References:

• APS 221 paragraphs 15, 18, 32
• APS 221 Attachment A paragraphs 21 to 25

Exposures to a structured vehicle must be measured on a basis that is consistent with exposures to any other counterparty, unless otherwise required by APS 221. Under paragraph 32 of APS 221, in measuring large exposures an ADI must include all on-balance sheet exposures and off-balance sheet exposures in both the banking book and trading book and instruments that would give rise to counterparty credit risk, in this case in relation to a structured vehicle.

A large exposure is calculated net of those exposures excluded under paragraph 18 of APS 221. Where an exposure to a structured vehicle satisfies the criteria of paragraph 18 of APS 221 and is therefore excluded, it is then also excluded from the requirements relating to the look-through arrangements in paragraphs 21 to 25 of Attachment A to APS 221.

For the purposes of applying the look-through requirements, it is intended that ADIs look through to the underlying assets that the structured vehicle holds as part of its pool of investments. An ADI’s potential future claims on investor commitments (e.g. through subscription credit facilities) are not considered to be assets of the structured vehicle and hence these are not included as exposures that an ADI has for the purposes of looking through structured vehicles.

Exposures to underlying assets of the structured vehicle are to be measured according to paragraphs 24 and 25 of Attachment A to APS 221. Worked examples A, B and C, as set out below, can be followed to determine the exposure to the underlying assets of a structured vehicle.

References:

• APS 221 Attachment A, paragraphs 22 to 25

Paragraph 22 of Attachment A to APS 221, outlines that an ADI is not required to assign an exposure to an underlying asset of a structured vehicle if the exposure to an underlying asset is less than 0.25 per cent of the ADI’s Tier 1 Capital. Paragraphs 24 and 25 outline how exposure values to underlying assets of a structured vehicle are calculated.

To apply the test included in paragraph 22, the exposure values first need to be calculated in accordance with paragraphs 24 and 25.

References:

• APS 221 Attachment A, paragraphs 23 to 25

An ADI will use information provided by a structured vehicle to measure exposures to underlying assets of a structured vehicle, in accordance with paragraphs 23 to 25 of Attachment A to APS 221.

APRA expects that an ADI will receive information about the composition of a structured vehicle’s underlying assets on a frequency that reflects the volatility of the structured vehicle’s asset composition. For structured vehicles with very stable asset compositions, less frequent (for example annual) reporting may be acceptable. Where the underlying composition is volatile, the ADI should receive reporting on a frequency which will limit the risk that reported values become unreliable. This may also mean that an ADI will need to request additional reporting when markets or market indicators that impact the value of a structured vehicle’s assets are also experiencing volatility.

Reference:

• APS 221 Attachment A, paragraph 23(b)

Paragraph 23 of Attachment A to APS 221 requires that where an ADI has an exposure to an underlying asset that cannot be identified and the exposure value is greater than or equal to 0.25 per cent of the ADI’s Tier 1 Capital, the ADI must assign the exposure value to an unknown counterparty which is treated as a distinct counterparty to the ADI.

An underlying asset that ‘cannot be identified’ is one where the ADI has an exposure to an underlying asset but the legal name of the counterparty of the asset cannot be identified (e.g. due to the reporting limitations of the structured vehicle).

Additionally, APRA considers that it would be reasonable for an ADI to treat an underlying asset as one that ‘cannot be identified’ where the ADI does not have a direct exposure to the counterparty of the asset, and the ADI’s only exposure to the counterparty arises from the application of the look-through requirements in paragraphs 21 to 25 of Attachment A to APS 221. In this case, it is not expected that an ADI establish a counterparty in its systems for the purposes of recording a look-through exposure. In this circumstance, the ADI would treat its exposure to the counterparty as an unknown counterparty exposure in accordance with paragraph 23(b) of Attachment A to APS 221.

Reference:

• APS 221 Attachment A, paragraphs 21 to 25

The look-through requirements should generally be applied using a single level look-through (i.e. an ADI will look through its exposure to a structured vehicle and recognise its exposure to the underlying assets held directly by the structured vehicle).

