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Prudential framework minor updates

This image shows APRA's contact details: AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY - 1 Martin Place (Level 12), Sydney, NSW 2000 - GPO Box 9836, Sydney, NSW 2001. Telephone: 02 9210 3000, Website: www.apra.gov.au. Australian coat of arms - APRA

To: All authorised deposit-taking institutions and insurers

 

APRA is releasing for consultation a number of minor updates to the prudential framework. This is a new process, being part of APRA's strategic initiative to modernise the prudential architecture, and is intended to ensure the framework is refreshed in a timely manner between more comprehensive reviews of prudential standards.

Minor framework updates 

 

Minor updates are proposed to the following standards and guidance as outlined in the table below. The specific updates are set out in more detail in Annex A. These are primarily technical clarifications in nature and do not present any material change in policy settings.

Prudential standard or prudential practice guide

Industries covered

Prudential Standard APS 180 Capital Adequacy: Counterparty Credit Risk (APS 180)

ADI

Prudential Practice Guide APG 210 Liquidity (APG 210)

ADI

Prudential Standard APS 120 Securitisation (APS 120)

ADI

Prudential Practice Guide CPG 110 Internal Capital Adequacy Assessment Process and Supervisory Review (CPG 110)

General insurance, life insurance, private health insurance, ADI

Prudential Standard CPS 320 Actuarial and Related Matters (CPS 320)

General insurance, life insurance, private health insurance

Request for submissions

 

APRA welcomes feedback on the proposed changes to prudential standards and guidance, found in Annex A. APRA also welcomes any feedback on this new, minor updates process, including any benefits or costs for regulated entities.

Written submissions should be sent to policydevelopment@apra.gov.au by 19 July 2023 and addressed to the General Manager, Policy, APRA. Subject to feedback, APRA expects that the updated standards and guidance would take immediate effect upon finalisation.

Yours sincerely,

 

Clare Gibney
Executive Director, PAD 


ANNEX A. PROPOSED REVISIONS

APS 180 Capital Adequacy: Counterparty Credit Risk

 

APRA proposes a minor consequential amendment to paragraph 2 to clarify the scope of the standard to exclude non-significant financial institutions (non-SFIs). This does not alter the capital calculation, as Prudential Standard APS 110 Capital Adequacy and Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk do not currently require non-SFIs to calculate capital using APS 180.

2. This Prudential Standard applies to all authorised deposit-taking institutions (ADIs) with the exception of:
(a) foreign ADIs;
(b) purchased payment facility providers; and
(c) non-significant financial institutions.
 

 

APRA also proposes a minor amendment to Attachment A 18(c) as to the treatment of eligible credit valuation adjustment (CVA) hedges in the CVA capital charge calculation. APRA currently plans to implement the Basel Committee on Banking Supervision’s updated CVA capital framework in 20262. APRA proposes to bring forward a minor amendment to remove the requirement to use the rules set out in Prudential Standard APS 116 Capital Adequacy: Market Risk (APS 116) in a certain scenario. This requirement was not included in the updated Basel framework and can produce counter-intuitive outcomes where capital requirements are higher when the CVA is hedged.  

Delete the following sentence from Attachment A 18(c): If restructuring is not included in the CDS contract then the proportion of that CDS hedge that may be treated as an eligible CVA hedge is as in accordance with the rules regarding specific risk offsetting set out in Attachment D of Prudential Standard APS 116 Capital Adequacy: Market Risk (APS 116).

APG 210 Liquidity

 

APRA proposes to insert a new paragraph 139 in APG 210 to clarify the treatment of collateral outflows in Prudential Standard APS 210 Liquidity (APS 210) paragraph 53. This clarification is intended to increase consistency across the industry in the recognition of derivatives and other margined products and to clarify that ADIs are to only consider collateral flows driven by market movements.

Chapter 2 – Liquidity coverage ratio

Derivative transactions - collateral

139. Paragraph 53 of Attachment A to APS 210 requires collateral outflows due to market valuation changes on derivative transactions and other transactions to be calculated as 100 per cent of the largest absolute net 30-day collateral flow realised in the past 24 months. APRA expects ADIs to include all derivative transactions (including futures) and other margined transactions (for example repos, reverse repos, collateral swaps and any other margined products) in the calculation. Collateral flows are only included in the calculation where they are driven by market valuation changes. Collateral received or returned upon the maturity or reset of a transaction is not expected to be included in the calculation where they are offset by a settlement amount. These collateral movements relate to the settlement of the transaction and are not due to a market valuation change.

 

APS 120 Securitisation

 

APRA proposes to make minor corrections to references in APS 120. 

Change footnotes 9, 11, 33 and 34 to refer to footnotes 6, 6, 32 and 32 respectively.

CPG 110 Internal Capital Adequacy Assessment Process and Supervisory Review 

 

APRA proposes a consequential amendment to the scope of the guidance to include private health insurance, in line with the upcoming revisions to the private health insurance capital framework coming into effect on 1 July 2023. APRA also proposes some other minor corrections to references. 

Refer to attached draft CPG 110 for proposed changes. 

 

APRA proposes to replace the stress test amount references relating to private health insurance from paragraph 34(d) of CPS 320 and paragraph 1(c) of Attachment C as this is no longer applicable after the revised private health insurance capital framework takes effect on 1 July 2023. APRA also proposes some other minor corrections to references.

Refer to attached draft CPS 320 for proposed changes. 

Important disclosure notice – publication of submissions 

 

All information in submissions will be made available to the public on the APRA website unless a respondent expressly requests that all or part of the submission is to remain in confidence. Automatically generated confidentiality statements in emails do not suffice for this purpose. Respondents who would like part of their submission to remain in confidence should provide this information marked as confidential in a separate attachment. 

Submissions may be the subject of a request for access made under the Freedom of Information Act 1982 (FOIA). APRA will determine such requests, if any, in accordance with the provisions of the FOIA. Information in the submission about any APRA-regulated entity that is not in the public domain and that is identified as confidential will be protected by section 56 of the Australian Prudential Regulation Authority Act 1998 and will therefore be exempt from production under the FOIA. 


Footnotes

 

1 APRA also releases from time to time specific FAQs to clarify technical aspects of the standards and respond to issues that can arise. The use of FAQs can, however, lead to a complex and fragmented framework over time. The new process (to directly update standards and guidance) seeks to avoid this.

Basel III: Finalising post-crisis reforms (bis.org).

2023