CIS—see section Y5B; - Proposed Amendments to Banking (Capital) Rules (“BCR”)

Level 2 CIS—see section Y5B;

Level n CIS—see section Y5B;

look-through approach means the approach for calculating the risk-weighted amount of an underlying exposure of a collective investment scheme set out in section Y7;

mandate-based approach means the approach for calculating the risk-weighted amounts of the underlying exposures of a collective investment scheme set out in section Y8;

regulatory deductible item, in relation to the calculation of the risk-weighted amount of a CIS exposure by an authorized institution, means—

22 (a) a CET1 capital instrument, an Additional Tier 1 capital instrument or a Tier 2 capital instrument issued by the institution or a financial sector entity other than the institution;

(b) a non-capital LAC liability of the institution or a financial sector entity other than the institution;

(i) a CET1 capital instrument under section 4(1)(c) of Schedule 4F or section 1(4)(d) of Schedule 4G;

(ii) an Additional Tier 1 capital instrument under section 4(3) of Schedule 4F or section 1(6) of Schedule 4G; or

(iii) a Tier 2 capital instrument under section 4(3) of Schedule 4F or section 1(6) of Schedule 4G;

third-party approach means the approach under which an authorized institution uses the risk-weighted amounts of the underlying exposures of a collective investment scheme calculated by a third party as inputs for the institution’s own calculation of the risk-weighted amount of a CIS exposure to that scheme.

Y5B. Interpretation: certain terms involving CIS exposures held by a collective investment scheme

(1) If an authorized institution has a CIS exposure to a collective investment scheme and such CIS exposure is held directly by the institution, that collective investment scheme is a Level 1 CIS.

(2) If a Level 1 CIS has a CIS exposure to another collective investment scheme and such CIS exposure is held directly by the Level 1 CIS, that another collective investment scheme is a Level 2 CIS.

(3) If the Level 2 CIS has a CIS exposure to another collective investment scheme and such CIS exposure is held directly by the Level 2 CIS, the Level 1 CIS is referred to as having an indirect CIS exposure to that another collective investment scheme through one interposed collective investment scheme.

(4) If—

(a) the Level 1 CIS has an indirect CIS exposure to another collective investment scheme through the Level 2 CIS and at least one interposed collective investment scheme; and (b) none of the underlying exposures of that another collective investment scheme is a CIS

exposure,

each interposed collective investment scheme (other than the Level 2 CIS) and that another collective investment scheme are referred to individually as a Level n CIS.

(5) If a collective investment scheme has a CIS exposure to another collective investment scheme and such CIS exposure is held directly by the first collective investment scheme, the first collective investment scheme is referred to as a collective investment scheme at a level immediately above that another collective investment scheme.

Subdivision 2—CIS exposures that constitute holdings of regulatory deductible items

Y5C. Application of Subdivision 2

This Subdivision applies to a CIS exposure of an authorized institution to a Level 1 CIS, or any part of such CIS exposure, that constitutes—

23 (a) the institution’s direct holding, indirect holding, synthetic holding or future holding of an item falling within paragraph (a) or (c) of the definition of regulatory deductible item in section Y5A; or

(b) the institution’s indirect holding, synthetic holding or future holding of an item falling within paragraph (b) of the definition of regulatory deductible item in section Y5A.

Y5D. Treatment of CIS exposures falling within section Y5C(a) or (b)

(1) If a CIS exposure of an authorized institution to a Level 1 CIS, or any part of such CIS exposure, constitutes a holding fallings within section Y5C(a) or (b) (subject holding), the institution must—

(a) determine whether any amount of the subject holding must be deducted from its capital base in accordance with Division 4 of Part 3; and

(b) make any deduction so determined from its capital base accordingly.

(2) If—

(a) a subject holding of an authorized institution is an insignificant LAC investment; and (b) by virtue of section 5 of Schedule 4F, no amount of, or only part of, the subject holding

is deducted from the institution’s capital base in accordance with sections 43(1)(o), 47(1)(c) and 48(1)(c),

any amount of the subject holding that is not deducted from the institution’s capital base must be allocated a risk-weight of 100%.

(3) If—

(a) a subject holding of an authorized institution falls within section 48A; and

(b) by virtue of section 48(3), no amount of, or only part of, the subject holding is deducted from the institution’s capital base in accordance with section 48(1)(g)(i),

any amount of the subject holding that is not deducted from the institution’s capital base must be allocated a risk-weight of 100%.

(4) If—

(a) a subject holding of an authorized institution is a significant LAC investment; and (b) by virtue of section 1(7) of Schedule 4G, no amount of, or only part of, the subject

holding is deducted from the institution’s CET1 capital in accordance with section 43(1)(p),

any amount of the subject holding that is not deducted from the institution’s CET1 capital must be allocated a risk-weight of 250%.

