General requirements

An authorized institution [which] makes an application under section 10B(2)(a) of these Rules to use the IMM(CCR) approach must demonstrate to the satisfaction of the Monetary Authority that-

(a) the board of directors (or a committee designated by the board) and the senior management of the institution- (i) approve all the key elements of, and any material

changes to, the institution’s counterparty credit risk management system (being the methods, models, processes, controls, and data collection and information technology systems used by the institution which enable the identification, measurement, management and control of counterparty credit risk by the institution);

(ii) possess an understanding of the design and

operation of, and the management reports generated by, the institution’s counterparty credit risk

management system adequate for them to perform their functions specified in this paragraph;

(iii) exercise oversight of the institution’s counterparty credit risk management system sufficient to ensure that the system complies with paragraph (b); and (iv) ensure that there is a reporting system within the institution to provide information (including, but not limited to, information relating to any material changes to, or deviations from, established policies

and procedures or any material findings identified in a review or audit referred to in paragraph (k)) to them regularly and in sufficient detail as will enable them to-

(A) exercise the oversight referred to in subparagraph (iii); and

(B) make informed decisions relating to the institution’s counterparty credit risk exposures;

(b) the institution’s counterparty credit risk management system-

(i) is suitable for the purposes of identifying,

measuring, managing, controlling and reporting the institution’s counterparty credit risk taking into account the characteristics and extent of the institution’s counterparty credit risk exposures;

(ii) identifies, measures, monitors and controls

counterparty credit risk over the life of transactions;

(iii) measures and manages both current exposures (gross and net of collateral held, where appropriate) and future exposures; and

(iv) is operated in a prudent and [consistently] effective manner that is also consistent with sound practices for counterparty credit risk management;

(c) the institution-

(i) clearly documents the counterparty credit risk management system and the internal policies, controls and procedures relating to the operation of the system, including-

(A) the internal models to which the application relates (referred to in this Schedule as relevant models);

(B) the calculation of the risk measures generated by the relevant models with

(C) the model validation process, including frequency and methodologies of validation and analyses used; and

(ii) has a system for monitoring and ensuring compliance with those internal policies, controls and procedures;

(d) the institution has a risk control unit-

(i) which is functionally independent of the

institution’s staff and management responsible for originating counterparty credit risk exposures;

(ii) which reports directly to the institution’s senior management;

(iii) which is responsible for-

(A) the design or selection of the institution’s counterparty credit risk management system;

(B) the testing, validation and implementation of the institution’s counterparty credit risk management system;

(C) the oversight of the effectiveness of the institution’s counterparty credit risk management system for the purposes of paragraph (b), including the control of data integrity;

(D) the production and analysis of daily management reports on the output of the relevant models, including an evaluation of the relationship between measures of counterparty credit risk exposure and credit and trading limits;

(E) the ongoing review of, and changes to, the institution’s counterparty credit risk management system; and

(F) the conduct of a regular back-testing programme to verify the accuracy and reliability of the relevant models;

(iv) the work of which is an integral part of the day-to-day credit risk management process of the

institution; and

(v) the daily management reports of which are reviewed by a level of management with sufficient seniority and authority to enforce both reductions of positions taken by individual traders and reductions in the institution’s overall risk exposure;

(e) the institution has a collateral management unit- (i) which is adequately staffed and with sufficient

resources to process margin calls and disputes in a timely and accurate manner even during periods of severe market crisis, and to enable the institution to limit the number of large disputes caused by trade volumes; and

(ii) which is responsible for-

(A) calculating and making margin calls,

managing margin call disputes and reporting levels of independent amount, initial

margins and variation margins accurately on a daily basis;

(B) controlling the integrity of the data used to make margin calls and ensuring that [such]

data are consistent and reconciled regularly with all relevant data sources within the institution;

(C) tracking the extent of reuse of collateral (both cash and non-cash) and the rights ceded by the institution in respect of the collateral that it posts;

(D) tracking concentration in individual types of collateral accepted by the institution; and (E) producing and maintaining appropriate

collateral management information (including information on the type of collateral (cash and non-cash) received and

in the areas to which such information relates) and reporting the information to the institution’s senior management on a regular basis;

(f) the institution has a sufficient number of staff who are qualified and trained to use the relevant models in the institution’s business, risk control, audit and back office functions as will enable those functions to work effectively in identifying, measuring, managing, controlling and reporting the institution’s counterparty credit risk;

(g) the use of the relevant models is part of the institution’s counterparty credit risk management system and plays an essential role in the institution’s daily risk management, capital planning and corporate governance functions, with- (i) the results generated by the relevant models being

used in-

(A) planning, measuring, monitoring and controlling the institution’s counterparty credit risk exposures;

(B) determining the institution’s trading and credit risk exposure limits and measuring the usage of those limits;

(C) credit approval; and

(D) internal capital allocation; and

(ii) the relationship between the relevant models and the limits mentioned in paragraph (i)(B) being

maintained consistently over time and understood by the institution’s senior management, credit function and staff engaged in trading activity;

(h) the institution-

(i) uses stress-testing and scenario analysis to identify risk factors that give rise to general wrong-way risk and address the possibility of severe shocks;

(ii) monitors general wrong-way risk by product, by region, by industry, or by other categories that are relevant to the business of the institution;

(iii) has policies and procedures for identifying, monitoring and controlling transactions with specific wrong-way risk at the inception and throughout the life of the transactions; and

(iv) provides regular reports on wrong-way risks to its senior management and board of directors (or a committee designated by the board);

(i) the cash management policy of the institution takes account of the liquidity risks arising from potential incoming margin calls (including calls for posting of collateral due to adverse market shocks or potential downgrade of the institution’s external credit rating and calls for return of collateral);

(j) the institution ensures that the nature and horizon of collateral reuse are consistent with its liquidity needs and do not jeopardize its ability to post or return collateral in a timely manner;

(k) an independent review or audit of the institution’s

compliance with internal policies, controls and procedures, including the requirements specified in this Schedule, in respect of the institution’s counterparty credit risk management system is conducted regularly by the institution’s internal auditors or by independent external parties which are qualified to do so;

(l) the institution, prior to being granted an IMM(CCR) approval-

(i) has been using an internal model which is broadly consistent with the requirements set out in this Schedule to estimate the distribution of exposures (within the meaning given in section 226G(2) of these Rules) using current market data for such period, which in any case is not less than 1 year, as the Monetary Authority considers reasonable in all the circumstances of the case; and

(ii) has been conducting testing, being back-testing which is broadly consistent with the requirements set out in this Schedule relating to back-testing, using historical data on movements in

2. Specific requirements relating to the relevant models