Regulation of the Financial Market Authority (FMA) on the

This English translation of the authentic German text serves merely information purposes. The official wording in German can be found in the Austrian Federal Law Gazette (Bundesgesetzblatt – BGBl.). 1

Regulation of the Financial Market Authority (FMA) on the Solvency of Credit Institutions

Solvency Regulation

(Solvabilitätsverordnung – SolvaV)

Federal Law Gazette II No.

374/2006 original version

as amended by

Federal Law Gazette II No

253/2007

On the basis of Article 21d para. 6, Article 21f para. 4, Article 22 para. 7, Article 22a para. 5 no. 5, Article 22a para. 7, Article 22b paras. 10 and 11, Article 22d para. 5, Article 22e paras. 5 and 6, Article 22f para. 2, Article 22g para. 9, Article 22h para. 7, Article 22j para. 2, Article 22k paras. 4 and 9, Article 22l para. 4, Article 22n para. 5, Article 22o para. 5 and Article 22p para. 5 of the Banking Act (Bankwesengesetz – BWG; Federal Law Gazette No. 532/1993 as last amended by Federal Law Gazette I No. 141/2006), the following regulation has been issued with the consent of the Federal Minister of Finance:

Table of Contents

Part 1: General Provisions Article 1. Purpose Article 2. Definitions

Part 2: Credit Risk

Chapter 1: Standardised Approach to Credit Risk

Section 1: General Provisions

Article 3. General Provisions


Section 2: Risk Weights

Article 4. Exposures to Central Governments or Central Banks Article 5. Exposures to Regional Governments, Local Authorities and Legally Recognised

Religious Communities Article 6. Exposures to Public-Sector Entities, Administrative Bodies and

Non-Commercial Undertakings Article 7. Exposures to Multilateral Development Banks Article 8. Exposures to International Organisations Article 9. Exposures to Institutions Article 10. Assignment of Weights for Exposures to Institutions Article 11. Exposures to Corporates Article 12. Retail Exposures Article 13. Exposures Secured by Real Estate Property Article 14. Residential Mortgage Loans Article 15. Commercial Mortgage Loans Article 16. Past Due Exposures Article 17. High-Risk Items Article 18. Exposures in the Form of Covered Bonds Article 19. Additional Requirements for Covered Bonds Secured by Real Estate Article 20. Weighting of Exposures in the Form of Covered Bonds Article 21. Short-Term Exposures to Credit Institutions and Corporates Article 22. Exposures in the Form of Shares in Investment Funds Article 23. Exposures in the Form of Rated Shares in Investment Funds Article 24. Average Risk Weight for Exposures in the Form of Shares in Investment Funds Article 25. Other Items Article 26. Trust Assets and Bonds from Direct Issuance Article 27. Asset Sale and Repurchase Agreements and Outright Forward Purchases Article 28. Credit Protection for a Basket of Exposures

Section 3: Use of Credit Assessments from External Credit Assessment Institutions

Article 29. Use of Credit Assessments from External Credit Assessment Institutions Article 30. General Provisions regarding Use Article 31. Use of Multiple Credit Assessments Article 32. Issuer and Issue Credit Assessments Article 33. Short-Term Credit Assessments for Exposures Article 34. Short-Term Credit Assessments for Facilities Article 35. Domestic and Foreign Currency Items

Chapter 2: Internal Ratings Based Approach

Section 1: General Provisions

Article 36. General Provisions


Section 2: Minimum Requirements

Article 37. Rating Systems Article 38. Structure of Rating Systems Article 39. Assignment of Exposures Article 40. Integrity of the Assignment Process Article 41. Use of Models Article 42. Documentation of Rating Systems Article 43. Models Obtained from Third-Party Vendors Article 44. Data Maintenance Article 45. Stress Tests Article 46. Qualification of Obligor Default Article 47. Overall Requirements for Own Estimates Article 48. Requirements regarding PD Estimates for Exposures to Central Governments

and Central Banks, Institutions and Corporates Article 49. Requirements regarding PD Estimates for Retail Exposures Article 50. Requirements for Own LGD Estimates Article 51. Requirements regarding LGD Estimates for Exposures to Central Governments

and Central Banks, Institutions and Corporates Article 52. Requirements regarding LGD Estimates for Retail Exposures Article 53. Requirements for the Estimation of Conversion Factors Article 54. Requirements regarding Conversion Factor Estimates for Exposures to Central

Governments and Central Banks, Institutions and Corporates Article 55. Requirements regarding Conversion Factor Estimates for Retail Exposures Article 56. Requirements for the Recognition of Personal Collateral in Parameter Estima-

tion Article 57. Additional Requirements for Assessing the Effect of Credit Derivatives Article 58. Requirements for Purchased Receivables Article 59. Validation of Internal Estimates Article 60. Quantitative Requirements for Internal Models for Equity Exposures Article 61. Qualitative Requirements for Internal Models for Equity Exposures Article 62. Validation and Documentation of Internal Models for Equity Exposures Article 63. Responsibility of Directors and Credit Risk Control Requirements Article 64. Duties of the Internal Audit Unit

Section 3: Calculation of Exposure Values

Article 65. Calculation of Exposure Values Article 66. Exposure Values of Equity Exposures Article 67. Exposure Values of Other Assets


Section 4: Risk Parameters PD, LGD and M

Article 68. PD Estimates for Exposures to Central Governments and Central Banks, Insti-tutions and Corporates

Article 69. LGD Estimates for Exposures to Central Governments and Central Banks, Insti-tutions and Corporates

Article 70. Residual Maturity for Exposures to Central Governments and Central Banks, Institutions and Corporates

Article 71. PD and LGD Estimates for Retail Exposures Article 72. Equity Exposures under the PD/LGD Method

Section 5: Risk-Weighted Exposure Amounts and Expected Loss Amounts

Article 73. Risk-Weighted Exposure Amounts and Expected Loss Amounts Article 74. Exposures to Central Governments and Central Banks, Institutions and Corpo-

rates Article 75. Retail Exposures Article 76. Defaulted Exposures Article 77. Equity Exposures Article 78. Other Assets Article 79. Exposures in the Form of Shares in Investment Funds Article 80. Dilution Risk Article 81. Expected Loss Amounts Article 82. Treatment of Expected Loss Amounts

Chapter 3: Credit Risk Mitigation

Section 1: Credit Protection

Article 83. Credit Protection

Subsection 1: Real Collateral and Netting

Article 84. On-Balance-Sheet Netting Article 85. Master Netting Agreements Covering Repurchase Transactions, Securities and

Commodities Lending or Borrowing Transactions and Other Capital Market-Driven Transactions

Article 86. Method-Based Eligibility of Real Collateral Article 87. Financial Collateral Article 88. Unrated Debt Securities Issued by Institutions Article 89. Investment Fund Shares Article 90. Additional Financial Collateral under the Comprehensive Method Article 91. Additional Eligibility for Calculations under the Internal Ratings Based Approach Article 92. Real Estate Collateral Article 93. Receivables Article 94. Other physical collateral Article 95. Other Types of Collateral


Subsection 2: Personal Collateral

Article 96. Protection Providers Article 97. Double Default Article 98. Credit Derivatives Article 99. Internal Hedges

Section 2: Minimum Requirements

Subsection 1: Minimum Requirements for Netting and Master Netting Agreements Article 100. Netting Article 101. Master Netting Agreements Subsection 2: Minimum Requirements for Other Physical Collateral Article 102. Financial Collateral Article 103. Real Estate Collateral Article 104. Valuation of Real Estate Collateral Article 105. Receivables Article 106. Value of Receivables Article 107. Other physical collateral Article 108. Value of Other Physical Collateral Article 109. Other Types of Collateral Article 110. Financial leasing Subsection 3: Minimum Requirements for Personal Collateral Article 111. Requirements for All Personal Collateral Article 112. Operational Requirements Article 113. Sovereign and Other Public-Sector Counter-Guarantees Article 114. Additional Requirements for Personal Collateral other than Credit Derivatives Article 115. Guarantee Schemes Eligible for the Purpose of Credit Risk Mitigation Article 116. Additional Requirements for Credit Derivatives Article 117. Mismatches Article 118. Double Default

Section 3: Effects of Credit Risk Mitigation

Subsection 1: Article 119. General Article 120. Cash, Securities and Commodities under Repurchase Transactions or Securi-

ties or Commodities Lending or Borrowing Transactions Article 121. Credit-Linked Notes Article 122. On-Balance-Sheet Netting


Subsection 2: Master Netting Agreements Article 123. Master Netting Agreements Covering Repurchase Transactions, Securities and

Commodities Lending or Borrowing Transactions, and Other Capital Market-Driven Transactions

Article 124. Net Position in Commodities and Securities Article 125. Volatility Adjustments Article 126. Volatility Adjustment for Foreign Exchange Risk Article 127. Adjusted Exposure Value Article 128. Internal Model Method Subsection 3: Other Real Collateral Article 129. Financial Collateral Article 130. Financial Collateral Simple Method Article 131. Financial Collateral Comprehensive Method Article 132. Volatility Adjustments for the Value of Financial Collateral Article 133. Scaling Up Volatility Adjustments Article 134. Supervisory Volatility Adjustments Article 135. Own Estimates of Volatility Adjustments Article 136. Quantitative Requirements for Own Volatility Adjustments Article 137. Qualitative Requirements for Own Volatility Adjustments Article 138. Application of 0% Volatility Adjustments Article 139. Weighted Exposure Amounts and Expected Loss Amounts for Financial Collat-

eral Article 140. Other Collateral Eligible for the Purpose of Credit Risk Mitigation under the

Internal Ratings Based Approach Article 141. Alternative Valuation of Real Estate Collateral Article 142. Weighted Exposure Amounts and Expected Loss Amounts for Mixed Pools of

Collateral Article 143. Deposits with Third-Party Institutions Article 144. Pledged Life Insurance Policies Article 145. Collateral pursuant to Article 95 no. 3 Subsection 4: Personal Collateral Article 146. Valuation of Personal Collateral Article 147. Personal Collateral Denominated in Different Currencies Article 148. Weighted Exposure Amounts and Expected Loss Amounts for Securitisation

Transactions Article 149. Weighted Exposure Amounts and Expected Loss Amounts under the Standard-

ised Approach to Credit Risk Article 150. Weighted Exposure Amounts and Expected Loss Amounts under the Internal

Ratings Based Approach


Subsection 5: Accounting for Maturity Mismatches Article 151. Maturity Mismatches Article 152. Maturity Mismatches in Financial Collateral Article 153. Maturity Mismatches in Personal Collateral Subsection 6: Article 154. Basket Protection Subsection 7: Article 155. Combinations of Credit Risk Mitigation in the Standardised Approach

Chapter 4: Securitisation Positions Section 1: Calculation of Risk-Weighted Exposure Amounts and Expected Loss

Amounts

Article 156. Effective Transfer of Exposures in a Traditional Securitisation Article 157. Effective Transfer of Credit Risk in a Synthetic Securitisation Article 158. Calculation of Risk-Weighted Exposure Amounts for Exposure Portfolios Secu-

ritised in a Synthetic Securitisation pursuant to Article 22d para. 2 Banking Act Article 159. Treatment of Maturity Mismatches in Synthetic Securitisations Article 160. Calculation of Risk-Weighted Exposure Amounts – General Principles Article 161. Calculation of Risk-Weighted Exposure Amounts under the Standardised Ap-

proach to Credit Risk Article 162. Treatment of Securitisation Positions in a Second Loss Tranche or Better in an

ABCP Programme under the Standardised Approach to Credit Risk Article 163. Treatment of Unrated Liquidity Facilities under the Standardised Approach to

Credit Risk Article 164. Reduction of Risk-Weighted Exposure Amounts under the Standardised Ap-

proach Article 165. Calculation of Risk-Weighted Exposure Amounts under the Internal Ratings

Based Approach Article 166. Ratings Based Method Article 167. Use of Inferred Ratings under the Internal Ratings Based Approach Article 168. Internal Assessment Approach for Positions in ABCP Programmes under the

Internal Ratings Based Approach Article 169. Supervisory Formula Method Article 170. Liquidity Facilities under the Internal Ratings Based Approach Article 171. Recognition of Credit Risk Mitigation for Securitisation Positions under the In-

ternal Ratings Based Approach Article 172. Calculation of Minimum Capital Requirements for Securitisation Positions with

Credit Risk Mitigation under the Ratings Based Method Article 173. Calculation of Minimum Capital Requirements for Securitisation Positions with

Credit Risk Mitigation under the Supervisory Formula Method


Article 174. Reduction of Risk-Weighted Exposure Amounts under the Internal Ratings-

Based Approach Article 175. Calculation of Additional Risk-Weighted Exposure Amounts for Securitisations

of Revolving Exposures with Early Amortisation Provisions under the Standard-ised Approach to Credit Risk

Article 176. Calculation of Additional Risk-Weighted Exposure Amounts for Securitisations of Revolving Exposures with Early Amortisation Provisions under the Internal Ratings Based Approach

Article 177. Securitisations subject to early amortisation provisions and consisting of retail exposures which are uncommitted and unconditionally cancellable without prior notice

Article 178. Conversion Factor for Other Securitisations Subject to Early Amortisation Pro-visions

Article 179. Highest Minimum Capital Requirement for Securitisations of Revolving Expo-sures

Section 2: Use of Credit Assessments from External Credit Assessment Institutions

Article 180. Requirements for Credit Assessments Article 181. Use of Credit Assessments

Part 3: Operational Risk

Chapter 1: Basic Indicator Approach

Article 182. Minimum Capital Requirements Article 183. Relevant Indicator Article 184. Basis of the Relevant Indicator

Chapter 2: Standardised Approach

Article 185. Minimum Capital Requirements Article 186. Business Lines Article 187. Principles for Mapping Business Lines

Chapter 3: Advanced Measurement Approach

Article 188. Advanced Measurement Approach Article 189. Quantitative Standards Article 190. Internal Data Article 191. External Data Article 192. Scenario Analysis Article 193. Business Environment and Internal Control Factors Article 194. Recognition of Insurance and Other Risk Mitigation Techniques


Part 4: Risk Types Pursuant to Article 22o para. 2 Banking Act Chapter 1: Trading Book Section 1: General

Article 195. Trading Intent Article 196. Assignment to the Trading Book Article 197. Internal Hedges

Section 2: Valuation Methods

Article 198. Marking to Market Article 199. Marking to Model Article 200. Independent Price Verification Article 201. Valuation Adjustments or Reserves Article 202. Systems and Controls

Section 3: General Provisions Regarding Position Risk

Article 203. Netting of Positions and Currency Translation Article 204. Treatment of Derivatives Article 205. Position Risk in Repurchase Transactions and Securities Lending or Borrowing

Transactions

Section 4: Special Provisions Regarding Position Risk

Article 206. General and Specific Position Risk Article 207. Specific Position Risk Associated with Interest Rate Instruments Article 208. General Position Risk Associated with Interest Rate Instruments Article 209. Specific and General Position Risk Associated with Equity Instruments Article 210. General and Specific Position Risk Associated with Stock-Index Futures Article 211. Investment Fund Shares in the Trading Book Article 212. Specific Position Risk Associated with Trading Book Positions Hedged by

Credit Derivatives Article 213. Underwriting Article 214. Settlement Risk Article 215. Free Deliveries Article 216. Counterparty Credit Risk Article 217. Expected Loss Amounts for Counterparty Credit Risk


Chapter 2: Options Risk

Article 218. General Article 219. Gamma Risk Article 220. Vega Risk Article 221. Scenario Matrix Method

Chapter 3: Commodities Risk and Foreign Exchange Risk

Article 222. Minimum Capital Requirement for Commodities Risk Article 223. Minimum Capital Requirement for Foreign Exchange Risk

Chapter 4: Market Risk Models

Article 224. General Article 225. Qualitative Standards Article 226. Market Risk Factors Article 227. Quantitative Standards Article 228. Back-Testing Methods Article 229. Methods of Determining the Multiplier Article 230. Stress-Testing Methods Article 231. Combinations of Models and Standardised Methods Article 232. Criteria for the Approval of Models Used to Calculate Minimum Capital Re-

quirements for Specific Position Risk and Incremental Default Risk

Part 5: Counterparty Credit Risk of Derivative Instruments, Repurchase Transactions, Securities or Commodities Lending or Borrowing Transactions, Long Settlement Transactions and Margin Lending Transactions

Chapter 1: Specification of Application

Article 233. Specification of Application

Chapter 2: Mark-to-Market Method

Article 234. Mark-to-Market Method

Chapter 3: Original Exposure Method

Article 235. Original Exposure Method


Chapter 4: Standardised Method

Article 236. Standardised Method Article 237. Payment Leg Article 238. Assignment to Risk Positions Article 239. Size of Risk Position Article 240. Hedging Set Article 241. Counterparty credit risk multiplier (CCRM) Article 242. Exposure Value Article 243. Internal Procedures

Chapter 5: Internal Model Method

Article 244. Internal Model Method Article 245. Exposure Value Article 246. Own Estimates of the Scaling Factor Article 247. Correlation of Market and Credit Risk Factors Article 248. Netting Sets with Margin Agreements Article 249. Organisational Unit for Counterparty Credit Risk Management Article 250. Counterparty Credit Risk Management Article 251. Stress Tests Article 252. Internal Auditing Article 253. Integration of the Model into the Risk Management System Article 254. Integrity of the Model Article 255. Model Validation

Chapter 6: Contractual Netting

Article 256. Contractual Netting Article 257. Types of Netting Agreements and Conditions for Application Article 258. Recognition of Netting Agreements Article 259. Netting Agreements: Potential Future Credit Exposure Article 260. Netting Agreements: Net-to-Gross Ratio Article 261. Netting Agreements under the Standardised Method and Internal Models

Part 6: Transitional and Final Provisions Article 262. Transitional Provisions Article 263. References Article 264. Repeals Article 265. Entry into Effect


Part 1: General Provisions

Purpose

Article 1. This regulation serves to transpose Directive 2006/48/EC of the European Par-liament and of the Council relating to the taking up and pursuit of the business of credit institu-tions (OJ No. L 177 of 30 June 2006, p. 1) and Directive 2006/49/EC of the European Parlia-ment and of the Council on the capital adequacy of investment firms and credit institutions (OJ No. L 177 of 14 June 2006, p. 201) into Austrian law where those directives have not already been implemented in the Banking Act, Federal Law Gazette No. 532/1993 as last amended by Federal Law Gazette I No. 141/2006 or in other FMA regulations. This regulation governs the calculation of minimum capital requirements for credit institutions pursuant to Article 22 para. 1 Banking Act.

