• A sound limit system should include:
• Establishment and regular review of counterparty limits by a designated committee. Further, a banking organization should have a process to escalate limit approvals to higher levels of authority, depending on the size of counterparty exposures, credit quality, and tenor.
• Individual CCR limits based on peak exposures rather than expected exposures.
• Peak exposures are appropriate for individual counterparty limit monitoring purposes because they represent the risk tolerance for exposure to a single counterparty.
• Expected exposure is an appropriate measure for aggregating exposures across counterparties in a portfolio credit model, or for use within CVA.

• Consideration of risk factors such as the credit quality of the counterparty, tenor of the transactions, and the liquidity of the positions or hedges.
• Sufficiently automated monitoring processes to provide updated exposure measures at least daily.
• Monitoring of intra-day trading activity for conformance with exposure limits and exception policies. Such controls and procedures can include intra-day limit monitoring, trade procedures and systems that assess a trade’s impact on limit utilization prior to execution, limit warning triggers at specific utilization levels, and restrictions by credit risk management on allocation of full limits to the business lines.
• The Banking organizations should:
• Maintain CCR policies that address margin practices and collateral terms, including, but not limited to:
• Processes to establish and periodically review minimum haircuts.
• Processes to evaluate the volatility and liquidity of the underlying collateral. Banks should strive to ensure that haircuts on collateral do not decline during periods of low volatility.
• Controls to mitigate the potential for a weakening of credit standards from competitive pressure.
• Set guidelines for cross-product margining. Banking organizations offer cross-product margining arrangements to clients to reduce required margin amounts. Guidelines to control risks associated with cross-product margining would include limiting the set of eligible transactions to liquid exposures, and having procedures to resolve margin disputes.
• Maintain collateral management policies and procedures to control, monitor and report:
• The extent to which collateral agreements expose a banking organization to collateral risks, such as the volatility and liquidity of the securities held as collateral.
• Concentrations of less liquid or less marketable collateral asset classes.
• The risks of re-hypothecation or other reinvestment of collateral (both cash and noncash) received from counterparties, including the potential liquidity shortfalls resulting from the re-use of such collateral.
• The CCR associated with the decision whether to require posted margin to be segregated. Organizations should perform a legal analysis concerning the risks of agreeing to allow cash to be commingled with counterparty’s own cash and of allowing a counterparty to re-hypothecate securities pledged as margin.
• Maintain policies and processes for monitoring margin agreements involving third-party custodians. As with bilateral counterparties, banking organizations should:

• Identify the location of the account to which collateral is posted, or from which it is received.
• Obtain periodic account statements or other assurances that confirm the custodian is holding the collateral in conformance with the agreement.
• Understand the characteristics of the account where the collateral is held (for example, whether it is in a segregated account), and the legal rights of the counterparty or any third-party custodian regarding this collateral.

• Policies and procedures outlining sound practices for managing a close-out should include:
• Requirements for hypothetical close-out simulations at least once every two years for one of the banking organization’s most complex counterparties.
• Standards for the speed and accuracy with which the banking organization can compile comprehensive counterparty exposure data and net cash outflows. Operational capacity to aggregate exposures within four hours is a reasonable standard.
• The sequence of critical tasks, and decision-making responsibilities, needed to execute a close-out.
• Requirements for periodic review of documentation related to counterparty terminations, and confirmation that appropriate and current agreements that specify the definition of events of default and the termination methodology that will be used are in place.

• Banking organizations should take corrective action if documents are not current, active and enforceable.
• Management should document their decision to trade with counterparties that are either unwilling or unable to maintain appropriate and current documentation.

• Established closeout methodologies that are practical to implement, particularly with large and potentially illiquid portfolios. Dealers should consider using the “close-out amount” approach for early termination upon default in inter-dealer relationships.
• A requirement that the banking organization transmit immediate instructions to its appropriate transfer agent(s) to deactivate collateral transfers, contractual payments, or other automated transfers contained in “standard settlement instructions” for counterparties or prime brokers that have defaulted on the contract or for counterparties or prime brokers that have declared bankruptcy.
• “(1) 1CCR exposures comprise the
  1. balance sheet CCR exposures pursuant to section 10,
  2. derivative CCR exposures pursuant to section 11,
  3. off-balance sheet CCR exposures pursuant to section 13 and4. free delivery exposures pursuant to section 14;”
• “Several CCR exposures can arise from a single transactions. 3Securities or commodities transferred under repurchase agreements or lent under lending agreements are to be assignedto the transferor or lender regardless of how they are shown on the balance sheet. 4For a creditlinked note for which the institution is the protection seller, both the CCR exposure to theissuer of the credit linked note and the CCR exposure to the reference asset or the referenceportfolio are to be recognised.”
• “A CCR exposure is deemed to be effectively securitised if it belongs to a portfoliosecuritised by a securitisation transaction pursuant to section 1b (6) of the Banking Act forwhich the institution is deemed to be an originator pursuant to section 1b (7) of theBanking Act and for which it meets the minimum requirements for material and effectiverisk transfer pursuant to section 232.”

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