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).