Australia: ADIs welcome transitional relief to Basel III counterparty credit risk measures implementation

Last Updated: 26 February 2013
Article by Louise McCoach

Key Points:

The updated implementation timeframe will permit ADIs to prepare counterparty credit risk capital calculations on a "best endeavours" basis until their first annual reporting period beginning on or after 1 July 2013.

On 13 November 2012, the Australian Prudential Regulation Authority (APRA) published a paper (Response Paper) setting out its response to industry submissions on an earlier APRA discussion paper released in August 2012, Implementing Basel III capital reforms in Australia — counterparty credit risk and other measures.

APRA released with the paper a package of final prudential and reporting standards and guidance which will implement the Basel III capital reforms for Authorised Deposit-taking Institutions (ADIs) in Australia with effect from 1 January 2013.

Transitional relief

One of the issues raised in the August Paper related to the timing for implementing the new counterparty credit risk rules, which APRA proposed would take effect from 1 January 2013.

In response to several submissions requesting that APRA consider transitional relief, the paper outlines an updated implementation timeframe which will permit ADIs to prepare counterparty credit risk capital calculations on a "best endeavours" basis until their first annual reporting period beginning on or after 1 July 2013. In addition, given that the central counterparty (CCP) supervision regime necessary to achieve qualifying status may not be in place from 1 January 2013, APRA will consider allowing transitional arrangements when considering the qualifying status of central counterparties, where it is satisfied that such arrangements raise no prudential concerns.

APRA's response to submissions

APRA's detailed responses to the submissions provide welcome clarification on a range of counterparty credit risk and other issues, including:

  • the calculation of the credit valuation adjustment (CVA) risk capital charge;
  • how exposures to qualifying CCPs and non-qualifying CCPs should be capitalised;
  • how asset value correlations should be determined for unregulated financial institutions;
  • how minimum holding periods should be determined when calculating collateral haircuts;
  • the removal of the APS 112 exemption affecting FX contracts that have an original maturity of less than 14 days;
  • the public disclosure requirements for the new counterparty credit risk measures;
  • the relevance of the Internal Model Method (IMM)
  • whether APRA's treatment of specific wrong-way risk is consistent with Basel III
  • the impact of the 10 percent rule relating to securitisation exposures and securitisation due diligence requirements
  • the availability of waivers in relation to certain trade finance exposures;
  • the definition of "financial institution";
  • inconsistencies between credit quality prudential and reporting standards;
  • associations with related entities; and
  • disclosure requirements for the use of external credit assessment institutions (ECAIs) for capital adequacy purposes.

Counterparty credit risk proposals

Submissions on APRA's counterparty credit risk proposals requested a number of concessional treatments. The paper makes it clear that, as a general matter, APRA will seek to adopt the minimum Basel III requirements for the definition and measurement of counterparty credit risk capital, except in certain areas where there are strong pragmatic reasons to either allow for a simplified approach or continue APRA's existing approach. The paper highlighted the following key exceptions to the minimum Basel III requirements:

  • APRA has implemented only the simpler of the two calculation methods for capital requirements for default fund contributions to qualifying central counterparties set out in the Basel III reforms;
  • ADIs with immaterial over-the-counter (OTC) counterparty credit risk exposure may be permitted by APRA to use a simplified approach to calculate the CVA risk capital requirement; and
  • APRA has not introduced the IMM into the capital adequacy framework.

Other matters

The paper announced that APRA's policy position on investments in commercial entities is inconsistent with the updated APS 111 released on 30 September 2012. APRA confirms the policy position outlined in APRA's response paper released in September 2012, Implementing Basel III capital reforms in Australia,and will shortly release a corrected version of APS 111.

Next steps

APRA has referred a number of queries in relation to the interpretation of the Basel III counterparty credit risk rules to the Basel Committee for further consideration. APRA expects there will be further guidance from the Basel Committee in the form of updated "frequently asked questions" documents. However, APRA does not expect that this further guidance will result in any changes to the package of final prudential and reporting standards that it has released so far.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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