Regulatory Alerts2012-12-21
D3/2012 Transitional Arrangements for Capital Requirements on Over-the-Counter Derivatives Not Transacted Through a Central Counterparty
The South African Reserve Bank’s Office of the Registrar of Banks has issued Directive D3/2012 to establish transitional capital requirements for over-the-counter derivatives not cleared through a central counterparty. Effective from 1 January to 31 December 2013, South African banks must apply zero percent capital to the Credit Valuation Adjustment risk component for rand-denominated and locally bilateral OTC derivatives while maintaining standard default risk calculations. This temporary reduction lowers the total capital burden for these specific trades and supports domestic clearing without altering other Basel III-aligned regulatory frameworks.
[Logo] South African Reserve Bank From the Office of the Registrar of Banks
D3/2012
2012-12-21
To: All banks, controlling companies, branches of foreign institutions, eligible institutions and auditors of banks or controlling companies
Directive 03/2012 issued in terms of section 6(6) of the Banks Act, 1990
Transitional arrangements related to capital requirements for over-the-counter derivatives that are not transacted through a central counterparty
Executive summary
The Office of the Registrar of Banks (this Office) hereby informs all relevant persons of the decision taken by the Governor in consultation with the Registrar in respect of the capital requirements to be applied to specified transactions in over-the-counter (OTC) derivatives for the period 1 January 2013 until 31 December 2013.
1. Introduction
The amended Regulations relating to Banks (the amended Regulations), which will come into effect on 1 January 2013, introduce additional capital requirements related to banks' exposures to OTC derivatives, exchange-traded derivatives and securities-financing transactions, in alignment with the Basel III capital framework¹ (Basel III). These additional capital requirements vary according to the degree to which the derivative instruments (derivatives) are traded through a central counterparty (CCP). The objective of the additional capital requirements is to encourage the trading of derivatives on exchanges or, in instances where derivatives are traded on an OTC basis, that they be settled through a CCP so as to reduce counterparty credit risk (CCR).
¹ "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems", revised June 2011. Available at http://www.bis.org/publ/bcbs189.htm.
PO Box 8432 Pretoria 0001 • 379 Helen Joseph Street Pretoria 0002 • South Africa • Tel +27 12 3133911/0861 12 7272 • Fax +27 12 3133758 • www.reservebank.co.za
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In accordance with the relevant requirements specified in the Basel III framework and in the amended Regulations, capital requirements are the highest for trades that are not settled through a CCP. Furthermore, the Basel III framework and the amended Regulations distinguish between capital requirements for trades transacted through either qualifying or non-qualifying CCPs, with higher capital requirements being applied to non-qualifying CCPs.
2. OTC derivative clearing
South Africa does not currently have a domestically registered or domestically qualifying CCP that transacts OTC derivatives. Consequently, banks registered in South Africa have no alternative but to absorb the full impact of the increased capital requirements specified in the amended Regulations for domestically traded OTC derivatives.
Capital requirements for bilateral trades in the amended Regulations are based on a CCR component for default risk and a credit valuation adjustment (CVA) risk component.
3. Domestic currency OTC derivatives and OTC derivatives with local counterparties
After due consideration of the incentives for banks to commence clearing OTC derivatives through a domestically qualifying CCP, the transitional arrangements specified below shall apply to the CVA risk component of capital requirements emanating from banks' exposures to OTC derivatives that are denominated and transacted solely in South African rand (denoted ZAR-OTC derivatives), as well as all OTC derivatives entered into bilaterally between local counterparties (denoted local-OTC derivatives).²
Upon implementation of the amended Regulations on 1 January 2013, banks and controlling companies will be required to continue to treat ZAR-OTC derivatives and local-OTC derivatives that are not cleared through either a domestic or non-domestic CCP as bilateral trades. Banks shall report and calculate the relevant capital requirement for the default risk component of CCR on the basis of the capital requirements for a bilateral trade. However, the capital requirement for CVA risk shall be reported and calculated as follows:
For the purposes of reporting a bank's capital requirements for ZAR-OTC derivatives and local-OTC derivatives, the bank shall report the relevant required amounts on the form BA 200 in full compliance with the requirements specified in the amended Regulations. Banks that report according to the standardised approach for credit risk shall report the CVA exposure related to OTC derivative trades in accordance with the relevant requirements specified in columns 26 and 27 of line 80 of the form BA 200, and in lines 92 to 99, not excluding reporting CCR exposures in other relevant line items and columns,
² For purposes of this directive, local-OTC derivatives means OTC derivatives entered into bilaterally between South African counterparties. Local registered branches of foreign banks will also be included for these purposes. Local-OTC derivatives may include OTC derivatives not denominated solely in ZAR.
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without alteration. Banks that have applied for and have been granted permission to use the internal ratings-based approach for credit risk shall report the relevant CVA risk information in full in columns 26 and 27 of line 280 and in lines 287 to 294 of the form BA 200.
In accordance with the provisions of regulation 38(8)(c) of the amended Regulations, the Governor in consultation with the Registrar decided that, from 1 January 2013 until 31 December 2013, or prior notice specified in writing by the Registrar, for the purposes of calculating the capital requirement for ZAR-OTC and local-OTC derivatives associated with the reported CVA risk exposure, the bank shall be required to hold zero per cent of the capital requirement for CVA risk, as reported on the form BA 200. Furthermore, from 1 January 2013 until 31 December 2013, or prior notice specified in writing by the Registrar, no amount for CVA risk capital related to the aforesaid ZAR-OTC and local-OTC derivatives shall be reported as part of the total requirement for CCR in column 2 of line 1 of the form BA 700.
4. Complete framework
No other capital requirements as articulated in the amended Regulations will be affected by the above-mentioned transitional arrangements.
5. Acknowledgement of receipt
Two additional copies of this directive are enclosed for the use of your institution's independent auditors. The attached acknowledgement of receipt duly completed and signed by both the chief executive officer of the institution and the said auditors should be returned to this Office at the earliest convenience of the aforementioned signatories.
[Signature] pp Registrar of Banks
The previous directive issued was Directive 2/2012, dated 24 January 2012.