Definitions

Article 2. (1) For the purposes of this regulation, the terms listed below are defined as fol-lows: 1. Central counterparty: an entity that legally interposes itself between counterparties to

contracts traded within one or more financial markets, becoming the buyer to every seller and the seller to every buyer;

2. Long settlement transactions: transactions where a counterparty undertakes to deliver a security, a commodity, or a foreign exchange amount against cash, other financial in-struments, or commodities at a settlement or delivery date that is contractually specified as later than five business days after the date on which the credit institution enters into the transaction.

(2) For the purposes of Articles 156 to 179 (Securitisation positions), the terms listed below are defined as follows: 1. Kirb: 8% of the risk-weighted exposure amounts that would be calculated under the

Internal Ratings Based Approach in respect of the securitised exposures had they not been securitised, plus the amount of expected losses associated with those exposures calculated under those provisions;

2. Clean-up call option: a contractual option for the originator to repurchase or extinguish the securitisation positions before all of the underlying exposures have been repaid, when the amount of outstanding exposures falls below a specified level;

3. Excess spread: finance charge collections and other fee income received in respect of the securitised exposures net of costs and expenses;

4. Liquidity facility: a securitisation position arising from a contractual agreement to provide funding to ensure the timeliness of cash flows to investors;

5. Asset-backed commercial paper programme (ABCP program): a programme of securiti-sations in which the securities issued predominantly take the form of commercial paper with an original maturity of one year or less.


For the purposes of Articles 233 to 261 (Counterparty Credit Risk for Derivatives, Repur-chase Transactions, Securities or Commodities Lending Transactions, Long Settlement Trans-actions and Margin Lending Transactions), the terms listed below are defined as follows: 1. Derivatives: derivatives pursuant to Annex 2 to Article 22 Banking Act and, for credit

institutions which invoke Article 22q Banking Act, all over-the-counter (OTC) instruments in the trading book;

2. Netting set: a group of transactions with a single counterparty that are subject to a le-gally enforceable bilateral netting arrangement and for which netting is recognised under Articles 256 to 261 and Articles 22g to 22h Banking Act.

Part 2: Credit Risk

Chapter 1

Standardised Approach to Credit Risk

Section 1

General Provisions Article 3. In calculating their minimum capital requirements, credit institutions which apply

the Standardised Approach to Credit Risk pursuant to Article 22a Banking Act must adhere to the provisions set forth in this chapter with regard to 1. risk weights and the criteria for their assignment to exposure classes pursuant to Arti-

cle 22a para. 4 Banking Act and 2. the use of credit assessments from eligible external credit assessment institutions or

export credit agencies to calculate weights. .

Section 2

Risk Weights

Exposures to Central Governments or Central Banks

Article 4. (1) Exposures to central governments and central banks pursuant to Article 22a para. 4 no. 1 Banking Act are to be assigned a risk weight of 100%.

(2) Exposures pursuant to Article 22a para. 4 no. 1 Banking Act for which a credit assess-ment from an eligible external credit assessment institution is available are to be assigned risk weights according to the table below. Credit assessments are to be assigned to credit quality steps in accordance with Article 21b para. 6 Banking Act.


Credit quality step

1 2 3 4 5 6

Risk weight 0% 20% 50% 100% 100% 150%

(3) Exposures to the European Central Bank are to be assigned a risk weight of 0%.

(4) Exposures to 1. the Austrian federal government, the Oesterreichische Nationalbank or 2. Member States' central governments and central banks are to be assigned a risk weight of 0% in cases where the exposures are denominated and funded in the national currency of the respective Member State or central bank.

(5) When the competent authorities of a third country which apply supervisory and regula-tory arrangements at least equivalent to those applied in the Community assign a risk weight which is lower than that indicated in para. 1 and 2 to exposures to their central government and central bank denominated and funded in the national currency, credit institutions may weight such exposures in the same manner.

(6) Exposures pursuant to Article 22a para. 4 no. 1 Banking Act for which a credit assess-ment from an export credit agency is recognised pursuant to Article 22a para. 12 Banking Act are to be assigned risk weights according to the table below on the basis of the minimum export insurance premium (MEIP) assigned to the credit assessment. MEIP 0 1 2 3 4 5 6 7 Risk weight 0% 0% 20% 50% 100% 100% 100% 150%

Exposures to Regional Governments, Local Authorities and Legally Recognised Religious Communities

Article 5. (1) Exposures to regional governments and local authorities pursuant to Arti-cle 22a para. 4 no. 2 Banking Act are to be assigned the same risk weight as exposures to insti-tutions.

(2) Exposures to Austrian provincial governments and municipal authorities are to be as-signed the same risk weight as exposures to the Austrian federal government.

(3) Exposures to regional governments and local authorities in other Member States are to be assigned the same risk weight as exposures to the corresponding central governments in cases where 1. the credit risk of exposures to the regional government or local authority is lower than or

equal to that of the central government; 2. the regional government or local authority possesses specific revenue-raising powers;

and 3. specific arrangements have been made in order to reduce their risk of default.


(4) When the competent authorities of a third country jurisdiction which apply supervisory and regulatory arrangements at least equivalent to those applied in the Community treat expo-sures to regional governments and local authorities as exposures to their central government, credit institutions may weight exposures to such regional governments and local authorities in the same manner.

(5) Exposures to legally recognised religious communities are to be treated in the same manner as exposures to regional governments and local authorities. Paras. 2 and 3 are not applicable in this context.

Exposures to Public-Sector Entities, Administrative Bodies and Non-Commercial Undertakings

Article 6. (1) Exposures to public-sector entities, administrative bodies and non-commercial undertakings are to be assigned a risk weight of 100%.

(2) Exposures to public-sector entities and non-commercial undertakings pursuant to Arti-cle 22a para. 4 no. 3 Banking Act which are established in Austria are to be treated in the same manner as exposures to institutions; Article 10 para. 4 is not applicable in this context.

(3) Exposures to public-sector entities established in Austria may be assigned a risk weight of 0% in cases where the Austrian federal government has provided an appropriate guarantee for the exposure.

(4) In cases where exposures to public-sector entities established in other Member States are treated in the same manner as exposures to institutions or to the corresponding central government with the permission of the competent authority, credit institutions may treat expo-sures to those public-sector entities in the same manner.

(5) When the competent authorities of a third country jurisdiction treat exposures to the third country's public-sector entities as exposures to institutions, credit institutions may treat expo-sures to such public sector entities in the same manner if that third country applies supervisory and regulatory arrangements at least equivalent to those applied in the Community.

Exposures to Multilateral Development Banks

Article 7. (1) Exposures to multilateral development banks pursuant to Article 22a para. 4 no. 4 Banking Act, as well as exposures to the Inter-American Investment Corporation, the Black Sea Trade and Development Bank and the Central American Bank for Economic Integra-tion, for which a credit assessment from an eligible external credit assessment institution is available are to be assigned risk weights according to the table below. Credit assessments are to be assigned to credit quality steps in accordance with Article 21b para. 6 Banking Act.

Credit quality step

1 2 3 4 5 6

Risk weight 20% 50% 50% 100% 100% 150%


(2) In cases where a credit assessment from an eligible external credit assessment institu-tion is not available for an exposure pursuant to para. 1, the exposure is to be assigned a risk weight of 50%.

(3) Exposures to the following multilateral development banks are to be assigned a risk weight of 0%: 1. the International Bank for Reconstruction and Development; 2. the International Finance Corporation; 3. the Inter-American Development Bank; 4. the Asian Development Bank; 5. the African Development Bank; 6. the Council of Europe Development Bank; 7. the Nordic Investment Bank; 8. the Caribbean Development Bank; 9. the European Bank for Reconstruction and Development; 10. the European Investment Bank; 11. the European Investment Fund, with a risk weight of 20% to be assigned to the unpaid

capital of the European Investment Fund; 12. the Multilateral Investment Guarantee Agency; 13. the International Finance Facility for Immunisation; 14. the Islamic Development Bank.

Exposures to International Organisations

Article 8. Exposures to international organisations pursuant to Article 22a para. 5 no. 1 Banking Act are to be assigned a risk weight of 0%.

Exposures to Institutions

Article 9. Exposures to institutions pursuant to Article 22a para. 4 no. 6 Banking Act are to be assigned a risk weight pursuant to Article 10 on the basis of the credit quality step assigned to the institution's country of incorporation.

(2) Exposures to financial institutions pursuant to Article 4 (5) of Directive 2006/48/EC which are established in another Member State or a third country are to be risk weighted in the same manner as exposures to institutions if those financial institutions 1. are authorised and supervised by the competent authorities responsible for the authori-

sation and supervision of credit institutions, and 2. subject to prudential requirements equivalent to those applied to credit institutions.

(3) Exposures to an unrated institution are not to be assigned a risk weight lower than that applied to exposures to its central government.


Assignment of Weights for Exposures to Institutions

Article 10. (1) Exposures to institutions are to be assigned a risk weight according to the credit quality step assigned to the central government of the jurisdiction in which the institution is incorporated in accordance with the table below. Credit quality step to which central government is assigned

1 2 3 4 5 6

Risk weight 20% 50% 100% 100% 100% 150%

(2) Exposures to institutions incorporated in countries where the central government is un-rated are to be assigned a risk weight of 100%.

(3) Exposures to institutions with an original maturity of three months or less are to be as-signed a risk weight of 20%.

(4) Exposures to institutions with a residual maturity of three months or less denominated and funded in the national currency are to be assigned a risk weight that is one credit quality step below the more favourable weight applicable to exposures to the respective central gov-ernment pursuant to Article 4 paras. 4 and 5.

(5) Investments in equity or regulatory capital instruments issued by institutions are to be risk weighted at 100% unless they are deducted from own funds pursuant to Article 23 para. 13 Banking Act.

(6) Exposures to institutions in the form of minimum reserves required by the ECB or by the Oesterreichische Nationalbank to be held by the credit institution may be assigned the risk weight applied to exposures to the Austrian federal government, provided that 1. the reserves are held in accordance with Regulation (EC) No. 1745/2003 of the Euro-

pean Central Bank of 12 September 2003 or a subsequent replacement regulation, or in accordance with national requirements in all material respects equivalent to that Regula-tion; and

2. in the event of the insolvency of the institution where the reserves are held, the reserves are fully repaid to the credit institution in a timely manner and are not made available to meet other liabilities of the institution.

(7) The liquidity reserve held in accordance with Article 25 para. 13 Banking Act is to be as-signed a risk weight of 0%.

Exposures to Corporates

Article 11. (1) Exposures to corporates pursuant to Article 22a para. 4 no. 7 Banking Act for which a credit assessment from an eligible external credit assessment institution is available are to be assigned risk weights according to the table below. Credit assessments are to be as-signed to credit quality steps in accordance with Article 21b para. 6 Banking Act.


Credit quality step

1 2 3 4 5 6

Risk weight

20% 50% 100% 100% 150% 150%

(2) Exposures to corporates for which a credit assessment pursuant to para. 1 is not avail-able are to be assigned a risk weight of 100%. In cases where the risk weight assigned to the central government within the territory of which the undertaking is incorporated is higher than 100% the higher risk weight is to be applied.

Retail Exposures

Article 12. Retail exposures pursuant to Article 22a para. 4 no. 8 Banking Act are to be as-signed a risk weight of 75%.

Exposures Secured by Real Estate Property

Article 13. Exposures or parts of exposures pursuant to Article 22a para. 4 no. 9 Banking Act which are fully secured by real estate property are to be assigned a risk weight of 100%.

Residential Mortgage Loans

Article 14. (1) Exposures and parts of exposures which are fully secured by mortgages on residential property which is or will be occupied or let by the owner are to be assigned a risk weight of 35%, provided that 1. the value of the property does not materially depend on the credit quality of the obligor;

this requirement does not preclude situations where purely macro-economic factors af-fect both the value of the property and the performance of the borrower;

2. the risk of the borrower does not materially depend upon the performance of the under-lying property or project, but rather on the underlying capacity of the borrower to repay the debt from other sources; as such, repayment does not materially depend on any cash flow generated by the underlying property serving as collateral;

3. the minimum requirements pursuant to Article 103 are fulfilled and the valuation rules pursuant to Article 104 are observed; and

4. the value of the property exceeds the exposure value by a substantial margin.

(2) Subject to the requirements set forth in para. 1 nos. 1 to 4, the risk weight pursuant to para. 1 must also be assigned to exposures arising from real estate leasing transactions which involve residential properties and in which the lessor retains ownership of those properties throughout the entire term of the lease agreement.

(3) For the purposes of para. 1, the requirement pursuant to para. 1 no. 2 need not be ful-filled in the case of exposures secured by mortgages on residential property located in Austria and in the case of exposures arising from real estate leasing transactions which involve residen-tial properties located in Austria.


(4) Exposures which are fully secured by mortgages on residential properties located within the territory of another Member State as well as exposures arising from real estate leasing transactions which involve residential properties located in another Member State may be as-signed a risk weight of 35% where the requirement pursuant to para. 1 no. 2 is not fulfilled if the competent authorities in the Member State in question waive that requirement.

Commercial Mortgage Loans

Article 15. (1) In the case of exposures or parts of exposures which are fully secured by mortgages on offices or other commercial premises (commercial real estate property) located in Austria, that part of the exposure which does not exceed 50% of the property's market value or 60% of the property's mortgage lending value, whichever is lower, may be assigned a risk weight of 50%, provided the requirements pursuant to Article 14 para. 1 nos. 1 and 3 are ful-filled. The portion of the exposure which exceeds the limit is to be assigned a risk weight of 100%.

(2) Where the requirements pursuant to Article 14 para. 1 nos. 1 and 3 are fulfilled and the credit institution's exposure is fully secured by its ownership of the property, the weight pursuant to para. 1 is to be applied to exposures arising from real estate leasing transactions which in-volve commercial real estate properties located in Austria and in which the credit institution act-ing as lessor retains ownership of those properties throughout the entire term of the lease agreement.

(3) Exposures pursuant to para. 1 which are fully secured by mortgages on commercial real estate property in another Member State and exposures pursuant to para. 2 which involve commercial real estate property in another Member State may be assigned a risk weight of 50% if and to the extent that such treatment is permitted in the Member State in question.

(4) Exposures which are fully secured by mortgages on commercial real estate properties located within the territory of another Member State as well as exposures arising from real es-tate leasing transactions which involve commercial real estate properties located in another Member State may be assigned a risk weight of 50% where the requirement pursuant to Arti-cle 14 para. 1 no. 2 is not fulfilled if the competent authorities in the Member State in question waive that requirement.

Past Due Exposures

Article 16. (1) The secured part of a material past due exposure pursuant to Article 22a para. 4 no. 10 Banking Act is to be assigned a risk weight of: 1. 100% in cases where value adjustments are no less than 20% of the unsecured part of

the exposure gross of value adjustments, or where the exposure is fully secured by col-lateral pursuant to Article 22h para. 1 Banking Act, the specific minimum requirements pursuant to Articles 100 to 118 are not fulfilled, the credit institution has ensured the good quality of the collateral using strict operational criteria and value adjustments amount to 15% of the exposure gross of value adjustments;

2. 150% in all other cases.


(2) An obligation is considered material in accordance with Article 22b para. 4 no. 10 Bank-ing Act when, on the basis of the total items due and the credit facility/limit, the customer's total past due instalments including unpaid charges and interest as well as overruns of overdraft limits are greater than 2.5% of the total of all overdraft limits advised to the customer (adjusted for exchange rate fluctuations) and exceed an amount of EUR 250.

(3) For the purpose of defining the secured part of the past due item, the same collateral as that eligible for credit risk mitigation purposes may be used.

(4) In the case of past due exposures secured by residential real estate properties, those exposures which are weighted at 35% must be assigned a risk weight of 50% if value adjust-ments are no less than 20% of the exposure gross of value adjustments; otherwise, they are to be assigned a risk weight of 100% of the exposure net of value adjustments. Past due expo-sures secured by commercial real estate property are to be assigned a risk weight of 100%.

High-Risk Items

Article 17. (1) High-risk exposures pursuant to Article 22a para. 5 no. 4 Banking Act and exposures in the form of high-risk investment fund shares are to be assigned a risk weight of 150%.

(2) Non past due items which are assigned a risk weight of 150% pursuant to Articles 4 to 28 and para. 1 and for which value adjustments have been established may be assigned a risk weight of: 1. 100% if value adjustments are no less than 20% of the exposure value gross of value

adjustments; and 2. 50% if value adjustments are no less than 50% of the exposure value gross of value

adjustments.

Exposures in the Form of Covered Bonds

Article 18. (1) Covered bonds mean bonds as defined in Article 20 para. 3 no. 7 Invest-ment Fund Act 1993 (Investmentfondsgesetz – InvFG 1993) and collateralised by any of the following assets: 1. Exposures to or guaranteed by a) the Austrian federal government or the central governments of Member States; b) Austrian provincial governments, municipal authorities or public-sector entities, and

regional governments, local authorities or public-sector entities in other Member States;

c) the central governments and central banks of third countries, multilateral development banks or international organisations that qualify for credit quality step 1 in the Stan-dardised Approach to Credit Risk or at least credit quality step 2 in the Standardised Approach to Credit Risk provided that the exposures do not exceed 20% of the nomi-nal amount of outstanding covered bonds of the issuing institution; or


d) Regional governments or local authorities in third countries or other public-sector

entities which are risk weighted as exposures to institutions or central governments and central banks pursuant to Article 5 para. 4 or Article 6 para. 5, and qualify for credit quality step 1 or at least credit quality step 2 in the Standardised Approach to Credit Risk provided that the exposures do not exceed 20% of the nominal amount of outstanding covered bonds of the issuing institution.

