ensure that the agreements continue to be eligible.
      (3) The firm may rely on a legal opinion obtained on a group basis by another member of the financial group of which it is a member if the firm and the other member have satisfied themselves that the opinion covers a netting agreement to which the firm is a counterparty.
      (4) The firm must report a transaction on a gross basis if there is any doubt about, or any subsequent legal development affects, the enforceability of the agreement.

      Note Under rule 4.5.18 (3), a netting agreement is not an eligible netting agreement if there is doubt about its enforceability.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.22 Relying on general legal opinions

      (1) A banking business firm may rely on a general legal opinion about the enforceability of netting agreements in a particular jurisdiction if the firm is satisfied that the type of netting agreement is covered by the opinion.
      (2) The firm must satisfy itself that the netting agreement with a counterparty and the general legal opinion are applicable to each transaction and product type undertaken with the counterparty, and in all jurisdictions where those transactions are originated.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.23 Netting of positions across books

      A banking business firm may net positions across its banking and trading books only if:

      (a) the netted transactions are marked-to-market daily; and
      (b) any collateral used in the transactions satisfies the criteria for eligible financial collateral in the banking book.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.24 Monitoring and reporting of netting agreements

      (1) If directed by the Regulatory Authority, a banking business firm must demonstrate that its netting policy is consistently implemented, and that its netting agreements continue to be enforceable.
      (2) The firm must keep adequate records to support its use of netting agreements and to be able to report netted transactions on both gross and net bases.
      (3) The firm must monitor its netting agreements and must report and manage:
      (a) roll-off risks;
      (b) exposures on a net basis; and
      (c) termination risks;
      for all the transactions included in a netting agreement.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 4.5.25 Collateral and guarantees in netting

      (1) A banking business firm may take collateral and guarantees into account in calculating the risk-weight to be applied to the net sum under a netting agreement.
      (2) The firm may assign a risk-weight based on collateral or a guarantee only if:
      (a) the collateral or guarantee has been accepted or is otherwise subject to an enforceable agreement; and
      (b) the collateral or guarantee is available for all the individual transactions that make up the net sum of exposures calculated.
      (3) The firm must ensure that provisions for applying collateral or guarantees to netted exposures under a netting agreement comply with the requirements for eligible financial collateral and guarantees in these rules.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).