MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4611.12.31ii. Inward bills for collection;iii. Outward bills for collection;iv. Travelers’ checks unsold;v. Trust department accounts;vi. Items held for safekeeping/custodianship;vii. Items held as collaterals;viii.Deficiency claims receivable; andix. Others.18. For derivative contracts, the creditequivalent amount shall be the sum of thecurrent credit exposure (or replacementcost) and an estimate of the potential futurecredit exposure (or add-on). However, thefollowing shall not be included in thecomputation:a) Instruments which are traded in anexchange where they are subject to dailyreceipt and payment of cash variationmargin; andb) Exchange rate contract with originalmaturity of fourteen (14) calendar days orless.19. The current credit exposure shall bethe positive mark-to-market value of thecontract (or zero if the mark-to-market valueis zero or negative). The potential futurecredit exposure shall be the product of thenotional principal amount of the contractmultiplied by the appropriate potentialfuture credit conversion factor, as indicatedbelow:Interest ExchangeResidual Maturity Rate Rate EquityContract Contract ContractOne (1) year or less 0.0% 1.0% 6.0%Over one (1) year tofive (5) years 0.5% 5.0% 8.0%Over five (5) years 1.5% 7.5% 10.0%Provided, That:a) For contracts with multipleexchanges of principal, the factors are to bemultiplied by the number of remainingpayments in the contract;b) For contracts that are structured tosettle outstanding exposure followingspecified payment dates and where theterms are reset such that the market valueof the contract is zero on these specifieddates, the residual maturity would be setequal to the time until the next reset date,and in the case of interest rate contracts withremaining maturities of more than one (1)year that meet these criteria, the potentialfuture credit conversion factor is subject toa floor of one-half percent (1/2%); andc) No potential future credit exposureshall be calculated for single currencyfloating/floating interest rate swaps, i.e., thecredit exposure on these contracts wouldbe evaluated solely on the basis of theirmark-to-market value.20. The credit equivalent amount shallbe treated like any on-balance sheet asset,and shall be assigned the appropriate riskweight, i.e., according to the third partycredit assessment of the counterpartyexposure.B. Credit risk mitigation (CRM)21. Banks use a number of techniquesto mitigate the credit risks to which theyare exposed. For example, exposures maybe collateralized by first priority claims, inwhole or in part with cash or securities, ora loan exposure may be guaranteed by athird party. Physical collateral, such as realestate, buildings, machineries, andinventories are not recognized at this timefor credit risk mitigation purposes in linewith Basel II recommendations.22. In order for banks to obtain capitalrelief for any use of CRM techniques, alldocumentation used in collateralizedtransactions and for documentingguarantees must be binding on all partiesand legally enforceable in all relevantjurisdictions. Banks must have conductedsufficient legal review to verify this and havea well-founded legal basis to reach thisQ RegulationsAppendix Q-46 - Page 14Manual of Regulations for Non-Bank Financial Institutions