2. Exposures to institutions which qualify for credit quality step 1 in the Standardised Ap-proach to Credit Risk where the total exposure does not exceed 15% of the nominal amount of outstanding covered bonds of the issuing institution; this limit does not apply to exposures caused by the transmission and management of payments of the obligors of, or liquidation proceeds in respect of, loans secured by real estate to the holders of covered bonds;

3. short-term exposures to institutions with a maturity not exceeding 100 days which qual-ify as a minimum for credit quality step 2 in the Standardised Approach to Credit Risk;

4. mortgages on residential real estate up to 80% of the value of the pledged properties or the principal amount of the liens combined with any prior liens, whichever value is lower;

5. mortgages on commercial real estate up to 60% of the value of the pledged properties or the principal amount of the liens combined with any prior liens, whichever value is lower;

6. liens on ships where the total amount of such liens combined with any senior liens does not exceed 60% of the value of the pledged ships.

(2) For the purposes of para. 1, collateralisation includes situations where the assets de-scribed in para. 1 nos. 1 to 6 are exclusively dedicated in law to the protection of the bondhold-ers against losses.

Additional Requirements for Covered Bonds Secured by Real Estate

Article 19. Where covered bonds are collateralised by real estate, credit institutions must meet the minimum requirements set forth in Article 103 and observe the valuation rules set forth in Article 104.

Weighting of Exposures in the Form of Covered Bonds

Article 20. Covered bonds are to be assigned a risk weight on the basis of the risk weight applicable to senior unsecured exposures to the credit institution which issues them. These weights are to be assigned in accordance with the table below.

Risk weight assigned to exposures to institution

20% 50% 100% 150%

Risk weight assigned to covered bonds

10% 20% 50% 100%


Short-Term Exposures to Credit Institutions and Corporates

Article 21. Short-term exposures to credit institutions for the central governments of which an appropriate credit assessment from an eligible external credit assessment institution is avail-able and to corporates pursuant to Article 22a para. 4 no. 14 Banking Act for which an appropri-ate credit assessment from an eligible external credit assessment institution is available are to be assigned risk weights according to the table below. Credit assessments are to be assigned to credit quality steps in accordance with Article 21b para. 6 Banking Act.

Credit quality step

1 2 3 4 5 6

Risk weight 20% 50% 100% 150% 150% 150%

Exposures in the Form of Shares in Investment Funds

Article 22. Exposures in the form of shares in investment funds pursuant to Article 22a para. 4 no. 15 Banking Act are to be assigned a risk weight of 100%.

Exposures in the Form of Rated Shares in Investment Funds

Article 23. Exposures in the form of shares in investment funds for which a credit assess-ment from an eligible external credit assessment institution is available are to be assigned risk weights according to the table below. Credit assessments are to be assigned to credit quality steps in accordance with Article 21b para. 6 Banking Act.

Credit quality step

1 2 3 4 5 6

Risk weight

20% 50% 100% 100% 150% 150%

Average Risk Weight for Exposures in the Form of Shares in Investment Funds

Article 24. (1) In cases where the requirements set forth in para. 2, credit institutions may look through to the underlying exposures of an investment fund in order to calculate an average risk weight for the fund in accordance with the provisions of this chapter if the credit institution is aware of all of the investment fund's underlying exposures or the following assumptions are made in the calculation of the risk weight: 1. An investment fund invests, to the maximum extent allowed under its mandate, in the

exposure classes attracting the highest minimum capital requirement, and 2. then continues making investments in descending order until the maximum total invest-

ment limit is reached.

(2) The requirements for the application of para. 1 are as follows:


1. The investment fund is managed by a credit institution pursuant to Article 1 para. 1

no. 13 or a company which is subject to supervision in a Member State, or the invest-ment fund is managed by a company incorporated in a third country and subject to gov-ernment supervision which is considered equivalent to that laid down in Community law and cooperation between the competent authorities is sufficiently ensured;

2. The investment fund's prospectus or equivalent document includes information on: a) the categories of assets in which the investment fund is authorised to invest; and b) if investment limits apply, the relative limits and the methodologies to calculate them;

and 3. the business of the investment fund is reported on at least an annual basis to enable an

assessment to be made of its assets and liabilities, income and operations over the re-porting period.

Other Items

Article 25. (1) Credit institutions are to assign the following risk weights to other items pur-suant to Article 22a para. 4 no. 16 Banking Act: 1. 0% for: a) cash in hand denominated in euro and in freely convertible foreign currencies, coined

precious metals insofar as they are Austrian or foreign legal tender; and b) Gold bullion held by the credit institution itself or on an allocated basis to the extent

backed by bullion liabilities; c) Asset items to be deducted from own funds; 2. 20% for cash items in the process of collection; and 3. 100% for: a) Tangible assets and b) Prepayments and accrued income for which an institution is unable to determine the

counterparty.

(2) Holdings of equity and other participations are to be assigned a risk weight of at least 100% except where they are deducted from own funds or come under Article 17 para. 1.

Trust Assets and Bonds from Direct Issuance

Article 26. Trust assets where the credit institution only bears the management risk and bonds from direct issuance are to be assigned a risk weight of 0%.

Asset Sale and Repurchase Agreements and Outright Forward Purchases

Article 27. In the case of asset sale and repurchase agreements and outright forward pur-chases, the risk weight assigned to the assets in question is to be applied.


Credit Protection for a Basket of Exposures

Article 28. (1) Where a credit institution provides credit protection for a basket of exposures under such terms that the nth default among the exposures triggers payment and this credit event terminates the contract, the risk weights pursuant to Articles 22c to 22f Banking Act for securitisation positions are to be assigned if the collateral has an external credit assessment from an eligible external credit assessment institution.

(2) In cases where a credit assessment from an eligible external credit assessment institu-tion is not available for the collateral, the weighted exposure amount is to be calculated as fol-lows: 1. The risk weights of the exposures in the basket are to be aggregated, excluding n-1

exposures, up to a maximum of 1250% and multiplied by the nominal amount of the pro-tection provided by the derivative; and

2. The n-1 exposures to be excluded from the aggregation are to be determined on the basis that each of those exposures produces a lower risk-weighted exposure amount than the risk-weighted exposure amount of any of the exposures included in the aggre-gation.

Section 3

Use of Ratings from External Credit Assessment Institutions Article 29. Credit institutions which use credit assessments from one or more eligible ex-

ternal credit assessment institutions for the purpose of calculating risk weights under the Stan-dardised Approach to Credit Risk must adhere to the provisions of this section when using such credit assessments.

General Provisions regarding Use

Article 30. (1) In cases where credit assessments published by an eligible external credit assessment institution are used, they must be applied in a continuous and consistent way over time.

(2) In cases where credit assessments produced by an eligible external credit assessment institution for a certain exposure class are used, they must be applied consistently to all expo-sures belonging to that exposure class.

(3) Credit institutions may only use credit assessments from an eligible external credit as-sessment institution that take into account all amounts both in principal and in interest owed to it.


Use of Multiple Credit Assessments

Article 31. (1) Where a credit institution pursuant to Article 30 uses credit assessments from an eligible external credit assessment institution and only one credit assessment is avail-able from an eligible external credit assessment institution for an exposure, that assessment is to be used to determine the risk weight to be applied to the exposure.

(2) In cases where two credit assessments from eligible external credit assessment institu-tions are available and the two correspond to different risk weights for an item, the higher risk weight is to be assigned to the exposure.

(3) In cases where more than two credit assessments from eligible external credit assess-ment institutions are available for an item, the two assessments generating the lowest risk weights are to be used. In this context, the following applies: 1. If the two lowest risk weights are different, the higher risk weight is to be assigned; and 2. If the two lowest risk weights are the same, that risk weight is to be assigned.

Issuer and Issue Credit Assessments

Article 32. (1) In cases where a credit assessment exists for a specific issuing program or facility to which the exposure to be weighted belongs, this credit assessment is to be used to determine the risk weight to be assigned to that exposure.

(2) Where no directly applicable credit assessment pursuant to para. 1 exists for a certain exposure, but a credit assessment exists for a specific issuing program or facility to which the exposure does not belong or a general credit assessment exists for the issuer, then that credit assessment is to be used if it produces 1. a higher risk weight than would otherwise be the case or 2. a lower risk weight and the exposure in question ranks pari passu or senior to the spe-

cific issuing program or facility or to senior unsecured exposures of that issuer.

(3) The application of the provisions regarding exposures in the form of covered bonds pur-suant to Articles 18 to 20 is to remain unaffected by the provisions above.

(4) Credit assessments for issuers within a corporate group cannot be used as credit as-sessments of other issuers within the same corporate group.

Short-Term Credit Assessments for Exposures

Article 33. (1) Short-term credit assessments may only be used for short-term asset items and off-balance sheet transactions constituting exposures to institutions and corporates.

(2) Short-term credit assessments may only be used for the specific items to which the short-term credit assessments refer. They must not be used to derive risk weights for other ex-posures.


Short-Term Credit Assessments for Facilities

Article 34. (1) Notwithstanding Article 33, if a facility for which a short-term credit assess-ment exists is assigned a 150% risk weight, then all unrated, unsecured exposures to that obli-gor – whether short-term or long-term – must also be assigned that risk weight.

(2) Notwithstanding Article 33, if a facility for which a short-term credit assessment exists is assigned a 50% risk weight, then all unrated short-term exposures to that obligor are to be as-signed a risk weight of at least 100%.

Domestic and Foreign Currency Items

Article 35. A credit assessment that refers to an item denominated in the obligor's domes-tic currency cannot be used to derive a risk weight for another exposure to that same obligor that is denominated in a foreign currency.

Chapter 2

Internal Ratings Based Approach

Section 1

General Provisions

Article 36. In calculating weighted exposure amounts and expected loss amounts for expo-sure classes pursuant to Article 22b para. 2 Banking Act and for dilution risk in the case of pur-chased receivables, credit institutions which apply the Internal Ratings Based Approach must fulfil the minimum requirements set forth in this chapter and observe the rules for calculating exposure values and expected loss amounts as well as the risk parameters probability of de-fault, loss given default and effective maturity.

Section 2

Minimum Requirements

Rating Systems

Article 37. The systems used by the credit institution to control and assess credit risk must be sound, ensure system integrity and in any case fulfil the following requirements: 1. The rating systems used ensure a meaningful assessment of obligor and transaction

characteristics, a meaningful differentiation of risk, and accurate and consistent quanti-tative estimates of risk;

2. The internal ratings and own estimates of risk parameters which are applied play an essential role in the credit risk management and decision-making process as well as the credit approval process, the internal capital adequacy assessment process pursuant to Article 39a Banking Act and the risk management system pursuant to Article 39 Banking Act;


3. All data required for reliable credit risk measurement and credit risk management are

collected and stored; and 4. the rating systems and their structure are documented and validated.

Structure of Rating Systems

Article 38. (1) A rating system comprises all of the methods, processes, controls, data col-lection and IT systems that support the assessment of credit risk, the assignment of exposures to grades or pools (rating), and the quantification of default and loss estimates for certain types of exposure. In using rating systems, credit institutions must fulfil the following requirements: 1. In cases where a credit institution uses multiple rating systems, the rationale for assign-

ing an obligor or a transaction to a rating system must be documented and applied in a manner that appropriately reflects the level of risk associated with each obligor or trans-action; and

2. Assignment criteria and processes must be reviewed periodically to determine whether they remain appropriate for the current portfolio and current external conditions.

(2) Credit institutions which use direct estimates of risk parameters may regard those esti-mates as grades on a continuous rating scale.

(3) A rating system for exposures pursuant to Article 22b para. 2 nos. 1 to 3 Banking Act must fulfil the following additional requirements: 1. The rating system must take into account the risk characteristics of the obligor as well

as the transaction; 2. The rating system must have an obligor rating scale which exclusively reflects the quan-

tification of the risk of obligor default; an obligor grade is a classification within the rating system's obligor rating scale on the basis of a specified and distinct set of rating criteria from which estimates of PD are derived. The obligor rating scale must fulfil the following requirements:

a) The obligor rating scale must have a minimum of seven grades for non-defaulted obligors and one for defaulted obligors;

b) The relationship between obligor grades must be documented in terms of the level of default risk each grade implies and the criteria used to distinguish that level of default risk.

c) Where a credit institution's portfolios are concentrated in a particular market segment and range of default risk, then the credit institution must have enough obligor grades within that range to avoid undue concentrations of obligors in a particular grade; sig-nificant concentrations within a single obligor grade must be supported by empirical evidence that the obligor grade covers a reasonably narrow PD band and that the de-fault risk posed by all obligors in the grade falls within that band; and

3. Where own LGD estimates are used, the rating system must have a facility rating scale which exclusively reflects LGD-related transaction characteristics; a facility grade is a classification within the rating system's facility scale on the basis of a specified and dis-tinct set of rating criteria from which own estimates of LGD are derived. Facility grades must fulfil the following requirements:


a) Individual facility grades are defined; the grade definition must include both a descrip-

tion of how exposures are assigned to the grade and a description of the criteria used to distinguish the level of risk across grades.

b) Significant concentrations within a single facility grade must be supported by empiri-cal evidence that the facility grade covers a reasonably narrow LGD band and that the risk posed by all exposures in the grade falls within that band.

(4) In the calculation of weighted exposure amounts for specialised lending exposures pur-suant to Article 74 para. 3, para. 3 above is applicable with the limitation that the obligor rating scale need not exclusively reflect the quantification of the risk of obligor default for these expo-sures, and at least four grades for non-defaulted obligors and at least one class for defaulted obligors must be defined.

(5) A rating system for exposures pursuant to Article 22b para. 2 no. 4 Banking Act must fulfil the following additional requirements: 1. The rating system must reflect both obligor and transaction risk, and capture all relevant

obligor and transaction characteristics; 2. The level of risk differentiation must ensure that the number of exposures in a given

grade or pool is sufficient to enable meaningful quantification and validation of the loss characteristics at the grade or pool level; excessive concentrations of exposures and ob-ligors in the grades or pools must be avoided;

3. The process of assigning exposures to grades or pools provides for a meaningful differ-entiation of risk, provides for a grouping of sufficiently homogenous exposures, and en-ables accurate and consistent estimation of loss characteristics at the grade or pool level; in the case of purchased receivables, the grouping must reflect the seller's under-writing practices and the heterogeneity of its customers; and

4. The following risk drivers must be taken into account in the assignment of exposures to grades or pools:

a) Obligor risk characteristics; b) Transaction risk characteristics, including product and collateral types; c) Delinquency if it is a material risk river for the exposure in question.

Assignment of Exposures

Article 39. (1) Credit institutions must have specific definitions, processes and criteria for assigning exposures to grades or pools within a rating system in order to ensure that 1. the grades or pools are sufficiently detailed to allow the persons charged with assigning

ratings to assign obligors or facilities posing similar risk to the same grade or pool in a consistent manner across lines of business, departments and locations;

2. the rating process is documented in a transparent manner so that third parties can un-derstand the assignment of exposures and evaluate its appropriateness; and

3. the criteria used are consistent with the credit institution's internal lending standards and policies for handling troubled obligors and facilities.


(2) Credit institutions must take all relevant information into account in assigning obligors and facilities to grades or pools. This information must be current and must enable the credit institution to forecast the future performance of the exposure. The less information a credit insti-tution has, the more conservative it must be in its assignments of exposures to obligor or facility grades and pools. In cases where a credit institution uses an external rating as a primary factor determining an internal rating assignment, the credit institution must ensure that it considers other relevant information.

(3) In assigning exposures pursuant to Article 22b para. 2 nos. 1 to 3 Banking Act, credit in-stitutions must also 1. assign each obligor to an obligor grade in the credit approval process; 2. assign each exposure to a facility grade where own estimates of LGD and conversion

factors are used; 3. assign each exposure to a grade pursuant to Article 38 para. 4 in the case of specialised

lending exposures for which the weighted exposure amount is calculated in accordance with Article 74 para. 3;

4. separately rate each legal entity to which the credit institution is exposed, and have ac-ceptable policies regarding the treatment of individual obligors and groups of connected clients; and

5. assign all exposures to the same obligor to the same obligor grade; exceptional cases where separate exposures are allowed to result in multiple grades for the same obligor are:

a) the existence of country transfer risk, depending on whether the exposures are de-nominated in local or foreign currency;

b) cases where personal collateral is reflected in an adjusted borrower grade; c) cases in which consumer protection, banking secrecy, data protection or other legisla-

tion prohibits the exchange of client data; and d) specialised lending for individual transactions.

(4) In the credit approval process, credit institutions must assign each exposure pursuant to Article 22b para. 2 no. 4 Banking Act to a grade or pool.

(5) For overrides of grade or pool assignments, credit institutions must document the situa-tions in which human judgement may override the inputs or outputs of the assignment process and the personnel responsible for approving these overrides. Credit institutions must document these overrides and the personnel responsible. Credit institutions must analyse and assess the performance of exposures whose rating has been overridden, accounting for all responsible personnel.


Integrity of the Assignment Process

Article 40. (1) For exposures pursuant to Article 22b para. 2 nos. 1 to 3 Banking Act, credit institutions must fulfil the following requirements: 1. An independent unit within the credit institution that does not benefit directly from deci-

sions to extend credit must carry out or approve assignments of exposures to grades and periodic reviews of assignments;

2. Assignments must be updated at least on an annual basis; high-risk obligors and prob-lem exposures must be subject to more frequent review, and assignments are to be up-dated as soon as material information on obligor or exposure becomes available; and

3. The credit institution must have an effective process to obtain and regularly update rele-vant information on obligor characteristics that affect PDs and on transaction character-istics that affect LGDs and conversion factors.

