MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4611.12.31conclusion, and undertake such furtherreview as necessary to ensure continuingenforceability.23. The effects of CRM will not bedouble counted. Therefore, no additionalsupervisory recognition of CRM forregulatory capital purposes will be grantedon claims for which an issue-specific ratingis used that already reflects that CRM.Principal-only ratings will not be allowedwithin the framework of CRM.24. While the use of CRM techniquesreduces or transfers credit risk, itsimultaneously may increase other risks(residual risks). Residual risks includelegal, operational, liquidity and marketrisks. Therefore, it is imperative that banksemploy robust procedures and processesto control these risks, including strategy;consideration of the underlying credit;valuation; policies and procedures;systems; control of roll-off risks; andmanagement of concentration risk arisingfrom the bank’s use of CRM techniquesand its interaction with the bank’s overallcredit risk profile.25. The disclosure requirements underPart VIII of this document must also beobserved for banks to obtain capital relief(i.e., adjustments in the risk weights ofcollateralized or guaranteed exposures) inrespect of any CRM techniques.Collateralized transactions26. A collateralized transaction is onein which:a) banks have a credit exposure orpotential credit exposure; andb) that credit exposure or potentialcredit exposure is hedged in whole or inpart by collateral posted by a counterparty 1or by a third party in behalf of thecounterparty.27. In addition to the generalrequirement for legal certainty set out inparagraph 22, the legal mechanism by whichcollateral is pledged or transferred mustensure that the bank has the right to liquidateor take legal possession of it, in a timelymanner, in the event of default, insolvencyor bankruptcy (or one or more otherwisedefinedcredit events set out in thetransaction documentation) of thecounterparty (and, where applicable, of thecustodian holding the collateral).Furthermore, banks must take all stepsnecessary to fulfill those requirements underthe law applicable to the bank’s interest inthe collateral for obtaining and maintainingan enforceable security interest, e.g., byregistering it with a registrar, or forexercising a right to net or set off in relationto title transfer collateral.28. In order for collateral to provideprotection, the credit quality of thecounterparty and the value of the collateralmust not have a material positive correlation.For example, securities issued by thecounterparty – or by any related group entity– would provide little protection and sowould be ineligible.29. Banks must have clear and robustprocedures for the timely liquidation ofcollateral to ensure that any legalconditions required for declaring thedefault of the counterparty and liquidatingthe collateral are observed, and thatcollateral can be liquidated promptly.30. Where the collateral is required tobe held by a custodian, the BSP will onlyrecognize the collateral for regulatorycapital purposes if it is held by BSPauthorizedthird party custodians.31. A capital requirement will beapplied to a bank on either side of thecollateralized transaction: for example, bothrepos and reverse repos will be subject tocapital requirements. Likewise, both sidesof a securities lending and borrowingtransaction will be subject to explicit capital1Counterparty refers to a party to whom a bank has an on- or off-balance sheet credit exposure or a potential credit exposure.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 15