Associations with Related Entities – frequently asked questions

FAQ 1.0: How should an originating ADI treat exposures to a securitisation or covered bond special purpose vehicles (SPV) under APS 222 (effective January 2022) and APS 221?

An ADI is required under Prudential Standard APS 222 Associations with Related Entities (APS 222) to measure and set prudent limits on their exposures to related entities. A related entity is defined in paragraph 8(f) of APS 222 as an entity which could give rise to risk to the ADI due to conflicts of interest and contagion, where the risk would not arise if the ADI were dealing with an unrelated entity.

An originating ADI is defined in paragraph 11(o) of Prudential Standard APS 120 Securitisation (APS 120). It means an ADI that directly or indirectly originates underlying exposures in the pool; is the managing ADI for the securitisation; or provides a facility (other than a derivatives transaction) or credit enhancement to an asset-backed commercial paper securitisation.

In identifying whether a securitisation or covered bond special purpose vehicle (SPV) is a related entity under APS 222, an originating ADI would generally apply the following interpretations:

Funding-only or capital-relief securitisation SPVs: Originating ADIs generally would not treat funding-only or capital-relief securitisation SPVs as related entities under APS 222. Paragraphs 12 to 15 of APS 120 require clear separation between the originating ADI and the securitisation SPV such that the relationship is unlikely to give rise to conflicts of interest and contagion that would typically arise from a related entity.
Self-securitisation SPVs: Originating ADIs generally would not treat self-securitisation SPVs as related entities. This is consistent with Reporting Standard ARS 222.0 Exposures to Related Entities (ARS 222.0) which states in the instruction guide that funding-only securitisations that are self-securitisations are excluded from the reporting requirements in ARS 222.0.
Covered bond SPVs: Issuing ADIs generally would not treat covered bond SPVs as related entities given the prudential exceptions provided to the liabilities of a covered bond SPV to an issuing ADI, in paragraph 33 of Prudential Standard APS 121 Covered Bonds (APS 121).

Consistent with the requirements of APS 222, an ADI would still need to assess its relationship with these SPVs to determine if there are any factors which could deem the SPVs to be related entities of the ADI (e.g. if the ADI controls the SPV), and if the SPV may be a step-in risk entity.

Where an ADI does not treat entities as related entities, the large exposure requirements in Prudential Standard APS 221 Large Exposures (APS 221) would apply. For this purpose, the ADI must consider all of the requirements of APS 221, including prudential limits, look-through requirements and consideration of additional risk factors. However, in relation to funding-only securitisations, self-securitisations and covered bond SPVs, APRA expects that the look through requirements in paragraphs 21 to 26 of Attachment A to APS 221 would not apply where securitisation SPVs only hold retail assets. Rather, the originating ADI would aggregate its exposure to the underlying assets of the SPV with any other exposure that the ADI has to the same counterparty (or group of connected counterparties), when applying large exposure limits and reporting in ARF 221.0. For the avoidance of doubt, assets and liabilities between an ADI and its covered bond SPV are not recognised under APS 221 given paragraph 33 of APS 121.

Identification

A related entity is defined in paragraph 8(f) of APS 222 and includes a related individual of the ADI and a related individual's relatives. A related individual of an ADI is defined in paragraph 8(g) and means a senior manager of the ADI, an individual who is a Board member of the ADI or any other individual that is likely to have direct or indirect control over the ADI, the ADI’s senior management or the ADI’s Board.

Under paragraph 17, an ADI would have systems and controls in place to identify its related entities (including information relevant to identifying those entities and individuals) and report exposures to its related entities.

To identify a senior manager of the ADI and an individual who is a Board member of the ADI, an ADI would apply the below interpretation:

‘Senior manager'	An individual identified as a senior manager under paragraph 25 of Prudential Standard CPS 520 Fit and Proper, pursuant to the definitions of that term in Prudential Standard APS 001 Definitions (APS 001) and the Banking Act 1959.
'Board member of the ADI'	An individual who is on the Board of the ADI, the term ‘Board’ meaning the board of directors of an institution as defined in APS 001.