(2) For exposures pursuant to Article 22b para. 2 no. 4 Banking Act, the following require-ments must be fulfilled: 1. Obligor and facility assignments must be updated at least annually, and the loss charac-

teristics and delinquency status of each identified risk pool must be reviewed at least annually; and

2. The status of individual exposures within each pool must be reviewed at least annually on the basis of a representative sample, and assignments must be updated as neces-sary.

Use of Models

Article 41. Credit institutions which use statistical models or other mechanical methods to assign exposures to obligor or facility grades or pools must fulfil the following requirements: 1. The credit institution must demonstrate that the model has good predictive power and

that minimum capital requirements are not distorted as a result of its use; 2. The input variables must form an objectively justified and effective basis for the resulting

predictions. 3. The model must not have material biases; 4. The credit institution must have processes in place for vetting data inputs into the model,

including an assessment of the accuracy, completeness and appropriateness of the data;

5. The data used to build the model are representative of the credit institution's current population of obligors and exposures;

6. The model must be validated on an annual basis; this must include monitoring its predic-tive power and stability, a review of the model specification and the testing of model outputs against actual outcomes;

7. The model must be supplemented by all additional relevant information, especially quali-tative factors, which are not captured by the model; the rules defining how this informa-tion is to be combined with the model's output must be documented; and


8. The model must be monitored in order to review model-based assignments, to find and

limit errors associated with model weaknesses, and to ensure that models are used ap-propriately.

Documentation of Rating Systems

Article 42. With regard to rating systems, credit institutions must document the following: 1. the design and operations of the rating systems used; the documentation must provide

information on compliance with the minimum requirements set forth in Articles 37 to 64 and contain a description of the following areas:

a) portfolio differentiation; b) rating criteria; c) the responsibilities of parties/units that rate obligors and exposures; and d) the frequency of assignment reviews, and senior management oversight of the rating

process; 2. the rationale for and analysis supporting the choice of rating criteria; 3. all major changes in the rating process, especially changes made to the rating process

subsequent to the last review by the FMA; 4. the organisation of rating assignment, including the rating assignment process and the

internal control structures; 5. the definitions of default and loss used internally, including evidence of their consistency

with Article 22b para. 5 no. 2 Banking Act; and 6. the methodologies of the statistical models used; in this context, the documentation

must include the following: a) a detailed outline of the theory, assumptions and mathematical and empirical basis of

the assignment of PD estimates to grades, individual obligors, exposures, or pools, and the data sources used to estimate the model;

b) an extensive and rigorous statistical process, including out-of-time and out-of-sample performance tests, for validating the model; and

c) indications of any circumstances under which the model does not work effectively.

Models Obtained from Third-Party Vendors

Article 43. Where a model based on approaches developed by third parties is used, the credit institution itself must demonstrably fulfil all requirements for rating systems and create the documentation.


Data Maintenance

Article 44. (1) For exposures pursuant to Article 22b para. 2 nos. 1 to 3 Banking Act, credit institutions must collect and store the following data regarding their internal ratings: 1. complete rating histories on obligors and collateral providers eligible for the purposes of

credit risk mitigation; 2. the dates on which the ratings were assigned; 3. the key data and methodology used to derive the rating; 4. the person responsible for the assignment of ratings; 5. the identity of defaulted obligors and exposures; 6. the date and circumstances of such defaults; and 7. data on the PDs and realised default rates associated with rating grades and on rating

migrations.

(2) Credit institutions which do not use own estimates of LGDs and/or conversion factors must collect and store data on comparisons of realised LGDs to the values set forth in Article 69 and on comparisons of realised conversion factors to the values set forth in Article 65 para. 9.

(3) In addition to the requirements set forth in para. 1, credit institutions which use own es-timates of LGDs and conversion factors must also collect and store the following data: 1. complete histories of data on the facility ratings as well as LGD and conversion factor

estimates associated with each rating scale; 2. the dates on which the ratings were assigned and on which the estimates were carried

out; 3. the key data and methodology used to derive the facility ratings as well as the LGD and

conversion factor estimates; 4. the person who assigned the facility rating and the person who generated the LGD and

conversion factor estimates; 5. data on the estimated and realised LGDs and conversion factors associated with each

defaulted exposure; 6. data on the LGD of the exposure before and after evaluation of the effects of personal

collateral, for those credit institutions that reflect the credit risk-mitigating effects of such collateral through LGD; and

7. data on the components of loss for each defaulted exposure.

(4) For exposures pursuant to Article 22b para. 2 no. 4 Banking Act, credit institutions must collect and store the following data regarding their internal ratings: 1. the data used in the process of assigning exposures to grades or pools; 2. data on the estimated PDs, LGDs and conversion factors associated with grades or

pools of exposures; 3. the identity of defaulted obligors and exposures; 4. for defaulted exposures, data on the grades or pools to which the exposures were as-

signed over the year prior to default and on the realised outcomes of LGDs and conver-sion factors; and


5. data on LGDs for qualifying revolving retail exposures.

(5) Credit institutions must collect and store all data regarding their internal ratings in ac-cordance with the provisions of Articles 26 and 26a Banking Act.

Stress Tests

Article 45. (1) Credit institutions must have in place sound stress testing processes for use in the assessment of their capital adequacy with regard to compliance with the minimum capital requirements pursuant to Article 22 para. 1 Banking Act. Stress testing must include possible events and future changes in economic conditions which could have unfavourable effects on the value of the credit institution's exposures as well as an assessment of its ability to withstand such changes.

(2) Credit institutions must perform stress tests regularly in order to assess the effect of cer-tain specific conditions on the minimum capital requirements for credit risk pursuant to Article 22 para. 1 no. 1 Banking Act. Stress tests must be meaningful and reasonably conservative, and must consider at least the effect of mild recession scenarios. Credit institutions must assess the migrations in ratings under the stress test scenarios. Stressed portfolios must contain the vast majority of a credit institution's total exposure. Credit institutions which apply Article 74 para. 1 no. 5 in the calculation of weighted exposure amounts must consider the impact of a deteriora-tion in the credit quality of protection providers, in particular the impact of a situation in which protection providers no longer fulfil requirements for the purpose of credit risk mitigation.

Qualification of Obligor Default

Article 46. (1) For overdrafts, days past due pursuant to Article 22b para. 5 no. 2 lit. a Banking Act commence once an obligor has breached an advised limit, has been advised of a limit smaller than the current outstandings, or has drawn credit without authorisation. Days past due for exposures arising from credit card transactions commence on the minimum payment due date.

(2) A credit obligation is considered material in accordance with Article 22b para. 5 no. 2 lit. a Banking Act when, on the basis of the total items due and the credit facility/limit, the cus-tomer's total past due instalments including unpaid charges and interest as well as overruns of overdraft limits are greater than 2.5% of the total of all overdraft limits advised to the customer (adjusted for exchange rate fluctuations) and exceed an amount of EUR 250.

(3) When using external data which itself is not consistent with the definition of default pur-suant to Article 22b para. 5 no. 2 Banking Act, credit institutions must make appropriate adjust-ments to achieve broad equivalence with the definition of default.

(4) Where none of the criteria pursuant to Article 22b para. 5 no. 2 Banking Act apply to a previously defaulted exposure, the credit institution must assess the obligor or facility in the same manner as a non-defaulted exposure. Should a criterion pursuant to Article 22b para. 5 no. 2 Banking Act be fulfilled again at a later point in time, then this is to be deemed another default.


(5) For exposures to obligors established in another Member State, credit institutions may apply the number of days past due set by the competent authority in that Member State instead of applying Article 22b para. 5 no. 2 lit. a Banking Act.

Overall Requirements for Own Estimates

Article 47. (1) Credit institutions must incorporate all relevant data, information and meth-ods when performing their own estimates of the risk parameters PD, LGD, conversion factor and EL. In particular, own estimates must 1. be based on both historical experience and empirical evidence; 2. not be based purely on judgemental considerations; 3. be plausible and intuitive, and be based on the material drivers of the respective risk

parameters; and 4. be all the more conservative where less data are available.

(2) Credit institutions must be able to provide a breakdown of loss experience in terms of default frequency, LGD, conversion factor, and loss where estimates of expected loss are used, by the factors which constitute the drivers of the respective risk parameters. Estimates must be representative of long-run experience.

(3) Credit institutions must take into account any changes in lending practice or the process of pursuing recoveries over the observation periods referred to in Articles 48 no. 8, 49 no. 4, 51, 52, 54 and 55. The estimates must reflect the implications of technical advances, new data and other information as it becomes available. Credit institutions must review their estimates when-ever new information comes to light, but at least on an annual basis.

(4) The population of exposures represented in the data used for estimation, the lending standards used when the data was generated and other relevant characteristics must be com-parable with those of the credit institution's exposures and standards. The economic or market conditions underlying the data must be relevant to current and foreseeable conditions. The number of exposures in the sample and the data period used for quantification must be suffi-cient to ensure the accuracy and robustness of estimates.

(5) In the case of purchased receivables, the purchasing credit institution must take into ac-count all relevant information available regarding the quality of the underlying receivables, in-cluding data for similar pools provided by the seller or by external sources. The purchasing credit institution must evaluate the data provided by the seller.

(6) Credit institutions must add to their estimates a margin of conservatism that is related to the expected range of estimation errors. Where methods and data are less satisfactory and the expected range of errors is larger, the margin of conservatism must be increased.

(7) Where a credit institution uses different estimates for the calculation of weighted expo-sure amounts and for internal purposes, the institution must document this and demonstrate the reasonableness of those estimates.


(8) Credit institutions may use data that are pooled across credit institutions if 1. the rating systems and criteria of the other credit institutions in the pool are similar to its

own; 2. the pool is representative of the portfolio for which the pooled data are used; and 3. the credit institution uses the pooled data for its estimates consistently over time.

(9) Credit institutions which use data that are pooled across credit institutions remain re-sponsible for the integrity of their rating systems and must demonstrate that they possess suffi-cient in-house understanding of their rating systems and that the rating process is monitored and reviewed effectively.

Requirements regarding PD Estimates for Exposures to Central Governments and Central Banks, Institutions and Corporates

Article 48. For exposures pursuant to Article 22b para. 2 nos. 1 to 3 Banking Act, credit in-stitutions must fulfil the following requirements regarding PD estimates: 1. PDs for each obligor grade must be estimated from long-run averages of one-year de-

fault rates; 2. For purchased corporate receivables, expected loss for each obligor grade may be es-

timated from long run averages of one-year realised default rates; 3. Where long-run average estimates of PD and LGD for purchased corporate receivables

are derived from an estimate of expected loss and an appropriate estimate of PD or LGD, total losses must be estimated in accordance with the requirements for the estima-tion of PD and LGD as set forth in this provision and in Article 50, and the outcome must be consistent with the definition of LGD as set forth in Article 50 para. 1;

4. PD estimation techniques are to be applied only with supporting analysis; in combining the results of techniques and in making adjustments for the limitations techniques and information, credit institutions must recognise the importance of judgmental considera-tions;

5. Where data on internal default experience are used for the estimation of PDs, it is nec-essary to demonstrate in analyses that the estimates are reflective of underwriting stan-dards and of any differences in the rating system that generated the values and the cur-rent rating system; where underwriting standards or rating systems change, the credit institution must add a greater margin of conservatism to its PD estimates;


6. Where internal grades are associated or mapped to the scale used by an external credit

assessment institution or similar organisations and the default rate observed for the ex-ternal organisation's grades is attributed to the internal grades, mapping must be based on a comparison of internal rating criteria to the criteria used by the external organisa-tion and on a comparison of the internal and external ratings of any common obligors; biases or inconsistencies in the mapping approach or underlying data must be avoided; the external organisation's criteria underlying the data used for quantification must be based on default risk only and not reflect transaction characteristics; the credit institution must carry out a comparison of the default definitions used in accordance with to the provisions of Article 22b para. 5 no. 2 Banking Act and document the basis for the map-ping;

7. Where statistical default prediction models are used, PDs may be estimated as the sim-ple average of default probability estimates for individual obligors in a given grade; the statistical models used to estimate default probability must fulfil the requirements set forth in Article 41; and

8. Irrespective of whether the credit institution uses external, internal, or pooled data sources, or a combination of the three, for its PD estimation, the length of the underlying historical observation period used must be at least five years for at least one source; where the available observation period spans a longer period for any source and these data are relevant, the credit institution is to use this longer observation period; this also applies to the PD/LGD Method for equity exposures pursuant to Article 72.

Requirements regarding PD Estimates for Retail Exposures

Article 49. For exposures pursuant to Article 22b para. 2 no. 4 Banking Act, credit institu-tions must fulfil the following requirements regarding PD estimates: 1. PDs for each obligor grade or pool must be estimated from long-run averages of one-

year default rates or derived from realised losses and appropriate LGD estimates; 2. Internal data for assigning exposures to grades or pools are to be regarded as the pri-

mary source of information for estimating loss characteristics; for purchased retail re-ceivables, external and internal reference data may be used; in this context, all relevant sources of information must be used for comparison purposes; otherwise, external data, including pooled data and statistical models, may be used provided there is a strong link between

a) the credit institution's process of assigning exposures to grades or pools and the process used by the external data source; and

b) the credit institution's internal risk profile and the composition of the external data; 3. If the credit institution derives long-run average estimates of PD and LGD from an esti-

mate of total losses and an appropriate estimate of PD or LGD, then the process for es-timating total losses must comply with Articles 32 to 64 and with the requirements of Ar-ticle 50;


4. Irrespective of whether the credit institution uses external, internal, or pooled data

sources, or a combination of the three, for its estimates of total losses, the length of the underlying historical observation period used must be at least five years for at least one source; where the available observation period spans a longer period for any source and these data are relevant, the credit institution is to use this longer observation period; historical data need not be given equal importance if more recent data are demonstrated to be a better predictor of loss rates; and

5. Credit institutions must identify and analyse expected changes in risk parameters over the term of the exposure.

Requirements for Own LGD Estimates

Article 50. For their own LGD estimates, credit institutions must fulfil the following require-ments: 1. LGDs for each facility grade or pool must be estimated on the basis of the average real-

ised LGDs for each facility grade or pool using all defaulted exposures recorded within the data sources;

2. LGD estimates that are appropriate for an economic downturn are to be used if those estimates are more conservative than the long-run average; where a rating system is expected to deliver LGDs at a constant level for each grade or pool over time, the esti-mates of risk parameters for each grade or pool must be adjusted in order to limit the capital impact of an economic downturn;

3. The extent of any dependence between the risk of the obligor and that of the collateral or collateral provider must be taken into account; cases where there is a significant de-gree of dependence must be addressed in a conservative manner;

4. Currency mismatches between the underlying exposure and the collateral must be ad-dressed in a conservative manner;

5. Where collateral is recognised, it is necessary to account for the market value as well as the fact that the credit institution may not be able to gain control of their collateral and liquidate it expeditiously;

6. Where collateral is recognised, credit institutions must establish internal requirements for collateral management, legal certainty and risk management which comply with Arti-cles 100 to 118.

7. Where additional collateral is recognised for determining counterparty credit risk under the Standardised Method pursuant to Articles 236 to 243 or in an internal model pursu-ant to Articles 244 to 255, the amounts expected to be recovered from the collateral must not be taken into account in the LGD estimates;

8. In the case of defaulted exposures, the sum of the best estimates of expected loss for each exposure given current economic conditions, the exposure status and the possibil-ity of additional unexpected losses during the recovery period is to be used as the basis for LGD estimates.

9. Unpaid late fees must be added to the credit institution's measure of loss or exposure to the extent that they have been capitalised in the credit institution's income statement.


Requirements regarding LGD Estimates for Exposures to Central Governments and Central Banks, Institutions and Corporates

Article 51. For the purpose of estimating LGDs for exposures pursuant to Article 22b

para. 2 nos. 1 to 3 Banking Act, the length of the underlying historical observation period used must be at least seven years for at least one source. If the available observation period spans a longer period for any source and the data is relevant, then the credit institution is to use this longer period.

Requirements regarding LGD Estimates for Retail Exposures

Article 52. For exposures pursuant to Article 22b para. 2 no. 4 Banking Act, credit institu-tions must fulfil the following requirements regarding their own LGD estimates: 1. LGD estimates may be derived from realised losses and appropriate estimates of PDs; 2. Future drawings may be reflected either in conversion factors or in LGD estimates; 3. For purchased retail receivables, external and internal reference data may be used to

estimate LGDs; and 4. Estimates of LGD shall be based on data over a minimum of five years; historical data

need not be given equal importance if more recent data are demonstrated to be a better predictor of loss rates.

Requirements for the Estimation of Conversion Factors

Article 53. For their own estimates of conversion factors, credit institutions must fulfil the following requirements: 1. Conversion factors for each facility grade or pool must be estimated on the basis of the

average expected conversion factors for each facility grade or pool using all observed defaults within the data sources;

2. Conversion factor estimates that are appropriate for an economic downturn are to be used if those estimates are more conservative than the long-run average; where a rating system is expected to deliver conversion factor estimates at a constant level for each grade or pool over time, the estimates of risk parameters for each grade or pool must be adjusted in order to limit the capital impact of an economic downturn;

3. Estimates of conversion factors should reflect the possibility of additional drawings by the obligor up to and after the time a default event is triggered;

4. A larger margin of conservatism must be added to the conversion factor estimate where a stronger positive correlation can reasonably be expected between the default fre-quency and the magnitude of the conversion factor.

5. In arriving at estimates of conversion factors, credit institutions must consider their in-ternal policies and strategies adopted in respect of account monitoring and payment processing; credit institutions must also consider their ability and willingness to prevent further drawings in circumstances short of default.


6. Credit institutions must have adequate systems and procedures in place to monitor

credit drawings on a daily basis; these must include facility amounts, current outstand-ings against committed lines and changes in outstandings per obligor and per grade; and

7. Where a credit institution uses different conversion factor estimates for the calculation of weighted exposure amounts and for internal purposes, the institution must document this and demonstrate the reasonableness of those estimates.

