Collateralized Transactions

For collateral to be recognized in the simple approach, it must be pledged for at least the life of the exposure and it must be marked to market and revalued with a minimum frequency of six months. Those portions of exposures collateralized by the market value of recognized collateral receive the risk weight applicable to the collateral instrument. The risk weight on the collateralized portion is subject to a floor of 20% except under the conditions specified in paragraphs 9.36 to 9.39. The remainder of the exposure must be assigned the risk weight appropriate to the counterparty. Maturity mismatches are not allowed under the simple approach (see paragraphs 9.10 to 9.11 ). The simple approach: eligible financial collateral 9.34 The following collateral instruments are eligible for recognition in the simple approach: (1) Cash (as well as certificates of deposit or comparable instruments issued by the lending bank) on deposit with the bank that is incurring the counterparty exposure 41 42 . (2) Gold. (3) Debt securities that meet the following conditions: (a) Debt securities rated 43 by a recognized external credit assessment institution (ECAI) where these are either: (i) At least BB- when issued by sovereigns or public sector entities (PSEs) that are treated as sovereigns; or (ii) At least BBB- when issued by other entities (including banks and other prudentially regulated financial institutions); or (iii) At least A-3/P-3 for short-term debt instruments. (b) Debt securities not rated by a recognized ECAI where these are: (i) Issued by a bank; and (ii) Listed on a recognized exchange; and (iii) Classified as senior debt; and (iv) All rated issues of the same seniority by the issuing bank are rated at least BBB– or a-3/p-3 by a recognized ECAI; and (v) The bank holding the securities as collateral has no information to suggest that the issue justifies a rating below BBB– or A-3/P-3 (as applicable); and (vi) SAMA is sufficiently confident that the market liquidity of the security is adequate. (4) Equities (including convertible bonds) that are included in a main index. (5) Undertakings for Collective Investments in Transferable Securities (UCITS)and mutual funds where: (a) a price for the units is publicly quoted daily; and (b) the UCITS/mutual fund is limited to investing in the instruments listed in this paragraph. 44 9.35 Resecuritizations as defined in the securitization chapters 18 to 23 are not eligible financial collateral. Simple approach: exemptions to the risk-weight floor 9.36 Repo-style transactions that fulfil all of the following conditions are exempted from the risk-weight floor under the simple approach: (1) Both the exposure and the collateral are cash or a sovereign security or PSE security qualifying for a 0% risk weight under the standardized approach (chapter 0); (2) Both the exposure and the collateral are denominated in the same currency; (3) Either the transaction is overnight or both the exposure and the collateral are marked to market daily and are subject to daily remargining; (4) Following a counterparty’s failure to remargin, the time that is required between the last mark-to-market before the failure to remargin and the liquidation of the collateral is considered to be no more than four business days; (5) The transaction is settled across a settlement system proven for that type of transaction; (6) The documentation covering the agreement is standard market documentation for repo-style transactions in the securities concerned; (7) The transaction is governed by documentation specifying that if the counterparty fails to satisfy an obligation to deliver cash or securities or to deliver margin or otherwise defaults, then the transaction is immediately terminable; and (8) Upon any default event, regardless of whether the counterparty is insolvent or bankrupt, the bank has the unfettered, legally enforceable right to immediately seize and liquidate the collateral for its benefit.