In some circumstances, however, to align with the intent of the look-through requirements it may be appropriate to look through a second level of the structure in order to appropriately identify the underlying risk. This could occur for example if the asset that had been identified when looking-through a structured vehicle was an investment in another structured vehicle. In that case, if the size of the exposure were material, it would be appropriate for the ADI to apply look-through at the next level down as well.

The reported exposure amount for each structured vehicle exposure and underlying asset should reflect the maximum loss to the ADI if the structured vehicle or the underlying asset failed. If the underlying asset and structured vehicle are connected counterparties per paragraph 21 of APS 221, then the reported exposure should reflect the maximum loss to the ADI if the connected counterparties failed simultaneously (refer example C).

Worked Example A

This worked example outlines the calculation methodology for an ADI’s exposure to a structured vehicle with a single tranche structure, per paragraph 24 of Attachment A to APS 221.

Assumptions:

• The ADI has a $15 exposure to the vehicle.
• The amounts listed under “(1) Calculation of Structured vehicle and underlying assets” below are the nominal value of each underlying asset in the structure.

Calculation of underlying exposures:

The ADI’s exposure to each underlying asset for the purposes of measuring large exposures is calculated as the nominal value of the underlying asset (1) divided by the total value of the vehicle multiplied by the value of the ADI’s exposure to the vehicle. In the case of Asset 1, that is: 

$30 / $100 x $15 = $4.50.

In total, based on this approach, the exposure to underlying assts is $15.00 as shown in (3) below.

Worked Example B

This worked example outlines the calculation methodology for an ADI’s exposure to a structured vehicle with a multiple tranche structure, per paragraph 25 of Attachment A to APS 221.

Step 1: Identify underlying assets, size of tranche and ADI investments

The amounts listed under (1a) are the nominal value of each underlying asset in the structure. The amounts listed under (1b) are the nominal value of each tranche and the amount of that tranche that the ADI has an exposure to.

Step 2: Identify the lower of the tranche value or the nominal value of each asset:

As per paragraph 25(a) of Attachment A, identify the lower of the value of the tranche and the nominal value of each underlying asset. In this example:

• For Tranche A and Asset 1, the lower of $80 and $30, which is $30.
• For Tranche A and Asset 6, the lower of $80 and $2, which is $2.

Step 3: Determine the exposure of the ADI to each underlying asset

As per paragraph 25(b) of Attachment A, apply the pro rata share of the ADI’s exposure in the tranche to the value determined in paragraph 25(a) (step 2 in this example). In this example:

• For Tranche A and Asset 1, $30 x $6 / $80 = $2.25.
• For Tranche A and Asset 6, $2 x $6 / $80 = $0.15.

Step 4: Sum the exposures to the underlying assets and cap at the nominal value of the asset

As per paragraph 25 of Attachment A, the ADI’s exposure to each asset is then calculated as the sum of its exposures to the asset as calculated in step 3, capped at the total nominal value of the underlying asset. In the case of Asset 6:

• The lower of $2 and $2.06 (where $2.06 is equal to the sum of $0.15, $0.77 and $1.14), which is $2.

Step 5: Apply the 0.25% threshold to determine the reportable exposures

The large exposure amounts to be reported are in Table 5 below. Asset 6 is less than 0.25% of the ADI’s Tier 1 Capital (from 1 January 2027 this limit will be 0.25% of the ADI’s Common Equity Tier 1 Capital) and is not required to be incorporated in large exposure reporting.

Worked Example C

This worked example outlines the calculation methodology for an ADI’s exposure to a structured vehicle with a multiple tranche structure, using the figures outlined in Worked Example B, and where the ADI additionally has an exposure to Asset 2 of $20 and an exposure to Asset 5 of $30 outside of the structured vehicle.

Direct Exposures to assets also held by structured vehicle

• Asset 2: $20
• Asset 5: $30

Step 1: Perform look-through on structured vehicle (as in Example B Table 4) to obtain exposures to assets.

Step 2: Add any direct exposures the ADI has to those same counterparties. If the parties are not connected counterparties, report these amounts as per table 6 below.

The ADI’s exposures for the purposes of measuring large exposures for unconnected counterparties is set out in table (6) below.

Step 3: determine if any assets are connected counterparties under paragraph 21 of APS 221 and aggregate the connected counterparties as a single exposure. 