Requirements regarding Conversion Factor Estimates for Exposures to Central Governments and Central Banks, Institutions and Corporates

Article 54. For exposures pursuant to Article 22b para. 2 nos. 1 to 3 Banking Act, the un-derlying data must cover a historical observation period of at least seven years for at least one source. If the available observation period spans a longer period for any source and the data is relevant, then the credit institution is to use this longer period.

Requirements regarding Conversion Factor Estimates for Retail Exposures

Article 55. For exposures pursuant to Article 22b para. 2 no. 4 Banking Act, the following requirements must be fulfilled: 1. Future drawings may be reflected either in conversion factor estimates or in LGD esti-

mates; and 2. Conversion factor estimates must be based on data over a minimum of five years; his-

torical data need not be given equal importance if more recent data are demonstrated to be a better predictor.

Requirements for the Recognition of Personal Collateral in Parameter Estimation

Article 56. (1) Credit institutions must have clearly specified criteria for the types of collat-eral providers they recognise for the calculation of weighted exposure amounts.

(2) The requirements of Articles 39 and 40 must be applied to recognised collateral provid-ers for the assignment of exposures and the integrity of assignments.

(3) Personal collateral must be 1. in writing; 2. non-cancellable on the part of the collateral provider; 3. in force until the obligation is satisfied in full; and 4. legally enforceable against the collateral provider. Personal collateral prescribing conditions under which the collateral provider may not be obliged to perform may be used for the purpose of credit risk mitigation in cases where the credit institu-tion can demonstrate that the assignment criteria adequately address any potential deterioration in the collateral.


(4) Credit institutions must have clearly specified criteria for adjusting grades, pools or LGD

estimates, or, in the case of exposures pursuant to Article 22b para. 2 no. 4 Banking Act and eligible purchased receivables, for the process of allocating exposures to grades or pools, in order to reflect the impact of personal collateral for the calculation of weighted exposure amounts. These criteria must comply with the minimum requirements set forth in Articles 39 and 40. In particular, they must 1. be plausible and intuitive; 2. address the collateral provider's ability and willingness to perform under the personal

collateral arrangement, and account for the likely timing of any payments; 3. account for the degree to which the collateral provider's ability to perform under the per-

sonal collateral arrangement is correlated with the obligor's ability to repay; and 4. account for the extent to which residual risk vis-à-vis the obligor remains.

(5) Credit institutions which apply the Standardised Approach to Credit Risk to exposures pursuant to Article 22b para. 2 nos. 1 and 2 Banking Act are exempt from the provisions of paras. 1 to 4: In such cases, the requirements pursuant to Articles 100 to 118 must be fulfilled.

(6) In the case of personal collateral for exposures pursuant to Article 22b para. 2 no. 4 Banking Act, the requirements set forth in paras. 1 to 4 also apply to the process of allocating exposures to grades or pools and to PD estimation.

Additional Requirements for Assessing the Effect of Credit Derivatives

Article 57. (1) In the case of mismatches between the underlying obligation and the refer-ence obligation of the credit derivative or the obligation used for determining whether a credit event has occurred, the requirements set forth in Article 117 apply. In the case of exposures pursuant to Article 22b para. 2 no. 4 Banking Act and eligible purchased receivables which come under Article 22b para. 2 no. 4 Banking Act, Article 117 applies to the process of allocat-ing exposures to grades or pools.

(2) The adjustment criteria must address the payout structure of the credit derivative and conservatively assess the impact this structure has on the level and timing of recoveries. Credit institutions must consider the extent to which other forms of residual risk remain.

Requirements for Purchased Receivables

Article 58. (1) The credit institution must ensure that it retains ownership of the receivables and control over the cash receipts from the receivables. When the obligor makes payments directly to a seller or servicer, the credit institution must verify regularly that the payments are forwarded completely and in accordance with the contractually agreed terms. A servicer means an entity that manages a pool of purchased receivables or the underlying credit exposures on a day-to-day basis. Credit institutions must have procedures to ensure that ownership of the re-ceivables and cash receipts is protected against bankruptcy stays or legal challenges that could materially delay the lender's ability to liquidate or assign the receivables or retain control over cash receipts.


(2) Credit institutions must monitor the quality of the purchased receivables and the finan-cial condition of both the seller and servicer. In particular, credit institutions must 1. assess the correlations between the quality of the purchased receivables and the finan-

cial condition of both the seller and servicer, and have in place internal policies and pro-cedures that provide adequate safeguards to protect against the effects of such correla-tions, including the assignment of each seller and servicer to an internal rating grade;

2. have adequate policies and procedures for determining seller and servicer eligibility; periodic reviews of sellers and servicers must be conducted in order to verify the accu-racy of reports from the seller or servicer, to detect fraud or operational weaknesses, and to verify the quality of the seller's credit policies and servicer's collection policies and procedures;

3. assess the characteristics of the pool of purchased receivables, including over-advances; history of the seller's arrears, bad debts, and bad debt allowances; payment terms, and potential contra accounts;

4. have effective policies and procedures for monitoring single-obligor concentrations on an aggregate basis both within and across purchased receivables pools; and

5. ensure that it receives from the servicer timely and sufficiently detailed reports on the maturity structure and dilution of receivables to ensure compliance with the eligibility cri-teria and advancing policies governing purchased receivables, and provide an effective means of monitoring and confirming the seller's terms of sale and dilution.

Credit institutions must have systems and procedures for detecting deteriorations in the seller's financial condition and in the quality of purchased receivables at an early stage, and for addressing emerging problems. Credit institutions must have clear and effective policies, proce-dures, and information technology systems to monitor covenant violations, and clear and effec-tive policies and procedures for initiating legal actions and dealing with problem purchased re-ceivables.

Credit institutions must have clear and effective policies and procedures governing the con-trol of purchased receivables, lending and payments. Written internal policies must specify all material elements of the receivables purchase programme, including the advancing rates, eligi-ble collateral, necessary documentation, concentration limits, and the way cash receipts are to be handled. All material factors, including the seller and servicer's financial condition, risk con-centrations, and trends in the quality of the purchased receivables and the seller's customer base, must be accounted for appropriately. Internal system must ensure that advances are only paid out against specifically defined collateral and with precise documentation.

(5) Credit institutions must have an effective internal process for assessing compliance with the internal policies and procedures pursuant to para. 1 to 4.


Validation of Internal Estimates

Article 59. (1) Credit institutions must have robust systems in place to validate the accu-racy and consistency of rating systems, rating processes and the estimation of all relevant risk parameters. The internal validation process must ensure a meaningful and consistent assess-ment of the performance of internal rating and risk estimation systems and be carried out at least once per year.

(2) The realised default rates for each obligor grade must be compared with the corre-sponding PD estimates. Where realised default rates are outside the expected range for a cer-tain grade, credit institutions must specifically analyse the reasons for the deviation. Where own estimates of LGDs or conversion factors are used, credit institutions must also perform a corre-sponding analysis for these estimates. Such comparisons must make use of historical data which span as long a period as possible. The methods and data used in these comparisons must be documented, and the documentation must be updated at least once per year.

(3) Credit institutions must also use other quantitative and qualitative validation tools as well as comparisons with relevant external data sources. The data used for the analysis must be appropriate to the portfolio, be updated regularly, and cover a relevant observation period. Credit institutions' internal assessments of the accuracy and performance of their rating systems must be based on as long a time period as possible.

(4) Credit institutions must consistently use the methods and data employed for validation in accordance with a documented concept. Credit institutions must document any changes in estimation and validation methods and validation data, including data sources and periods cov-ered.

(5) Credit institutions must have adequate standards for situations where realised PDs, LGDs, conversion factors and, where expected loss estimates are used, total losses deviate from expectations significantly enough to call the validity of the estimates into question. These standards must account for business cycles and similar systemic variability in default experi-ence. In cases where significant upward deviations are identified, credit institutions must revise their estimates upward in order to reflect realised default and loss values.

Quantitative Requirements for Internal Models for Equity Exposures

Article 60. Credit institutions which use an internal model pursuant to Article 77 para. 5 to calculate weighted exposure amounts for equity exposures pursuant to Article 22b para. 2 no. 5 Banking Act must fulfil the following requirements: 1. The estimate of potential loss must be robust to adverse market movements relevant to

the long-term risk profile of the credit institution's specific equity exposures; 2. The data used to represent return distributions must reflect the longest historical sample

period for which data is available and meaningful in representing the risk profile of the credit institution's specific equity exposures;

3. The data used must be sufficient to provide conservative, statistically reliable and robust loss estimates that are not based purely on subjective or judgmental considerations;


4. The shock employed demonstrably provides a conservative estimate of potential losses

over a relevant long-term market or business cycle; 5. The empirical analysis of available data must be combined with adjustments based on a

variety of factors in order to attain model outputs that achieve appropriate realism and conservatism; in developing value-at-risk models pursuant to Article 77 para. 5 to esti-mate potential quarterly losses, credit institutions may use quarterly data or convert shorter-horizon period data to a quarterly equivalent using an analytically appropriate method supported by empirical evidence; such an approach must be conservative, ap-plied consistently over time and documented appropriately; where only limited relevant data is available, the credit institution must add an appropriate margin of conservatism;

6. the model must be able to capture adequately all of the material risks embodied in eq-uity returns, including both the general market risk and specific risk exposure of the credit institution's equity portfolio; the model must adequately explain historical price variation, capture both the magnitude and changes in the composition of potential con-centrations, and be robust to adverse market environments; the population of risk expo-sures represented in the data used for estimation must be closely matched to or at least comparable with the bank’s equity exposures;

7. the model must be appropriate for the risk profile and complexity of a credit institution's equity portfolio; where a credit institution has material holdings with values that are highly non-linear in nature, the model must capture appropriately the risks associated with such instruments;

8. The mapping of individual positions to proxies, market indices, and risk factors must be plausible, intuitive, and conceptually well-founded;

9. Credit institutions must demonstrate through empirical analyses that the selection of risk factors is appropriate and that both general and specific risks are covered;

10. The estimates of the return volatility of equity exposures must incorporate all relevant and available data, information, and methods; independently reviewed internal data or external data (including pooled data) may be used; and

11. Credit institutions must carry out a rigorous and comprehensive programme of stress testing.

Qualitative Requirements for Internal Models for Equity Exposures

Article 61. In developing and using internal models for equity exposures pursuant to Arti-cle 77 para. 5, credit institutions must establish policies, procedures, and controls which ensure the integrity of the model and the modelling process. In any case, these must include the follow-ing: 1. the full integration of the model into internal reporting and the management of the equity

portfolio held outside of the trading book; models must be fully integrated into the credit institution's day-to-day risk management (in particular the measurement and assess-ment of equity portfolio performance) and the capital adequacy assessment processes pursuant to Article 39a Banking Act;


2. adequate systems and procedures for monitoring investment limits and exposures must

exist for equity exposures; 3. the units responsible for the design and application of the model must be independent

from the units responsible for managing individual equity exposures; 4. The directors must allocate sufficient skilled and competent resources to the organisa-

tional unit responsible for modelling. 5. Credit institutions must have in place management systems, procedures and control

functions for ensuring the periodic and independent review of all elements of the internal modelling process, including the approval of changes to the model, the vetting of model inputs and the review of model outputs; in any case, this review must include the follow-ing:

a) the accuracy, completeness and appropriateness of model inputs and outputs; b) the identification and limitation of potential errors associated with known weaknesses

in the model; and c) the identification of potential unknown weaknesses in the model.

Validation and Documentation of Internal Models for Equity Exposures

Article 62. (1) Credit institutions must have a robust system in place to validate the accu-racy and consistency of the internal model pursuant to Article 77 para. 5 and the modelling processes. All material elements of the model and the modelling process, including the respon-sibilities of those involved in the development, approval and review of the model, as well as validation must be documented.

(2) Credit institutions must use the internal validation process in order to assess and im-prove the performance of the internal model and processes in a consistent and meaningful way.

(3) The methods and data employed for quantitative validation must be used consistently in accordance with a comprehensive documented concept. Quantitative validation must be carried out at least once per year. Credit institutions must document any changes in estimation and validation methods and validation data, including data sources and periods covered.

(4) Credit institutions must compare actual equity returns (computed on the basis of real-ised and unrealised gains and losses) with the model's estimates. In these comparisons, credit institutions must make use of historical data which span as long a time period as possible. The methods and data used for such comparisons must be documented and updated at least once per year.

(5) In the course of validation, credit institutions must also use other quantitative validation tools as well as comparisons with external data sources. The analysis must be based on data that are appropriate to the portfolio, are updated regularly and cover a relevant observation period. Credit institutions' internal assessments of the performance of their models must be based on as long a time period as possible.


(6) Credit institutions must have in place sound rules for situations where a comparison of actual equity returns with the model's estimates calls the validity of the estimates or of the mod-els as such into question. These rules must account for business cycles and similar systemic variability in equity returns. Any changes to the model which are made by the credit institution must be documented and must comply with the rules for model validation.

Responsibility of Directors and Credit Risk Control Requirements

Article 63. (1) In cooperation with senior management, the credit institution's directors or a committee of experts designated by the directors must approve all material aspects of rating and estimation processes. These parties must be capable of understanding the systems used as well as the resulting reports.

(2) The directors must be notified of any material changes or exceptions to established policies.

(3) The directors must ensure that the rating systems operate properly. The credit risk con-trol unit must inform the directors regularly about the performance of the rating process, areas needing improvement, and the status of efforts to remedy previously identified deficiencies.

(4) The internal ratings based analysis of the credit institution's credit risk profile must be an essential part of reporting to the directors. The reports must at least include information on risk profiles by grade or pool, migration across grades or pools, estimates of the relevant parame-ters per grade or pool, and a comparison of realised default rates and own estimates of LGD and conversion factors against expectations and stress-test results. Reporting frequencies are to be based on the significance and type of information reported.

(5) The credit risk control unit pursuant to Article 21a para. 1 no. 5 Banking Act must be in-dependent of the personnel and management functions responsible for originating or renewing exposures and report directly to senior management. This unit must be responsible for the de-sign, implementation, oversight and performance of the rating systems, and it must produce and analyse reports on the output of the rating systems on a regular basis.

(6) In any case, the duties of the credit risk control unit must include the following: 1. examining and monitoring grades and pools; 2. producing and analysing summary reports from the rating systems; 3. implementing procedures to verify that grade and pool definitions are applied consis-

tently across departments and geographical areas; 4. reviewing and documenting changes to the rating process, including the reasons for

such changes; 5. reviewing the rating criteria to evaluate whether they remain predictive of risk; any

changes to the rating process, criteria or individual rating parameters must be docu-mented;

6. participating actively in the selection and design, implementation and validation of mod-els used in the rating process;

7. supervising and monitoring the models used in the rating process; and 8. reviewing and improving the models used in the rating process on an ongoing basis.


(7) Credit institutions which use pooled data pursuant to Article 47 para. 9 may outsource the following tasks to third parties: 1. the production of information relevant to examining and monitoring grades and pools; 2. the production of summary reports from the credit institution's rating systems; 3. reviews of the rating criteria to evaluate whether they remain predictive of risk; 4. the documentation of changes to the rating process, criteria or individual rating parame-

ters; and 5. the production of information relevant to the ongoing review and improvement of models

used in the rating process. Where tasks are outsourced to third parties, Article 60 para. 3 Banking Act is applicable to the scope of information, presentation and inspection rights and to the obligation to make docu-ments available in Austria.

Duties of the Internal Audit Unit

Article 64. Audits by the internal audit unit pursuant to Article 42 para. 4 no. 6 Banking Act must be performed at least once per year and in any case include all relevant processes as well as compliance with the minimum requirements pursuant to Articles 37 to 63.

Section 3

Calculation of Exposure Values Article 65. (1) For exposures pursuant to Article 22b para. 2 nos. 1 to 4 Banking Act, the

exposure value is equal to the value of the on-balance sheet exposure gross of value adjust-ments. This also applies to assets purchased at a price different than the amount owed. For purchased assets, the difference between the amount owed and the net value recorded on the balance sheet of the credit institution is to be designated as a discount if the amount owed is larger, and as a premium if it is smaller.

(2) In the case of repurchase transactions and securities or commodities lending or borrow-ing transactions which are subject to master netting agreements, the exposure value is to be calculated in accordance with the provisions governing credit risk mitigation.

(3) For on-balance sheet netting of loans and deposits, the credit institution must calculate the exposure value in accordance with the provisions governing credit risk mitigation.

(4) For lease exposures, the exposure value is equal to the discounted minimum lease payments. "Minimum lease payments" refer to the payments over the lease term that the lessee is or can be required to make and any bargain option. Any guaranteed residual value which fulfils the requirements regarding protection providers pursuant to Article 96 as well as the re-quirements pursuant to Articles 111 to 115 must also be included in the minimum lease pay-ments.


(5) In the case of derivatives pursuant to Annex 2 to Article 22 Banking Act, the exposure value must be calculated using one of the methods set out in Article 22 para. 5 Banking Act.

(6) The exposure value of purchased receivables is equal to the outstanding amount minus the minimum capital requirement for dilution risk calculated pursuant to Article 80 prior to credit risk mitigation.

(7) Where an exposure takes the form of securities or commodities sold, posted or lent un-der repurchase transactions or securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions, the exposure value is equal to the value of the securities or commodities determined in accordance with Article 22 Banking Act. Credit institutions which use the Financial Collateral Comprehensive Method must increase the exposure value by the volatility adjustment calculated. The exposure value of repurchase trans-actions, securities or commodities lending or borrowing transactions, long settlement transac-tions and margin lending transactions may be determined either in accordance with the meth-ods set forth in Articles 233 to 261 or using an internal model pursuant to Article 128.

(8) In the case of exposures to a central counterparty pursuant to Article 233, the exposure value is equal to zero if such exposures with all associated participants are fully collateralised on a daily basis.