[Explanatory note: Sections Y5C and Y5D are equivalent to section X11 in the 2019 consultative document.]

Subdivision 3—CIS exposures that do not constitute holdings of regulatory deductible items

Y5E. Application of Subdivision 3

(1) Subject to subsection (2), this Subdivision applies to the calculation of the risk-weighted amount of a CIS exposure.

(2) If the CIS exposure is a CIS exposure of an authorized institution to a Level 1 CIS, this Subdivision does not apply to —

(a) any part of the CIS exposure (which may be all of the CIS exposure) that is required to be deducted from the institution’s capital base under Division 4 of Part 3; and

24 (b) any part of the CIS exposure (which may be all of the CIS exposure) that is required to

be risk-weighted in accordance with section Y5D(2), (3) or (4).

Y6. Approaches to be used for determining risk-weighted amount of underlying exposure of collective investment scheme

(1) An authorized institution may, at its own discretion, choose to determine the risk-weight applicable to a CIS exposure to a Level 1 CIS by—

(a) using the fall-back approach in accordance with section Y10(1); or

(b) calculating the risk-weighted amount of the underlying exposures of the scheme with the use of the approach determined in accordance with subsections (1A), (1B) and (1C).

(1A) Subject to subsection (5), an authorized institution must use the look-through approach to calculate the risk-weighted amount of the underlying exposures of a Level 1 CIS if both of the conditions set out in subsection (2) are met in respect of the scheme.

(1B) Subject to subsection (5), an authorized institution has an option to use the third-party approach to calculate the risk-weighted amount of the underlying exposures of a Level 1 CIS if—

(a) either or both of the conditions set out in subsection (2) are not met in respect of the scheme;

(b) the third party concerned recalculates and updates the risk-weighted amount of the underlying exposures of the scheme at a frequency that is the same as, or more frequent than, that of the institution’s financial reporting; and

[Explanatory note: Subsection (1B)(b) is added to mirror the requirement in subsection (3)(a).]

(1C) Subject to subsection (5), an authorized institution must use the mandate-based approach to calculate the risk-weighted amount of the underlying exposures of a Level 1 CIS if—

(a) either or both of the conditions set out in subsection (2) are not met in respect of the scheme; and

(b) either—

(i) the third-party approach is infeasible (including the case where either or both of the conditions set out in subsection (1B)(b) and (c) are not met); or

(ii) the institution chooses not to use the third-party approach.

(2) The conditions are as follows—

(a) there is sufficient and frequent information available to the institution regarding the underlying exposures of the scheme; and

(b) the information and underlying exposures are verified by an independent third party who may be a depository, a custodian bank or (where applicable) a management company.

(3) The condition in subsection (2)(a) is met in respect of the scheme only if—

(a) the frequency of financial reporting of the scheme is the same as, or more frequent than, that of the institution’s financial reporting; and

(b) the granularity of the financial information provided in the scheme’s financial report is sufficient for determining the risk-weighted amount of its underlying exposures in accordance with the look-through approach.

(4) For the purposes of subsection (3), the financial report of a collective investment scheme needs not be an audited report.

25 (5) An authorized institution may use any combination of the look-through approach,

mandate-based approach and fall-back approach to calculate the risk-weighted amount of the underlying exposures of a Level 1 CIS if—

(a) it is not feasible to use the same approach for all the underlying exposures; and (b) the requirements applicable to the approach concerned set out in this Subdivision are

met in respect of the underlying exposures for which the approach is used.

Y6A. Conditions for using third-party approach

The conditions specified for section Y6(1B)(c) are—

(a) the third party concerned is the depository or the management company (however described) of the collective investment scheme concerned (subject CIS);

(b) the third party calculates the risk-weighted amount of all the underlying exposures of the subject CIS (third-party output) in accordance with either of the following—

(i) section X7(1) as if—

(A) the third party were an authorized institution that holds a CIS exposure to the subject CIS directly; and

(B) sections 66(1)(a) and (2)(b), 68A and X11 did not exist;

(ii) the capital standards issued by the Basel Committee that are currently in force and correspond to the following Parts of these Rules—

(A) Part 4, other than section 66(1)(a) and (2) in respect of regulatory deductible items, section 68A, Subdivision 2 of this Division and section X11; and (B) Parts 6A and 7, to the extent applicable to authorized institutions that use

the STC approach to calculate their credit risk for non-securitization exposures; and

[Explanatory note: The conditions have been revised taken into account comments received from the industry in the 2019 consultation.]

Y7. Look-through approach

(1A) This section sets out the look-through approach for calculating the risk-weighted amount of the underlying exposure of a collective investment scheme (subject CIS).