In this example Asset 2 is a connected counterparty of the structured vehicle, then the maximum loss to the ADI if the connected counterparties failed simultaneously would be the exposure to the SPV and the additional exposure to asset 2.  The combined exposure is therefore reported as a connected counterparty as per Table 7.

References:

• Footnote 10 in Attachment A to APS 221

Consistent with paragraph 1(b) of Attachment A to APS 221, the exposure to the protection buyer is measured as the exposure at default (EAD). There is no further exposure to be added if the credit derivative has a positive mark to market (MTM) as this positive MTM is already accounted for in the EAD exposure measurement.

References:

• Paragraph 18(g) of APS 221

Under paragraph 18(g) of APS 221, a large exposure excludes exposures arising in the course of settlement of market-related contracts unless the transaction remains unsettled after its delivery due date in which case the exposure value is the positive current exposure amount.

The settlement of a market-related contract becomes an exposure under APS 221 after the delivery due date, allowing for time zone differences.

References:

• Section C of ARF 221.0 and paragraph 18(g) of APS 221

Section C of ARF 221.0 requires an ADI to report settlement exposures exceeding or equal to 10 per cent of Tier 1 Capital. Settlement exposures are defined in paragraph 18(g) of APS 221 as those exposures arising from the settlement of market-related contracts which are excluded from large exposures. ARF 221.0 instructions require these settlement exposures to be reported as at the end of the reporting period.

Settlement exposures on non-delivery-versus-payment (non-DVP) transactions will be the positive current exposure amount (i.e. the notional amount on the derivative) on the reporting date. As both legs of a DVP transaction are settled simultaneously, there is no exposure to be reported under section C of ARF 221.0.

References:

• Paragraphs 12(a)(i), 15, 16, 30, 34, 35, 37 and 38 of APS 221

Under paragraph 12(a)(i) of APS 221 an ADI must have policies on large exposures and risk concentrations that cover exposure limits for various types of counterparties including credit risk mitigation providers. An ADI may have collateral exposures that are subject to general eligibility criteria where they do not have day-to-day discretion to decline the acceptance of collateral meeting the eligibility criteria (e.g. arising from a Credit Support Annex which specifies a list of eligible collateral and the counterparty (which is not the ADI) has the choice to deliver any collateral that meets this eligibility criteria).

APRA expects ADIs to monitor all of their collateral exposures including those that are subject to general eligibility criteria. However, APRA recognises that while an ADI can broadly influence the types of collateral that it will be exposed to at the time agreements affecting collateral are negotiated, it does not have day-to-day discretion to decline the acceptance of collateral meeting the eligibility criteria once agreed. ADIs are expected to appropriately recognise this distinction in their internal risk management policies and limit framework.

ADIs are expected to measure the collateral exposure based on current collateral balances. In recognition that the ADI does not have day-to-day discretion to decline the acceptance of collateral, changes in exposure arising from collateral subject to general eligibility criteria are not considered to fall under the scope of an ADI committing to a proposed large exposure for the purpose of prior notification requirements (see paragraphs 34 and 35 of APS 221). The large exposure limits in APS 221 continue to apply, as do the notification requirements in paragraphs 37 and 38 of APS 221.

References:

• Paragraphs 4 and 5 of Attachment A to APS 221

Paragraph 5 of Attachment A to APS 221 requires the recognition of an exposure to the Credit Risk Mitigation (CRM) provider. The exposure amount to be recognised in paragraph 5 should be equal to the amount referred to in paragraph 4(c) of Attachment A to APS 221 that is, the value of the collateral recognised in the calculation of the counterparty credit risk exposure value. In other words, the exposure to the issuer of collateral should be equal to the value of the collateral net of haircuts and not the difference between the SA-CCR Exposure at Default (EAD) amount calculated without the collateral and with the collateral.

References:

• Paragraphs 12, 18(c), 18(d), 18(e), 25, and 30 of APS 221.

An ADI may have an exposure to any level of government e.g. local government, state or territory government or federal government, or government-related entity. APS 221 refers to governments in a number of circumstances: policies on large exposures and risk concentrations (paragraph 12 of APS 221); exclusions from being a large exposure (paragraph 18 of APS 221); connecting counterparties involving governments or government-related entities (paragraph 25 of APS 221); and large exposure limits (paragraph 30 of APS 221).