(9) For the following items, the exposure value is equal to the committed but undrawn amount multiplied by the respective conversion factors indicated below: 1. For credit lines which are unconditionally cancellable at any time by the credit institution

without prior notice, or which provide for automatic cancellation due to deterioration in a borrower's creditworthiness, a conversion factor of 0% is to be applied, provided that the credit institution actively monitors the financial condition of the obligor and its internal control systems are designed in such a way as to enable the credit institution to detect a deterioration in the credit quality of the obligor immediately; undrawn retail credit lines may be considered unconditionally cancellable if the terms permit the credit institution to cancel them to the full extent allowable under the Consumer Protection Act (Konsumen-tenschutzgesetz – KSchG; Federal Law Gazette No. 140/1979) and related legislation; in the case of undrawn commitments for revolving purchased receivables which are un-conditionally cancellable or which can be cancelled automatically at any time by the credit institution without prior notice, a conversion factor of 0% is to be applied if the credit institutions actively monitor the financial condition of the obligor and their internal control systems are to be designed in such a way as to enable the credit institutions to detect a deterioration in the credit quality of the obligor immediately;

2. For short-term letters of credit arising from the movement of goods, a conversion factor of 20% is to be applied by the issuing and confirming credit institutions;

3. For other credit lines, note issuance facilities (NIFs), and revolving underwriting facilities (RUFs), a conversion factor of 75% is to be applied; and

4. Credit institutions which use their own estimates of conversion factors pursuant to Arti-cles 53 to 55 may use their own estimates of conversion factors for each of the cases listed in nos. 1 to 3; if own estimates are used for one of the cases listed in nos. 1 to 3, then such estimates must be used consistently.


(10) Where a commitment refers to the extension of a previously granted commitment, the lower of the two conversion factors associated with the individual commitment is to be used.

(11) For any other off-balance-sheet transactions not listed in paras. 1 to 9, the exposure value is equal to the following percentage of its value; the assignment to risk categories is to be based on Annex 1 to Article 22 Banking Act: 1. 100% if it is a full risk item; 2. 50% if it is a medium-risk item; 3. 20% if it is a medium/low-risk item; and 4. 0% if it is a low-risk item.

Exposure Values of Equity Exposures

Article 66. The exposure value of an equity exposure pursuant to Article 22b para. 2 no. 5 Banking Act is equal to the value presented in the annual financial statements. The exposure value of an equity exposure can be calculated as follows: 1. For investments held at fair value where changes in value flow directly through income

and into own funds, the exposure value is equal to the fair value presented in the bal-ance sheet;

2. For investments held at fair value where changes in value do not flow through income but into a separate tax-adjusted component of own funds, the exposure value is equal to the fair value presented in the balance sheet; and

3. For investments held at cost or at the lower of cost or market, the exposure value is equal to the cost or market value presented in the balance sheet.

Exposure Values of Other Assets

Article 67. The exposure value of other assets pursuant to Article 22b para. 2 no. 7 Bank-ing Act is equal to the value presented in the annual financial statements.

Section 4

Risk Parameters PD, LGD and M

PD Estimates for Exposures to Central Governments and Central Banks, Institutions and Corporates

Article 68. (1) With regard to PD estimates for exposures pursuant to Article 22b para. 2 nos. 1 to 3 Banking Act, credit institutions must fulfil the following requirements: 1. The PD of an exposure to a corporate or an institution must be at least 0.03%; 2. For purchased corporate receivables exposures where a credit institution cannot dem-

onstrate that its PD estimates meet the minimum requirements: a) For senior claims on purchased corporate receivables, the PD must equal the credit

institution's estimate of expected loss divided by the LGD for those receivables;


b) For subordinated claims on purchased corporate receivables, the PD must be equal

to the credit institution's estimate of expected loss; c) Credit institutions which use their own estimates of LGD for exposures pursuant to

Article 22b para. 2 no. 3 Banking Act may use their own estimates of PD if their esti-mates of expected loss for purchased corporate receivables can be decomposed into PDs and LGDs in a reliable manner;

3. The PD of defaulted obligors pursuant to Article 22b para. 5 no. 2 Banking Act is equal to 100%; and

4. Personal collateral may be taken into account in PD subject to the requirements of Arti-cles 83 to 118.

(2) When using their own LGD estimates for exposures pursuant to Article 22b para. 2 nos. 1 to 3 Banking Act, credit institutions may account for personal collateral by adjusting PDs.

(3) For the dilution risk of purchased corporate receivables, credit institutions must set the PD equal to the estimate of expected loss for dilution risk. Credit institutions which use their own estimates of LGD for exposures pursuant to Article 22b para. 2 no. 3 Banking Act may use their own estimates of PD if their estimates of expected loss for the dilution risk of purchased corpo-rate receivables can be decomposed into PDs and LGDs in a reliable manner; Credit institutions may recognise personal collateral in PD estimates in accordance with the provisions governing credit risk mitigation. Where a credit institution uses its own estimates of LGD for the purposes of Article 80, personal collateral can be recognised subject to Article 69 para. 3.

LGD Estimates for Exposures to Central Governments and Central Banks, Institutions and Corporates

Article 69. (1) For exposures pursuant to Article 22b para. 2 nos. 1 to 3 Banking Act, credit institutions must apply the following LGD values: 1. For senior exposures without eligible collateral for the purpose of credit risk mitigation:

45%; 2. For subordinated exposures without eligible collateral for the purpose of credit risk miti-

gation: 75%; 3. Real and personal collateral may be recognised in LGD in accordance with the provi-

sions governing credit risk mitigation; 4. For covered bonds pursuant to Article 18, an LGD value of 12.5% may be applied; 5. For purchased senior corporate receivables where the minimum requirements for PD

estimates pursuant to Article 49 are not fulfilled: 45%; 6. For purchased subordinated corporate receivables where the minimum requirements for

PD estimates pursuant to Article 49 are not fulfilled: 100%; and 7. For the dilution risk of purchased corporate receivables: 75%.

(2) Credit institutions which use their own estimates of LGD for exposures pursuant to Arti-cle 22b para. 2 no. 3 Banking Act may use their own estimates of LGD for the dilution and de-fault risk of purchased corporate receivables if their estimates of expected loss for purchased corporate receivables can be decomposed into PDs and LGDs in a reliable manner.


(3) Credit institutions which use their own estimates of LGD for exposures pursuant to Arti-cle 22b para. 2 nos. 1 to 3 Banking Act may account for personal collateral by adjusting esti-mates of PD or LGD if the minimum requirements pursuant to Articles 37 to 64 are fulfilled. Ex-posures secured by personal collateral must not be assigned adjusted PDs or LGDs in such a way that the adjusted risk weight would be lower than that of a comparable direct exposure to the collateral provider.

(4) For the calculation of the weighted exposure amount pursuant to Article 74 para. 1 no. 5, the LGD of a comparable direct exposure to the collateral provider is equal to either the LGD associated with an unsecured facility of the collateral provider or the LGD associated with the unsecured facility of the obligor, depending upon whether the available evidence and the structure of personal collateral indicate that the amount recovered would depend on the finan-cial condition of the collateral provider or obligor (respectively) in the event that both the collat-eral provider and obligor default during the term of the hedged transaction.

Residual Maturity for Exposures to Central Governments and Central Banks, Institutions and Corporates

Article 70. (1) For exposures pursuant to Article 22b para. 2 nos. 1 to 3 Banking Act, credit institutions must apply an effective maturity of 2.5 years. Exposures arising from repurchase transactions and securities or commodities lending or borrowing transactions which fall within Article 22b para. 2 nos. 1 to 3 Banking Act are to be assigned an effective maturity of 0.5 years.

(2) Credit institutions which use their own LGDs and conversion factors for exposures pur-suant to Article 22b para. 2 nos. 1 to 3 Banking Act must calculate the effective maturity (M) as follows for each of those exposures in accordance with nos. 1 to 6, with the maximum value for M being 5 years: 1. For an instrument subject to a cash flow schedule, M must be calculated according to

the following formula:

⎪⎭

⎪⎬

⎫

⎪⎩

⎪⎨

⎧

⎪⎭

⎪⎬

⎫

⎪⎩

⎪⎨

⎧ ×=

∑∑

5;;1

tt

tt

CF

CFtMinMaxM

where CFt denotes the cash flows from principal, interest payments and fees contractu-ally payable by the obligor in period t;

2. For derivatives subject to a master netting agreement, M is the weighted average resid-ual maturity of the exposure, where M shall be at least 1 year; the notional amount of each exposure is to be used for weighting the maturity;

3. For exposures arising from fully or nearly fully collateralised derivatives transactions pursuant to Annex 2 to Article 22 Banking Act and fully or nearly fully collateralised mar-gin lending transactions which are subject to a master netting agreement, M is the weighted average remaining maturity of the transactions and must be at least 10 days; the notional amount of each exposure is to be used for weighting the maturity;


4. In the case of purchased corporate receivables for which the credit institution uses its

own estimates of PD, M is equal to the weighted average maturity of the purchased re-ceivables for drawn amounts and must be at least 90 days; the same value of M must also be used for undrawn amounts under a committed purchase facility, provided the fa-cility contains effective covenants, early amortisation triggers, or other features that pro-tect the purchasing credit institution against a significant deterioration in the quality of the future receivables it is required to purchase over the facility's term; in the absence of such effective protection, M for undrawn amounts must be calculated as the sum of the longest-dated potential receivable under the purchase agreement and the remaining maturity of the purchase facility and must be at least 90 days;

5. Where the Internal Model Method pursuant to Articles 242 to 253 is used, M must be calculated for exposures to which the credit institution applies this method and for which the maturity of the longest-dated contract contained in the netting set is greater than one year according to the following formula:

,50;min 1

1

1

1

1

⎟⎟⎟⎟⎟

⎠

⎞

⎜⎜⎜⎜⎜

⎝

⎛

×∆×

×∆×+×∆×=

∑

∑∑≤

=

>

≤

=yeartk

kkkk

maturity

yeartkkkk

yeartk

kkkk

dftEEffectiveE

dftEEdftEEffectiveEM

where dfk refers to the risk-free discount factor for future time period tk, ∆tk the length of the time interval from tk-1 to tk, EEk the average market value pursuant to Article 243 para. 3 no. 2 and EffectiveEEk the maximum average market value pursuant to Arti-cle 243 para. 3 no. 3; credit institutions which use an internal model to calculate a one-sided credit valuation adjustment may use the effective credit duration estimated by such an internal model as M; where para. 4 is applied, the formula in no. 1 applies to all netting sets in which all contracts have an original maturity of less than one year; where the credit institution calculates weighted exposure amounts pursuant to Article 70 para. 1 no. 5, M is equal to the effective maturity of the credit protection but at least 1 year; and

6. For all other exposures pursuant to Article 22b para. 2 nos. 1 to 3 Banking Act or where a credit institution is not in a position to calculate M as set out in no. 1, M is to be set equal to the maximum remaining time in years that the obligor is permitted to take to fully discharge its contractual obligations and must be at least 1 year;

(3) Credit institutions must calculate effective maturity in accordance with para. 1 for expo-sures to: 1. Corporates which are established in a Member State and have total annual sales and

consolidated assets of less than EUR 500 million; and 2. Corporates which are established in a Member State, primarily invest in real estate and

have consolidated annual sales and consolidated assets of less than EUR 1 billion; and


(4) Credit institutions which use their own estimates of LGD for exposures pursuant to Arti-cle 22b para. 2 nos. 1 to 3 Banking Act must set M equal to at least one day for: 1. fully or nearly fully collateralised derivative instruments listed in Annex 2 to Article 22

Banking Act; 2. fully or nearly fully collateralised margin lending transactions; 3. repurchase transactions, securities or commodities lending or borrowing transactions; provided the documentation requires daily remargining and daily revaluation, and provisions are agreed which allow for the prompt liquidation or offsetting of collateral in the event of default or failure to remargin.

(5) Credit institutions must account for maturity mismatches in accordance with Articles 151 to 153.

PD and LGD Estimates for Retail Exposures

Article 71. (1) With regard to PD estimates for exposures pursuant to Article 22b para. 2 no. 4 Banking Act, credit institutions must fulfil the following requirements: 1. The PD of an exposure must be at least 0.03%; 2. The PD for defaulted obligors pursuant to Article 22b para. 5 no. 2 Banking Act or,

where an obligation approach is used, for defaulted exposures pursuant to Article 22b para. 5 no. 2 Banking Act must be 100%;

3. For the dilution risk of purchased receivables, the credit institution must set PD equal to the estimate of expected loss for dilution risk; where the credit institution can decom-pose its estimates of expected loss for the dilution risk of purchased receivables into PDs and LGDs in a reliable manner, the PD estimates determined in this way may be used instead; and

4. Personal collateral can be recognised by adjusting PDs in accordance with para. 3 if the collateral is eligible for the purposes of credit risk mitigation.

(2) Credit institutions must apply an LGD value of 75% for the dilution risk of purchased re-ceivables pursuant to Article 22b para. 2 no. 4 Banking Act; credit institutions which can de-compose their estimates of expected loss for the dilution risk of purchased receivables into PDs and LGDs in a reliable manner may use their own estimates of LGD for dilution risk.

(3) Credit institutions may recognise personal collateral by adjusting estimates of PD and LGD subject to the requirements of Article 52 for individual exposures or pools of exposures. Exposures secured by personal collateral must be assigned adjusted PDs or LGDs in such a way that the adjusted risk weight would be at least as high as that of a comparable direct expo-sure to the collateral provider.


(4) For the purpose of calculating the weighted exposure amount pursuant to Article 75 para. 2, the LGD of a comparable direct exposure to the collateral provider is equal to either the LGD associated with an unsecured exposure to the collateral provider or the LGD associated with an exposure to the obligor, depending upon whether the available evidence and the struc-ture of personal collateral indicate that the amount recovered would depend on the financial condition of the collateral provider or obligor (respectively) in the event that both the collateral provider and obligor default during the term of the secured transaction.

Equity Exposures under the PD/LGD Method

Article 72. Where the credit institution uses the PD/LGD Method for equity exposures, 1. PD must be calculated in accordance with Article 68, subject to the following minimum

values: a) 0.09% for exchange-traded equity exposures where the investment is part of a long-

term customer relationship and for non-exchange-traded equity exposures where the returns on the investment are based on regular and periodic cash flows not derived from capital gains;

b) 0.40% for exchange-traded equity exposures including other short positions pursuant to Article 77 para. 3 no. 5; and

c) 1.25% for all other equity exposures including other short positions pursuant to Arti-cle 77 para. 3 no. 5;

2. LGD must be set to 90%; for private equity exposures in sufficiently diversified portfo-lios, an LGD of 65% may be used; and

3. M must be set to five years.

Section 5

Risk-Weighted Exposure Amounts and Expected Loss Amounts

Article 73. Credit institutions must calculate the risk-weighted exposure amount individually for each exposure. In this calculation, credit institutions must determine the exposure value in accordance with Articles 65 to 67, the risk parameters probability of default, loss given default and effective maturity in accordance with Articles 68 to 72, and then insert those values in the formulae indicated in Articles 74 to 82.

Exposures to Central Governments and Central Banks, Institutions and Corporates

Article 74. (1) For exposures pursuant to Article 22b para. 2 nos. 1 to 3 Banking Act in which the obligor has not defaulted pursuant to Article 22b para. 5 no. 2 Banking Act, the risk-weighted exposure amount is to be calculated as follows:


1. The correlation (R) is to be calculated as follows:

⎟⎟⎠

⎞⎜⎜⎝

⎛−

−−+

−−

=−

−

−

−

50

50

50

50

11124.0

1112.0)(

eex

eexRnCorrelatio

PDxPDx

,

where ex denotes an exponential function based on the mathematical constant e; 2. The maturity factor (b) is to be calculated according to the following formula:

Maturity factor (b) = (0.11852 – 0.05478 × ln(PD))2, where ln(y) denotes the natural logarithm of y.

3. Subsequently, the risk weight (RW) is to be calculated as follows using the values ob-tained for the correlation and the maturity factor:

,5.11

)5.2(1)999.0(

11)(

5.1206.1b

bMLGDPDG

RR

RPDG

NLGDRW×−

×−+×

⎥⎥⎦

⎤

⎢⎢⎣

⎡×−⎟⎟

⎠

⎞⎜⎜⎝

⎛×

−+

−×××=

where:

N(x) the distribution function for the standard normal distribution G(z) the inverse distribution function for the standard normal distribution

4. The risk-weighted exposure amount is then calculated as follows: Risk-weighted exposure amount = RW × exposure value; and

5. For exposures which fulfil the requirements set forth in Article 97 and Article 118, the risk-weighted exposure amount may be calculated as follows:

Risk-weighted exposure amount = RW × exposure value × (0.15 + 160 × PDpp) where: PDpp the PD of the protection provider RW the weight calculated in accordance with no. 3 using the following parameters:

a) the PD of the obligor; b) the loss given default, which must be equal to that of a comparable direct exposure to

the protection provider; and c) the maturity factor (b), which is to be calculated in accordance with no. 2 using the PD

of the obligor or that of the protection provider, whichever is lower.

(2) In the case of exposures to undertakings with consolidated annual sales of less than EUR 50 million, the credit institution may replace the correlation formula indicated in para. 1 no. 1 with the following formula for the purpose of calculating the risk-weighted exposure amount:

( )⎟⎠⎞

⎜⎝⎛ −−−⎟⎟

⎠

⎞⎜⎜⎝

⎛−

−−+

−−

=−

−

−

−

455104.0

11124.0

1112.0)(

50

50

50

50 Sxe

exe

exRnCorrelatioPDxPDx

where S denotes the consolidated annual sales (in EUR million) of all undertakings in the group and can only take a value between 5 and 50. Where consolidated annual sales are lower than EUR 5 million, a sales figure of EUR 5 million is to be used. For purchased receivables, total annual sales are to be calculated as the weighted average of individual exposures in the pool.


The total assets of the consolidated group are to be substituted for total annual sales in cases where the total assets provide a more meaningful indicator than total annual sales.