(1) Subject to section Y11—

(a) if an underlying exposure of the subject CIS is a CIS exposure to another CIS, the risk-weighted amount of such underlying exposure must be calculated in accordance with—

(i) section Y8A(2) or (4), as the case requires; and (ii) section Y12(3);

(b) if an underlying exposure of the subject CIS is a capital investment in a commercial entity, the risk-weighted amount of such underlying exposure must be calculated in accordance with section Y9(1);

(c) if an underlying exposure of the subject CIS is an exposure to CVA risk in respect of derivative contracts or SFTs entered into by the subject CIS, the risk-weighted amount of such underlying exposure must be calculated in accordance with section Y9(2) and (3); and

(d) in any other case, the risk-weighted amount of the underlying exposure of the subject CIS must be calculated in accordance with Part 5 (other than this Division) or 7, or

26 Division 4 of Part 6A, as the case requires, as if the underlying exposure were held directly by the institution.

[Explanatory note: To enhance clarity, subsection (1) has been elaborated to set out explicitly the provisions applicable to underlying exposures that are CIS exposures, capital investments in commercial entities and exposures to CVA risk.]

Y7A. Third-party approach

(1) This section applies to an authorized institution that uses the third-party approach to calculate the risk-weighted amount of the underlying exposures of a collective investment scheme (subject CIS).

(2) An authorized institution must calculate the risk-weighted amount of the underlying exposures of the subject CIS as the product of—

(a) the third-party output in respect of the subject CIS provided by the third party concerned (see section Y6A(b)); and

(b) 1.2.

(3) The institution must not use an amount other than the product calculated under subsection (2) as the aggregate risk-weighted amount of the underlying exposures of the subject CIS for the purposes of Formula 12A in section Y12.

Y8. Mandate-based approach

(1A) This section sets out the mandate-based approach for calculating the risk-weighted amounts of the underlying exposures of a collective investment scheme (subject CIS).

(1) An authorized institution must calculate the risk-weighted amounts of the underlying exposures of the subject CIS in accordance with subsection (2) and based on the information contained in any one or more of the following documents—

(a) the mandate of the subject CIS;

(b) other disclosures of the subject CIS; and

(b) if applicable, the legislation or regulations governing the subject CIS.

(2) Subject to section Y11—

(a) if an underlying exposure of the subject CIS is a CIS exposure to another CIS, the risk-weighted amount of such underlying exposure must be calculated in accordance with—

(i) section Y8A(2) or (4), as the case requires; and (ii) section Y12(3);

(d) in any other case, the risk-weighted amount of an underlying exposure of the subject CIS must be calculated in accordance with Part 5 (other than this Division) or 7, or Division 4 of Part 6A, as the case requires, as if the underlying exposures were held directly by the institution.

(2A) For the purposes of subsection (2), the institution must estimate the amounts of the underlying exposures of the subject CIS as follows—

27 (a) underlying exposures that fall within paragraph (ab)(i) of the definition of underlying

exposures in section 2(1) must be estimated by assuming that the subject CIS—

(i) first invests in those assets that would attract the highest risk-weight under Parts 5 and 7, to the maximum extent allowed under the mandate of the subject CIS (or, if applicable, under the relevant legislation or regulations); and

(ii) then continues to invest in other assets in descending order of risk-weight, to the maximum extent allowed under the mandate of the subject CIS (or, if applicable, under the relevant legislation or regulations);

(b) underlying exposures that fall within paragraph (ab)(ii) of the definition of underlying exposure in section 2(1) and arise from derivative contracts must be estimated as—

(i) the notional amount of the subject CIS’s position in the underlying exposures of the derivative contracts (within the meaning given by section 226A) entered into by the subject CIS;

(ii) if the underlying exposures of the derivative contracts are unknown—the full notional amount of the derivative contracts; or

(iii) if the notional amount of the derivative contracts is unknown—the maximum notional amount of derivative contracts allowed under the subject CIS’s mandate (or, if applicable, under the relevant legislation or regulations);

(c) underlying exposures that fall within paragraph (ab)(iii) of the definition of underlying exposure in section 2(1) and arise from derivative contracts must be calculated, at the institution’s discretion, by using either—

(i) the SA-CCR approach; or (ii) the current exposure method; and

(d) any other underlying exposures (including those that fall within paragraph (ab)(iv) of the definition of underlying exposures in section 2(1)) must be estimated as—

(i) the contracted amount of the underlying exposures; or

(ii) if the contracted amount is unknown—the maximum contracted amount allowed under the subject CIS’s mandate (or, if applicable, under the relevant legislation or regulations).

