| (9) |
Counterparty credit risk: operational requirements relating to the use test |
As a minimum, a bank that wishes to adopt the internal model method for the measurement of the bank's exposure to counterparty credit risk—
| (a) |
shall demonstrate to the satisfaction of the Registrar that the distribution of exposures generated by the bank's internal model and used by the bank to calculate its effective expected positive exposure is closely integrated into the day-to-day counterparty credit risk management process of the bank, that is— |
| (i) |
the output of the internal model shall play an essential role in the credit approval, counterparty credit risk management, internal capital allocations and governance processes of the bank; |
| (ii) |
the internal model used by the bank to generate the distribution of exposures shall form part of a counterparty risk management framework that includes the identification, measurement, management, approval and internal reporting of counterparty risk, which framework shall include the aggregation of credit exposures to the same counterparty and the allocation of economic capital; |
| (iii) |
peak exposure from the distribution is used by the bank, for example, to determine counterparty credit limits; |
| (iv) |
expected positive exposure is used by the bank, for example, for internal allocation of capital. |
| (b) |
shall have a credible track record in the use of an internal model that generate a distribution of exposures to counterparty credit risk, that is, the bank shall demonstrate to the satisfaction of the Registrar that for at least one year prior to the bank's application for approval to use the internal model method the bank has implemented a model— |
| (i) |
that calculates the distributions of exposures upon which the bank's EPE calculation is based; |
| (ii) |
that broadly meets the minimum requirements specified in subregulation (8) above. |
| (c) |
shall have in place an independent risk control unit that complies with the relevant requirements specified in subregulation (8)(b) above; |
| (d) |
shall have in place a collateral management unit that complies with the relevant requirements specified in subregulation (8)(c) above; |
| (e) |
shall demonstrate to the satisfaction of the Registrar— |
| (i) |
that in addition to EPE which is a measure of future exposure, the bank measures and manages current exposure, gross and net of collateral held; |
| (ii) |
that the bank is able to measure counterparty exposure out to the life of all relevant contracts in a netting set and not just to a one year horizon, that is, the bank, for example, has procedures in place to identify and control the risks relating to counterparties in respect of which exposure rises beyond the one-year horizon; |
| (iii) |
that the bank is able to monitor and control the bank's exposure to counterparty credit risk; |
| (iv) |
that any forecasted increase in exposure beyond a one-year horizon constitutes an input into the bank's internal economic capital model. |
| (f) |
shall implement a time profile of forecasting horizons that duly reflects the time structure of future cash flows and the maturity of the contracts that expose the bank to counterparty credit risk, provided that— |
| (i) |
although the bank may not be required to estimate or report expected exposure on a daily basis, the bank shall have the system capability to estimate expected exposure or EE daily when necessary; |
| (ii) |
based on materiality and the composition of the bank's exposure, the bank, for example, may compute EE on a daily basis for the first ten days, once a week out to one month, once a month out to eighteen months or once a quarter out to five years and beyond five years. |
Public Service Commission Act, 1997