(3) For specialised lending exposures for which estimates of PD pursuant to Article 68 para. 1 are not available, the credit institution must assign risk weights according to the table below.

Residual maturity

Category 1 Category 2 Category 3 Category 4

Defaulted exposures pursuant to Article 22b

para. 5 no. 2 Banking Act

Less than 2.5 years

50% 70% 115% 250% 0%

2.5 years or longer

70% 90% 115% 250% 0%

(4) In assigning risk weights to specialised lending exposures pursuant to para. 3, credit in-stitutions must take the following factors into account: 1. financial strength; 2. the political and legal environment; 3. the transaction and asset characteristics; 4. the strength of the sponsor or developer, including any income streams from public-

private partnerships; and 5. the security package. Exposures are to be assigned to Categories 1 to 4 under para. 3 using a slotting scheme which adequately reflects the risk involved.

(5) Credit institutions may assigned a risk weight of 50% to exposures in Category 1 pursu-ant to para. 3 and a risk weight of 70% to exposures in Category 2 pursuant to para. 3 provided the credit institution's risk characteristics are substantially stronger than required for the relevant category in the slotting scheme in question.

(6) With regard to purchased corporate receivables, credit institutions must fulfil the mini-mum requirements set forth in Article 58. For purchased corporate receivables which fulfil the requirements set forth in Article 75 para. 6, the credit institution may use the risk quantification standards for retail exposures pursuant to Articles 49, 52 and 55 in cases where it would be unduly burdensome to use the risk quantification standards for corporate exposures.

(7) In the case of purchased corporate receivables, credit institutions may treat refundable purchase discounts, credit protection or partial credit protection based on personal collateral which provide first-loss protection for default losses, dilution losses or both, as first-loss posi-tions under Articles 156 to 179.


(8) Where a credit institution provides credit protection for a basket of exposures under such terms that the nth default among the exposures triggers payment and this credit event ter-minates the contract, the risk weights pursuant to Articles 156 to 179 are to be assigned if the credit protection has an external credit assessment from an eligible external credit assessment institution. Where a credit assessment from an eligible external credit assessment institution is not available, the weighted exposure amount is to be calculated as follows: 1. The risk weights of the exposures included in the basket are to be aggregated, exclud-

ing n-1 exposures; the sum of the expected loss amount multiplied by 12.5 and the risk-weighted exposure amount must not exceed the nominal amount of the protection pro-vided by the credit derivative multiplied by 12.5; and

2. The n-1 exposures to be excluded from the aggregation are to be determined on the basis that each of those exposures produces a lower risk-weighted exposure amount than the risk-weighted exposure amount of any of the exposures included in the aggre-gation.

Retail Exposures

Article 75. (1) For exposures pursuant to Article 22b para. 2 no. 4 Banking Act where the obligor has not defaulted pursuant to Article 22b para. 5 no. 2 Banking Act, credit institutions must calculate the risk-weighted exposure amount according to the following formula:

1. The correlation (R) is to be calculated as follows:

⎟⎟⎠

⎞⎜⎜⎝

⎛−

−−×+

−−

×=−

−

−

−

35

35

35

35

11116.0

1103.0

ee

eeR

PDxPDx

,

where ex denotes an exponential function based on the mathematical constant e; 2. Subsequently, the risk weight (RW) is to be calculated as follows using the resulting

correlation value:

,)999.0(11

)(5.1206.1⎥⎥⎦

⎤

⎢⎢⎣

⎡×−⎟⎟

⎠

⎞⎜⎜⎝

⎛×

−+

−×××= LGDPDG

RR

RPDGNLGDRW

where: N(x) is the distribution function for the standard normal distribution; G(z) denotes the inverse distribution function for the standard normal distribution;

3. The risk-weighted exposure amount is then calculated as follows:

Risk-weighted exposure amount = RW x Exposure value

(2) For exposures to small and medium-sized entities pursuant to Article 22b para. 2 no. 4 Banking Act, which fulfil the requirements set forth in Articles 97 and 118, the risk-weighted exposure amount may be calculated in accordance with Article 74 para. 1 no. 5.


(3) In the case of exposures pursuant to Article 22b para. 2 no. 4 Banking Act which are secured by real estate property, a correlation (R) value of 0.15 is to be applied.

(4) In the case of exposures pursuant to Article 22b para. 2 no. 4 Banking Act, a correlation (R) value of 0.04 is to be applied if: 1. The exposures are to individuals only; 2. The exposures are revolving, unsecured, and immediately and unconditionally cancella-

ble by the credit institution as long as they are not drawn. 3. The maximum permissible exposure to a single individual in the sub-portfolio is no more

than EUR 100,000; 4. Treatment pursuant to this paragraph is limited to portfolios which have exhibited low

volatility in loss rates relative to the average level of loss rates, especially in the low PD bands; and

5. The treatment is consistent with the underlying risk characteristics of the sub-portfolio. In the case of a collateralised credit line linked to a salary account, the requirement that the exposure be unsecured as set forth in no. 2 need not be fulfilled. In this case, amounts recov-ered from the collateral must not be taken into account in the LGD estimate.

(5) For purchased retail receivables, the weighted exposure amount is to be calculated in accordance with para. 1 if: 1. The minimum requirements pursuant to Article 58 are fulfilled; 2. The receivables were purchased from unrelated third-party sellers, and the credit institu-

tion's exposure to the obligor of the receivable does not include any exposures that are directly or indirectly originated by the credit institution itself;

3. The receivables were generated on an arm's-length basis between the seller and the obligor; in this context, inter-company accounts receivable and receivables subject to contra-accounts between firms that buy from and sell to each other are ineligible in any case;

4. The purchasing credit institution has a claim to all proceeds from the purchased receiv-ables or a pro-rata interest in the proceeds; and

5. The portfolio of purchased retail receivables is sufficiently diversified.

(6) In the case of purchased retail receivables, credit institutions may treat refundable pur-chase discounts, collateral or partial credit protection based on personal collateral which pro-vides first-loss protection for default losses, dilution losses or both, as first-loss positions pursu-ant to Articles 156 to 179.

(7) In the case of hybrid pools of purchased retail receivables, credit institutions must use for weighting that correlation value indicated in paras. 1 to 4 which produces in the highest weight if the purchasing credit institution cannot separate exposures secured by real estate collateral and qualifying revolving retail exposures pursuant to para. 4 from other retail expo-sures.


(8) By 31 December of each year, credit institutions which apply para. 4 must notify the FMA and the Oesterreichische Nationalbank in writing of the loss rates for qualifying revolving retail exposures pursuant to para. 4, for retail exposures secured by mortgages pursuant to para. 2 and for all other retail exposures.

Defaulted Exposures

Article 76. The following applies to defaulted exposures pursuant to Article 22b para. 5 no. 2 Banking Act: 1. Where the credit institution uses the LGD pursuant to Article 69, the risk-weighted expo-

sure amount is equal to zero; and 2. Where the credit institution uses its own estimates of LGD values, the following formula

applies:

( ){ }.5.12;0max BEELLGDRW −×=

where BE denotes the credit institution's estimate of expected loss for the exposure in accordance with Article 81.

Equity Exposures

Article 77. (1) Credit institutions may calculate risk-weighted exposure amounts for equity exposures pursuant to Article 22b para. 2 no. 5 Banking Act using the simple risk weight ap-proach pursuant to para. 3, the PD/LGD Approach pursuant to para. 4 or an internal model pur-suant to para. 5. A credit institution may employ different approaches to different portfolios of equity exposures if the credit institution itself uses different approaches internally and the rele-vant choices are made consistently and transparently, and are not motivated by the objective of reducing minimum capital requirements. Credit institutions may recognise personal collateral in accordance with the provisions governing credit risk mitigation.

(2) Credit institutions may calculate risk-weighted exposure amounts in accordance with Ar-ticle 78 for equity exposures to ancillary services undertakings.

(3) When using the simple risk weight approach, credit institutions must proceed as follows: 1. A risk weight of 190% must be applied to private equity exposures in sufficiently diversi-

fied portfolios; 2. A risk weight of 290% must be applied to exchange-traded equity exposures; 3. A risk weight of 370% must be applied to all other equity exposures; 4. The risk-weighted exposure amount is calculated according to the following formula:

Risk-weighted exposure amount = RW x Exposure value


5. Credit institutions may offset short cash positions and derivatives held in the non-trading

book against long positions in the same individual stocks, provided that these instru-ments are explicitly designated as hedges of specific equity exposures and provide a hedge for at least another year; other short positions are to be treated as if they were long positions, with the relevant risk weight assigned to the absolute value of each posi-tion; in the case of maturity mismatches, the method for corporate exposures pursuant to Article 22b para. 2 no. 3 Banking Act is to be applied.

(4) When using the PD/LGD approach, credit institutions must calculate risk-weighted ex-posure amounts in accordance with Article 74 para. 1. In cases where the credit institution does not have sufficient information to use the definition of default pursuant to Article 22b para. 5 no. 2 Banking Act, a scaling factor of 1.5 must be assigned to the risk weights. At the individual exposure level, expected loss and the risk-weighted exposure amount are limited in such a way that the sum of the expected loss amount multiplied by 12.5 and the risk-weighted exposure amount must not exceed the exposure value multiplied by 12.5.

(5) Where a value-at-risk model is used to calculate risk-weighted exposure amounts for equity exposures, the risk-weighted exposure amounts must be equal to the potential loss from the credit institution's equity exposures. The potential loss is to be derived on the basis of the difference between quarterly returns and an appropriate risk-free rate subject to the 99th-percentile, one-tailed confidence interval, computed over a long-term sample period and multi-plied by 12.5. The risk-weighted exposure amounts at the individual exposure level must not be less than the sum of minimum risk-weighted exposure amounts required under the PD/LGD Approach pursuant to para. 4 and the corresponding expected loss amounts multiplied by 12.5 and calculated on the basis of the PD and LGD values indicated in Articles 68 to 72.

Other Assets

Article 78. (1) For other assets pursuant to Article 22b para. 2 no. 7 Banking Act, the risk-weighted exposure amount is equal to the exposure value.

(2) For the residual value of leased assets, the risk-weighted exposure amount is to be cal-culated according to the formula below; the exposure must be provisioned for each year:

,1exp valueExposuret

amountosureweightedRisk ×=−

where t is the number of years remaining in the term of the lease contract.

Exposures in the Form of Shares in Investment Funds

Article 79. (1) For exposures in the form of shares in investment funds, credit institutions must decompose each investment fund into the underlying exposures according to its actual composition and account for those exposures individually in the calculation of risk-weighted exposure amounts and expected loss if:


1. all of the underlying exposures of the investment fund are known to the credit institution; 2. the criteria set forth in Article 24 para. 2 are fulfilled; and 3. the minimum requirements pursuant to Articles 37 to 64 are also fulfilled with regard to

the exposures underlying the investment fund.

(2) If the conditions set forth in para. 1 nos. 1 and 2 are fulfilled but para. 1 no. 3 is not ful-filled, the credit institution must: 1. apply the simple risk weight approach pursuant to Article 77 para. 3 to all of the equity

exposures pursuant to Article 22b para. 2 no. 5 Banking Act included in the investment fund; a risk weight of 370% must be applied to equity exposures which cannot be as-signed clearly to one of the three risk categories pursuant to Article 77 para. 3; and

2. apply the provisions of the Standardised Approach to Credit Risk to all other underlying exposures, subject to the following conditions:

a) the exposures must be assigned to the appropriate exposure class and attributed the risk weight of the credit quality step immediately above the credit quality step that would normally be assigned; and

b) a risk weight of 200% must be assigned to exposures which are assigned to the poorest credit quality steps and would thus normally receive a risk weight of 150%.

In cases where the requirements set forth in Article 24 para. 2 are not fulfilled or the credit institution is not aware of all of the underlying exposures of the investment fund, the credit insti-tution must apply the simple risk weight approach pursuant to Article 77 para. 3 to all of the exposures included in the investment fund share; a risk weight of 370% must be applied to eq-uity exposures which cannot be assigned clearly to one of the three risk categories pursuant to Article 77 para. 3. As an exception to the above, credit institutions may rely on a third party to calculate the average risk-weighted exposure amounts based on the underlying exposures of the investment fund share, provided that the accuracy of the calculations and communication to the credit institution is adequately ensured. The method indicated in para. 2 must be used in this context.

Dilution Risk

Article 80. (1) Credit institutions must calculate risk-weighted exposure amounts for the di-lution risk of purchased corporate receivables pursuant to Article 22b para. 2 no. 3 Banking Act and purchased retail receivables pursuant to Article 22b para. 2 no. 4 Banking Act in accor-dance with Article 74 para. 1. Exposure values must be determined in accordance with Arti-cles 65 to 67, and the risk parameters PD and LGD must be determined in accordance with Articles 68 to 72. The effective maturity (M) must be set to one year. Where the dilution risk of an exposure is immaterial, it need not be taken into account.

Expected Loss Amounts

Article 81. (1) For the purpose of calculating expected loss amounts, credit institutions must determine exposure values in accordance with Articles 65 to 67 and the risk parameters PD and LGD in accordance with Articles 68 to 72.


(2) Expected loss amounts for exposures pursuant to Article 22b para. 2 nos. 1 to 4 Bank-ing Act are to be calculated as follows: 1. EL = PD × LGD; and 2. Expected loss amount = EL × exposure value; 3. Where a credit institution uses its own estimates of LGD, the expected loss for defaulted

exposures is equal to the estimate of expected loss calculated according to Article 50 no. 8 for the exposure;

4. In the case of exposures for which the risk weighted exposure amount is calculated in accordance with Article 74 para. 1 no. 5, an expected loss amount of zero is to be ap-plied; and

5. In the case of defaulted exposures pursuant to Article 22b para. 5 no. 2 Banking Act, the expected loss amount is the credit institution's best estimate of expected loss for the de-faulted exposure.

(3) In the case of specialised lending exposures for which the credit institution calculates weighted exposure amounts in accordance with Article 74 para. 3, the credit institution must calculate expected loss according to the table below.

Residual maturity

Category 1 Category 2 Category 3 Category

4

Defaulted exposures pursuant to

Article 22b para. 5 no. 2 Banking Act

Less than 2.5 years

0% 0.4% 2.8% 8% 50%

2.5 years or longer

0% 0.8% 2.8% 8% 50%

(4) Credit institutions which calculate risk weighted exposure amounts using the simple risk weights method pursuant to Article 77 para. 3 must calculate expected loss for equity exposures as follows: 1. Expected loss amount = EL × exposure value; 2. The expected loss for private equity positions in sufficiently diversified portfolios and

exchange-traded equity exposures must be set to 0.8%; and 3. The expected loss for all other equity exposures must be 2.4%.

(5) Credit institutions which calculate risk weighted exposure amounts using the PD/LGD approach pursuant to Article 77 para. 4 must calculate expected loss amounts for equity expo-sures in accordance with para. 2 nos. 1 and 2:

(6) Credit institutions which calculate risk weighted exposure amounts using an internal model pursuant to Article 77 para. 5 must set the expected loss amounts for equity exposures to zero.

(7) Credit institutions must calculate expected loss amounts for the dilution risk arising from purchased receivables in accordance with para. 2 nos. 1 and 2.


(8) In the case of exposures in the form of investment fund shares, credit institutions must apply Article 79 when calculating expected loss amounts.

Treatment of Expected Loss Amounts

Article 82. The sum of the expected loss amounts calculated in accordance with Article 81 paras. 2, 3, 7 and 8 is to be subtracted from the sum of value adjustments and provisions re-lated to those exposures. Discounts on balance sheet exposures purchased when in default pursuant to Article 68 para. 1 are to be treated in the same way as value adjustments. Expected loss amounts for securitised exposures as well as the value adjustments and provisions related to those exposures are not be included in this calculation.

Chapter 3

Credit Risk Mitigation

Section 1

Credit Protection Article 83. Subject to the fulfilment of the minimum requirements pursuant to Article 22g

paras. 4 and 5 Banking Act, credit institutions may use the credit protection recognised in this section for the purpose of credit risk mitigation pursuant to Article 22g to 22h Banking Act.

Subsection 1

Real Collateral and Netting

On-Balance-Sheet Netting

Article 84. Credit institutions may use the on-balance-sheet netting of mutual claims be-tween the credit institution and its counterparty for the purpose of credit mitigation only in the case of reciprocal cash balances. Only loans and deposits of the lending credit institution may be subject to a modification of risk-weighted exposure amounts and expected loss amounts as a result of an on-balance-sheet netting agreement.


Master Netting Agreements Covering Repurchase Transactions, Securities and Commodities Lending or Borrowing Transactions and

Other Capital Market-Driven Transactions

Article 85. Credit institutions which apply the Financial Collateral Comprehensive Method may recognise the effects of bilateral netting contracts covering repurchase transactions, securi-ties and commodities lending or borrowing transactions, and other capital market-driven trans-actions with a counterparty if, Articles 214 and 216 notwithstanding, the collateral accepted and securities or commodities borrowed within such agreements comply with the requirements set forth in Articles 87 to 89.

Method-Based Eligibility of Real Collateral

Article 86. In cases where credit risk mitigation relies on the right of the credit institution to liquidate or retain assets, the eligibility of collateral depends on: 1. whether the risk-weighted exposure amounts and expected loss amounts are calculated

using the Standardised Approach to Credit Risk or the Internal Ratings Based Ap-proach;

2. whether the Financial Collateral Simple Method or the Financial Collateral Comprehen-sive Method is applied; and

3. whether the transaction is booked in the non-trading book or the trading book in the case of repurchase transactions and securities or commodities lending or borrowing transactions.