Further, APRA expects an ADI to apply the below interpretation:

‘Any other individual that is likely to have direct or indirect control over the ADI, the ADI’s senior management or the ADI’s Board’

ADIs would undertake an assessment to identify any individuals that are likely to have direct or indirect control. As a pragmatic approach, an ADI may choose to focus on individuals identified as:

'key management personnel'; or
'close members of the family’ of a senior manager or a Board member of the ADI

as defined in AASB 124: Related Party Disclosures (AASB 124). This pragmatic approach can be applied if, according to the ADI's assessment of its risk management framework, other individuals are unlikely to hold such a degree of control to influence the ADI, the ADI’s senior manager or Board.

Where there is any doubt over whether an individual, outside of those listed above, is likely have direct or indirect control, the ADI should have a process in place for identifying such individuals as related individuals of the ADI. This could arise where the ADI’s exposure to an individual is material and the relationship between the ADI and the individual could give rise to the risk of conflicts of interest to the ADI.

'Related individual's relatives'

An ADI would be able to rely on the definition of 'close members of the family of a person' in AASB 124.

Measurement

Exposures to related individuals are measured in a manner consistent with other related entities (as per APS 222). These exposures would be captured by the limit in paragraph 29(b)(ii) for an exposure to individual unregulated related entity, and the limit in paragraph 29(b)(iii) on aggregate exposures to all related entities (other than related ADIs and related overseas-based equivalents).

Reporting

Exposures to related individuals and their relatives would be reported under Reporting Form ARF 222.0 Exposures to related entities (ARF 222.0). Where an ADI identifies related individuals and relatives using AASB 124, the frequency of updating the ARF 222.0 reporting of exposures to these individuals would be in line with the frequency of the reporting produced under AASB 124.

FAQ 3.0: Is an Australian-incorporated subsidiary of an ADI eligible to be a part of the Extended Licensed Entity if it funds or holds offshore business or assets?

No. In accordance with APS 222 Attachment C paragraph 3(b)(ii) there must be no legal or regulatory barriers, or any other material risks, to the transfer of any assets or funds (including assets or funds of underlying subsidiaries) back to the ADI. Any subsidiaries incorporated domestically, including any holding companies, which fund or hold offshore business or assets will not be eligible to be treated as part of an ELE. This is consistent with APRA’s August 2019 response to submissions paper Revisions to related entities framework for ADIs.

FAQ 3.1: What borrowings can be undertaken or liabilities established by an ELE subsidiary to entities other than the ADI, where the ELE subsidiary holds assets on behalf of the ADI?

A member of the ELE which holds assets on behalf of the ADI cannot undertake borrowings from, or establish liabilities to, entities other than the ADI. These include borrowings and liabilities either on or off-balance sheet. There are very limited exceptions to this, which are detailed in APS 222 Attachment C, paragraph 3(a)(vi). APRA’s expectation is that for the purposes of assessing whether an entity is eligible to be part of the ELE, the entity’s liabilities cannot be netted or offset against assets of the entity.

ADIs should note that APRA will have regard to substance and form of the subsidiary and its relationship to the ADI when considering its eligibility to be part of the ELE. If APRA considers that an ELE subsidiary is undertaking borrowings or establishing liabilities that may create legal or regulatory barriers or other material risks to the transfer of assets or funds back to the ADI, then APRA may consider that the subsidiary is no longer eligible to be part of the ELE.

Paragraph 3(a)(vi) of Attachment C to APS 222 provides that a subsidiary that is part of an ELE may incur administration and operating expenses. APRA would expect that administration and operating expenses would be of a relatively short-term nature (generally these liabilities would be expected to be extinguished within six months) and, in aggregate, not exceed five per cent of the assets of the subsidiary.