(3) For the purposes of using the SA-CCR approach under subsection (2A)(c)(i)—

(a) if the replacement cost of a netting set is unknown—

(i) the sum of the notional amounts of the derivative contracts in the netting set must be regarded as the replacement cost of the netting set; and

(ii) the value of the multiplier in Formula 23AM in section 226BR(1) must be set at 1;

(b) if the potential future exposure of a netting set is unknown, the product of the sum of the notional amounts of the derivative contracts in the netting set and 15% must be regarded as the potential future exposure of the netting set.

[Explanatory note: Subsection (3) reflects the treatment set out in paragraph 60.7(3) of CRE60⁴ of the Basel Framework.]

(3A) For the purposes of using the current exposure method under subsection (2A)(c)(ii)—

(a) if the replacement cost of a derivative contract is unknown, the notional amount of the contract must be regarded as the replacement cost of the contract; and

4 https://www.bis.org/basel_framework/chapter/CRE/60.htm?inforce=20191215

28 (b) if the CCF applicable to a derivative contract is unknown, 47% must be regarded as the

CCF applicable to the contract.

(4) If the information available to the institution is not sufficient such that more than one risk-weight are applicable to an underlying exposure of the subject CIS, the institution must assign to the underlying exposure the highest of those applicable risk-weights.

Y8A. Provisions supplementary to sections Y7 and Y8—treatments for underlying exposures that are CIS exposures

(1) If an authorized institution has a CIS exposure to a Level 1 CIS, subsection (2) applies to any CIS exposure to a Level 2 CIS directly held by the Level 1 CIS (Level 2 CIS exposure).

(2) For the purpose of calculating the risk-weighted amount of a Level 2 CIS exposure, the institution must—

(a) determine the approach or approaches to be used to calculate the risk-weighted amount of the underlying exposures of the Level 2 CIS in accordance with section Y6 as if the Level 2 CIS exposure were a CIS exposure to a Level 1 CIS held directly by the institution; and

(b) calculate the risk-weighted amount of the underlying exposures of the Level 2 CIS—

(i) by using the approach or approaches determined under paragraph (a); and (ii) in accordance with the provisions in this Subdivision applicable to that approach

or those approaches.

(3) Subsection (4) applies to any CIS exposure to a Level n CIS (Level n CIS exposure) if neither of the following is true in respect of the Level 2 CIS that interposes between the Level 1 CIS and the Level n CIS —

(a) the institution allocates a risk-weight of 1250% to the Level 2 CIS exposure concerned under the fall-back approach in accordance with section Y10(1);

(b) the institution uses the third-party approach to calculate the risk-weighted amount of the underlying exposures of the Level 2 CIS.

(4) For the purpose of calculating the risk-weighted amount of a Level n CIS exposure—

(a) the institution may calculate the risk-weighted amount of the underlying exposures of the Level n CIS by using the look-through approach only if—

(i) the risk-weighted amount of all or part of the underlying exposures of the CIS at the level immediately above the Level n CIS is also calculated by using the look-through approach;

(ii) the Level n CIS exposure is one of those underlying exposures that are subject to the look-through approach; and

(iii) both of the conditions set out in section Y6(2) are met in respect of the Level n CIS and all of its underlying exposures;

(b) in any other case, the institution must allocate a risk-weight of 1250% to the Level n CIS exposure under the fall-back approach in accordance with section Y10(1).

Y9. Provisions supplementary to sections Y7 and Y8—treatments for underlying exposures related to commercial entities and CVA risk

[Explanatory note: Revised section Y11 replaces section X9(2) and (4) in the 2019 consultative document.]

(1) If an underlying exposure of a collective investment scheme is a capital investment in a commercial entity (concerned investment), an authorized institution must allocate a risk-weight to the concerned investment in accordance with those provisions of this Part that would be applicable to the concerned investment if—

29 (a) the concerned investment were held directly by the institution; and

(b) sections 43(1)(n), 46(1) and 117A did not exist.

(2) Subject to subsection (3), if an underlying exposure of a collective investment scheme is an exposure to CVA risk in respect of derivative contracts or SFTs entered into by the scheme with a counterparty, an authorized institution must, instead of using the methods set out in Division 3 of Part 6A, calculate the risk-weighted amount of the underlying exposure in accordance with paragraph (a), (b), (c) or (d), as the case requires, as if the derivative contracts or SFTs were entered into by the institution—

(a) if the SA-CCR approach is used to calculate the default risk exposure in respect of the derivative contracts, the risk-weighted amount of the underlying exposure is equal to the product of the following 3 items—

(i) the default risk exposure in respect of the contracts;

(ii) 0.5;

(iii) the risk-weight applicable to the counterparty;

(b) if the current exposure method is used to calculate the default risk exposures in respect of the derivative contracts, the risk-weighted amount of the underlying exposure is equal to the product of the following 2 items—

(i) the sum of risk-weighted amounts of the default risk exposures in respect of the contracts calculated in accordance with section 129;

(ii) 0.5;

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