Under paragraph 12 of APS 221 an ADI must have policies on large exposures and risk concentrations which cover, among other aspects, exposure limits for governments and government-related entities that are commensurate with the ADI’s risk appetite, risk profile, capital and balance sheet size. APRA expects an ADI to consider exposure limits and how they may apply to all levels of governments in these policies.

Paragraphs 18(c), (d) and (e) of APS 221 provides exclusions for certain government exposures. This applies for exposures to all levels of government, including a local, state, territory or federal government, which satisfy the exclusion criteria set out in paragraph 18 of APS 221.

Paragraph 25 of APS 221 provides that a government-related entity is not required to be treated as a connected counterparty with its related government or other government-related entities that are related to the same government. This applies for all levels of government, including a local, state, territory, or federal government.

Paragraph 30 of APS 221 prescribes large exposure limits for the aggregate large exposures of an ADI to a counterparty or a group of connected counterparties. Under paragraph 30(a) of APS 221 an ADI would determine whether the government associated with an exposure receives a zero per cent risk-weight in accordance with Attachment B to Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112) and, if it does, apply the 50 per cent of Tier 1 Capital limit. If the government does not receive a zero per cent risk-weight then the 25 per cent of Tier 1 Capital limit applies. As set out in footnote 4 of APS 221, these limits apply to exposures guaranteed by, or secured against securities issued by, foreign governments or central banks that receive a zero per cent risk weight under Attachment B to APS 112, provided the criteria for recognition of the credit risk mitigation in paragraphs 2 to 3 of Attachment A are met. All other government-related entities are subject to the 25 per cent of Tier 1 Capital limit.

References:

• Paragraph 18(d) of APS 221.

Under paragraph 18(d) of APS 221, any exposures to governments or central banks that are held as high-quality liquid assets (HQLA) under Attachment A to Prudential Standard APS 210 Liquidity (APS 210) can be excluded from large exposures. ADIs must ensure that the exposures meet the operational requirements in paragraphs 22 to 29 of Attachment A to APS 210. This applies to exposures considered to be HQLA using the Reserve Bank of New Zealand’s BS13A Liquidity Policy Annex: Liquid Assets.

References:

• Paragraph 18(d) of APS 221.

Under paragraph 18(d) of APS 221, any exposures to governments or central banks that are held as HQLA under Attachment A to APS 210 can be excluded from large exposures. Government securities that have been held as HQLA and that are now subject to a repurchase agreement remain eligible for exclusion from the definition of large exposures under paragraph 18(d) of APS 221 for the duration of the repurchase agreement.

References:

• Paragraphs 22 and 23 of APS 221.

A control relationship exists between two counterparties if the criteria in paragraph 22 of APS 221 are satisfied or an ADI assesses that a control relationship exists. As part of determining whether such a control relationship exists, paragraph 23 of APS 221 requires ADIs to refer to the criteria in relevant Australian Accounting Standards.

APRA expects that, in most circumstances, the determination when considering control under the Australian Accounting Standards and APS 221 would align. In exceptional circumstances an ADI may determine that while a control relationship exists under Australian Accounting Standards there is no control relationship under APS 221. Where such a determination is made, an ADI should be prepared to justify why that decision was made.

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References:

• Paragraphs 16, 24 and 30 of APS 221.

Under paragraph 24 of APS 221, when an ADI’s exposure to a non-retail counterparty exceeds five per cent of its Tier 1 Capital, it must identify all non-retail counterparties linked by an economic interdependence relationship to that counterparty. When ADIs are considering counterparties for assessment, APRA recognises that ADIs may take pragmatic approaches, such as adopting thresholds based on a percentage of Tier 1 Capital, below which the assessment is proportionate to the counterparty’s capacity to contribute additional risk.

ADIs must remain within large exposure limits in paragraph 30 of APS 221 even where they adopt some form of pragmatic approach to adhering to paragraph 24 of APS 221. If an ADI’s exposures to a counterparty or group of connected counterparties approaches the level quantified in the definition of a large exposure under paragraph 16 of APS 221 or the applicable large exposure limits, the ADI will need to extend its assessments as necessary.

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