Financial Collateral

Article 87. (1) Credit institutions may use the following financial collateral for the purposes of credit risk mitigation in all approaches and methods: 1. Cash on deposit with, or cash assimilated instruments held by, the lending credit institu-

tion; 2. debt securities which are issued by central governments or central banks and to which

an eligible external credit assessment institution or export credit agency has assigned a credit assessment associated with credit quality step 4 or above under the Standardised Approach to Credit Risk;

3. debt securities which are issued by institutions and to which an eligible external credit assessment institution has assigned a credit assessment associated with credit quality step 3 or above under the Standardised Approach to Credit Risk;

4. debt securities which are issued by other issuers and to which an eligible external credit assessment institution has assigned a credit assessment associated with credit quality step 3 or above under the Standardised Approach to Credit Risk;

5. debt securities to which an eligible external credit assessment institution has assigned a short-term credit assessment associated with credit quality step 3 or above under the Standardised Approach to short-term exposures;


6. Equities or convertible bonds which are included in an index recognised pursuant to

Article 20b InvFG on a regulated market and which fulfil the requirements of Article 209 para. 2 no. 2; and

7. Gold.

(2) Debt securities issued by central governments or central banks pursuant to para. 1 no. 2 also include the following: 1. Debt securities issued by regional governments or local authorities whose debt instru-

ments are treated as exposures to the central government under the Standardised Ap-proach to Credit Risk;

2. Debt securities issued by public-sector entities which are treated as exposures to central governments under the Standardised Approach to Credit Risk;

3. Debt securities issued by multilateral development banks which are assigned a risk weight of 0% under the Standardised Approach to Credit Risk; and

4. Debt securities issued by international organisations which are assigned a risk weight of 0% under the Standardised Approach to Credit Risk.

(3) Debt securities issued by institutions pursuant to para. 1 no. 3 also include the following: 1. Debt securities issued by regional governments or local authorities which are not treated

as exposures to the central government under the Standardised Approach to Credit Risk;

2. Debt securities issued by public-sector entities whose debt instruments are treated as exposures to institutions under the Standardised Approach to Credit Risk; and

3. Debt securities issued by multilateral development banks which are not assigned a risk weight of 0% under the Standardised Approach to Credit Risk.

Unrated Debt Securities Issued by Institutions

Article 88. (1) Credit institutions may use debt securities which are issued by institutions and which do not have a credit assessment from an eligible external credit assessment institu-tion as collateral for the purpose of credit risk mitigation if: 1. they are listed on a recognised exchange; 2. they qualify as senior debt; 3. all of the institution's other rated issues of the same seniority have been assigned a

credit assessment by an eligible external credit assessment institution which is associ-ated with credit quality step 3 or above under the Standardised Approach to Credit Risk;

4. the lending credit institution has no information suggesting that the debt security would justify a credit assessment below that indicated in no. 3; and

5. the market liquidity of the debt security is demonstrated to be sufficient for the purposes of credit risk mitigation.


(2) Where a security has two credit assessments from eligible external credit assessment institutions, the credit institution must apply the less favourable assessment for the purposes of para. 1 nos. 2 to 5. In cases where a security has more than two credit assessments from eligi-ble external credit assessment institutions, the two assessments generating the lowest risk weights are to be used. If the two lowest risk weights are different, the higher risk weight is to be assigned.

Investment Fund Shares

Article 89. (1) Credit institutions may use investment fund shares for the purposes of credit risk mitigation in all approaches and methods if: 1. they have a daily public price quote; and 2. the investment fund is limited to investing in instruments which are eligible for recogni-

tion under Articles 87 and 88.

(2) Where an investment fund uses (or may use) derivatives to hedge permitted invest-ments, this does not prevent the investment fund shares from being used for the purposes of credit risk mitigation.

Additional Financial Collateral under the Comprehensive Method

Article 90. (1) Credit institutions which apply the Financial Collateral Comprehensive Method may recognise as eligible the following financial collateral in addition to the collateral indicated in Articles 87 to 89 for the purpose of credit risk mitigation: 1. Equities or convertible bonds which are not included in a main index but are traded on a

recognised exchange; 2. Investment fund shares if: a) they have a daily public price quote; and b) the investment fund is limited to investing in instruments pursuant to no. 1 and in-

struments which are eligible under Articles 87 and 88.

(2) Where an investment fund uses (or may use) derivatives to hedge permitted invest-ments, this does not prevent the investment fund shares from being used for the purposes of credit risk mitigation pursuant to para. 1 no. 2.

Additional Eligibility for Calculations under the Internal Ratings Based Approach

Article 91. Credit institutions which calculate risk-weighted exposure amounts and ex-pected loss amounts using an Internal Ratings Based Approach may also recognise the collat-eral indicated in Articles 92 to 94.


Real Estate Collateral

Article 92. (1) For the purpose of credit risk mitigation, credit institutions may recognise as collateral residential property which is or will be occupied or let by the owner as well as com-mercial property if: 1. the value of the property does not materially depend on the credit quality of the obligor;

this requirement does not preclude situations where purely macro-economic factors af-fect both the value of the property and the performance of the borrower;

2. the risk of the borrower does not materially depend on the performance of the underly-ing property or project, but rather on the underlying capacity of the borrower to repay the debt from other sources; as such, repayment does not materially depend on any cash flow generated by the underlying property serving as collateral;

(2) The requirement pursuant to para. 1 no. 2 does not apply to residential real estate lo-cated in Austria. For residential properties located within the territory of other Member States, the requirement pursuant to para. 1 no. 2 does not apply if the competent authorities in the Member State in question waive that requirement.

(3) The requirement pursuant to para. 1 no. 2 does not apply to commercial real estate lo-cated in Austria. For commercial properties located within the territory of other Member States, the requirement pursuant to para. 1 no. 2 does not apply if the competent authorities in the Member State in question waive that requirement.

(4) Para. 1 no. 2 does not apply to residential and commercial properties located in a third country in cases where the legal provisions of that third country provide for the appropriate im-plementation of Directive 2006/48/EC and where this requirement is waived.

Receivables

Article 93. Credit institutions may use amounts receivable arising from commercial transac-tions or transactions with an original maturity of less than or equal to one year for the purpose of credit risk mitigation; in this context, eligible receivables do not include those associated with securitisations, sub-participations or credit derivatives, or amounts owed by affiliated parties.

Other physical collateral

Article 94. (1) Credit institutions may use the following as other physical collateral for the purpose of credit risk mitigation: 1. motor vehicles; 2. ships; 3. aircraft; 4. railway trains; 5. raw materials; 6. machines; and 7. containers.


(2) The assets listed in para. 1 may only be used as collateral for the purposes of credit risk mitigation if: 1. liquid markets exist for the disposal of the collateral in an expeditious and economically

efficient manner; 2. well-established, publicly available market prices exist for the collateral; 3. the credit institution is able to demonstrate that there is no evidence that the net prices it

receives when collateral is realised will deviate significantly from these market prices; and

4. the fulfilment of these requirements is documented and substantiated appropriately.

Other Types of Collateral

Article 95. Credit institutions may use the following as collateral for the purpose of credit risk mitigation: 1. Cash on deposit with, or cash-assimilated instruments held by, a third-party institution in

a non-custodial arrangement and pledged to the lending credit institution; 2. life insurance policies pledged and assigned to the lending credit institution; and 3. Securities which are issued by third-party institutions and must be repurchased on re-

quest.

Subsection 2

Personal Collateral

Protection Providers

Article 96. (1) Regardless of the approach selected, credit institutions may use personal collateral from the following collateral providers for the purpose of credit risk mitigation: 1. central governments and central banks; 2. regional governments and local authorities; 3. multilateral development banks; 4. international organisations exposures to which are assigned a risk weight of 0% under

the Standardised Approach to Credit Risk; 5. public-sector entities exposures to which are treated as exposures to institutions or cen-

tral governments under the Standardised Approach to Credit Risk; 6. institutions; and 7. other undertakings, including parent and subsidiary undertakings as well as affiliated

undertakings of the credit institution, which a) have been assigned a credit assessment by an eligible external credit assessment

institution which is associated with credit quality step 2 or above under the Standard-ised Approach to Credit Risk; or


b) in the case of credit institutions that calculate risk-weighted exposure amounts and

expected loss amounts using an Internal Ratings Based Approach, have not been as-signed a credit assessment by an eligible external credit assessment institution and are internally rated as having a probability of default equivalent to that associated with the credit assessments of eligible external credit assessment institutions associated with credit quality step 2 or above under the Standardised Approach to Credit Risk.

(2) Credit institutions which calculate risk-weighted exposure amounts and expected loss amounts using an Internal Ratings Based Approach may only use personal collateral from a protection provider for the purpose of credit risk mitigation if the protection provider has been rated internally in accordance with the minimum requirements set forth in Articles 37 to 64.

(3) Credit institutions use personal collateral from financial institutions pursuant to Article 4 (5) of Directive 2006/48/EC for the purpose of credit risk mitigation if those financial institutions 1. are authorised and supervised by the competent authorities responsible for the authori-

sation and supervision of credit institutions; and 2. are subject to prudential requirements equivalent to those applied to credit institutions.

Double Default

Article 97. (1) Credit institutions may use personal collateral from the following protection providers for the purposes of Article 74 para. 1 no. 5: 1. Institutions; 2. insurance and reinsurance undertakings pursuant to Article 2 Insurance Supervision Act

(Versicherungsaufsichtsgesetz – VAG; Federal Law Gazette No. 569/1978 as last amended by Federal Law Gazette I No. 104/2006); and

3. export credit agencies.

(2) Credit institutions may only use personal collateral for the purposes of Article 74 para. 1 no. 5 if the protection provider: 1. has sufficient expertise in providing personal collateral; 2. is subject to supervision which is at least equivalent to that applied to credit institutions

or had, at the time the personal collateral was provided, a credit assessment from an eligible external credit assessment institution which is associated with credit quality step 3 or above under the Standardised Approach to Credit Risk;

3. was assigned, at the time the personal collateral was provided, a credit assessment from an eligible external credit assessment institution which is associated with credit quality step 2 or above under the Standardised Approach to Credit Risk; and

4. had at all times a credit assessment with a PD which is associated with credit quality step 3 or above under the Standardised Approach to Credit Risk.

(3) In the case of personal collateral provided by an export credit agency, the collateral must not be secured by an explicit guarantee from the central government.


Credit Derivatives

Article 98. (1) Credit institutions may use the following types of credit derivatives, as well as instruments which are composed of credit derivatives or have the same economic effect, for the purpose of credit risk mitigation: 1. credit default swaps; 2. total return swaps; and 3. credit linked notes to the extent of their cash funding.

(2) Where a credit institution buys credit protection through a total return swap and records the net payments received on the swap as net income, the credit institution may only use the value of the credit protection for the purpose of credit risk mitigation if offsetting deterioration in the value of the asset protected is also recorded.

Internal Hedges

Article 99. Credit institutions may use internal hedges pursuant to Article 195 for the pur-pose of credit risk mitigation if the credit risk transferred to the trading book is transferred to one or more third parties. In cases where this transfer fulfils the conditions set forth in this regulation, the provisions governing personal collateral are to be applied for the purpose of calculating risk-weighted exposure amounts and expected loss amounts.

Section 2

Minimum Requirements

Subsection 1

Minimum Requirements for Netting and Master Netting Agreements

Netting

Article 100. Credit institutions may use on-balance-sheet netting agreements (with the ex-ception of master netting agreements covering repurchase transactions, securities or commodi-ties lending or borrowing transactions, and other capital market-driven transactions) for the pur-pose of credit risk mitigation if the following requirements are fulfilled: 1. They must be legally effective and enforceable in all relevant jurisdictions, even in the

event of the insolvency of a counterparty; 2. At all times, the credit institution must be able to determine those assets and liabilities

which are subject to the master netting agreement; 3. The credit institution must monitor and control the risks associated with the termination

of the credit protection; and 4. The credit institution must monitor and control the relevant exposures on a net basis.


Master Netting Agreements

Article 101. Credit institutions may use master netting agreements covering repurchase transactions, securities or commodities lending or borrowing transactions, and other capital market-driven transactions for the purpose of credit risk mitigation if the following requirements are fulfilled: 1. They must be legally effective and enforceable in all relevant jurisdictions, even in the

event of the insolvency of a counterparty; 2. The non-defaulting party must have the right to immediately terminate and close out all

transactions under the agreement in the event of default, including the insolvency of the counterparty;

3. The netting of gains and losses on transactions closed out under a master agreement is enabled, so that a single net amount is owed by one party to the other; and

4. The minimum requirements pursuant to Article 102 are fulfilled.

Subsection 2

Minimum Requirements for Other Physical Collateral


Article 102. (1) Credit institutions may use financial collateral and gold for the purposes of credit risk mitigation if the following requirements are fulfilled: 1. The credit quality of the obligor and the value of the collateral must not show a material

positive correlation; securities issued by the obligor or any affiliated undertaking are not eligible for the for the purposes of credit risk mitigation; this does not apply to the obli-gor's own issues of covered bonds pursuant to Articles 18 and 19 if they are recognised as collateral for repurchase transactions;

2. The credit institution must fulfil any contractual and statutory requirements in respect of, and take all steps necessary to ensure, the enforceability of the collateral arrangements under applicable law;

3. The credit institution must conduct sufficient legal reviews to confirm the enforceability of the collateral arrangements in all relevant jurisdictions and to repeat such reviews as necessary in order to ensure continuing enforceability;

4. The collateral arrangements must be properly documented and include binding proce-dures for the immediate liquidation of collateral;

5. The credit institution must employ robust procedures and processes to control the risks arising from the use of collateral; and

6. The credit institution must have in place documented policies and procedures which show the types and maximum amounts of collateral accepted.

(2) Credit institutions must calculate the market value of the collateral and revalue it on a regular basis. This revaluation must be performed at least every six months and whenever the credit institution has reason to believe that the market value has decreased significantly.


(3) Where the collateral is held by a third party, then the separate custody of the collateral must be agreed upon.

(4) In addition to paras. 1 to 3, in order for financial collateral to be recognised under the Fi-nancial Collateral Simple Method, the residual maturity of the protection must be at least as long as the residual maturity of the exposure.

Real Estate Collateral

Article 103. (1) Credit institutions may use real estate collateral for the purposes of credit risk mitigation if the following requirements are fulfilled: 1. The security interest must be legally enforceable in all jurisdictions which are relevant at

the time of the conclusion of the credit agreement, and the security interest must be properly filed on a timely basis.

2. The security interest defined in the agreements must be legally effective and fulfil all legal requirements for establishing the security interest;

3. The protection agreement and the legal process underpinning it must enable the credit institution to realise the value of the protection within a reasonable time frame;

4. The value of commercial real estate must be monitored at least once per year and that of residential real estate at least every three years; more frequent monitoring must be carried out where the market is subject to sharp fluctuations.

5. The credit institution must document the types of residential and commercial real estate accepted as collateral and the lending policies in this regard; and

6. The credit institution must have procedures to monitor whether the property accepted as collateral is adequately insured against damage.

(2) Credit institutions may use statistical methods to monitor the value of real estate pursu-ant to para. 1 no. 4 and to identify revaluation needs. The property valuation must be reviewed by an independent valuer when information indicates that the value of the property may have declined materially relative to general market prices. Independent valuers must possess the necessary qualifications, ability and experience to execute a valuation, and be independent from the credit decision process. For loans which exceed EUR 3 million or 5% of the own funds of the credit institution, the credit institution must have the property valuation reviewed by an independent valuer at least every three years.

Valuation of Real Estate Collateral

Article 104. (1) The property must be valued by an independent valuer at or less than the market value. In those Member States which have laid down rigorous criteria for the assess-ment of the mortgage lending value in statutory or regulatory provisions, the property may in-stead be valued by an independent valuer at or less than the mortgage lending value.


(2) The value of the collateral must be the market value or mortgage lending value reduced as appropriate to reflect the results of the monitoring required under Article 103 para. 1 no. 4 and to account for any prior claims on the property. The market value or mortgage lending value must be documented in a transparent manner. The "market value" refers to the estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller, after proper marketing, in an arm's-length transaction in which the parties each act knowledgeably, prudently and without compulsion. The "mortgage lending value" re-fers to the value of the property as determined by a prudent assessment of the future market-ability of the property, taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property. Speculative elements must not be taken into account in the assessment of the mort-gage lending value.

Receivables

Article 105. (1) Credit institutions may use receivables for the purposes of credit risk miti-gation if the following requirements are fulfilled: 1. The legal mechanism by which the collateral is provided must be unconditional and en-

sure that the lender has clear rights over the proceeds; 2. The credit institution must take all steps necessary to fulfil local requirements regarding

the enforceability of security interests; 3. There must be a framework which allows the credit institution to have a first-priority

claim over the collateral, with preferential liens not taken into account in assessing prior-ity;

4. The credit institution must conduct sufficient legal reviews to confirm the enforceability of the collateral arrangements in all relevant jurisdictions;

5. The collateral arrangements must be properly documented and enable a clear and ro-bust procedure for the immediate collection of collateral.

6. The credit institution's processes must ensure that any legal conditions required for de-claring the default of the borrower and the immediate collection of collateral are fulfilled;

7. In the event of financial distress or default on the part of the borrower, the credit institu-tion must be authorized to sell the receivables, assign the receivables to other parties or otherwise liquidate the receivables without the consent of the borrower.

8. The credit institution must have a sound process for determining the credit risk associ-ated with the receivables; such a process must include, among other things, analyses of the borrower's business and industry and the types of customers with whom the bor-rower does business; where the credit institution relies on information provided by the obligor to determine credit risk, the credit institution must review the obligor's lending practices to ascertain their soundness and credibility;


9. The margin of the assessment base (C**) used to calculate risk-weighted exposure

amounts pursuant to Article 140 and the value of the receivables must reflect all appro-priate factors, including the cost of collection, concentration within the receivables pool pledged by an individual borrower, and potential concentration risk within the credit insti-tution's total exposures beyond that controlled by the credit institution's general risk management process;

10. The credit institution must monitor the receivables on an ongoing basis and regularly review compliance with loan covenants and other legal requirements;

11. The receivables pledged or assigned by an obligor must be diversified and must not be unduly correlated with the obligor; where the correlation is high, the attendant risks must be taken into account in the setting of margins for the exposure amount of the collateral pool as a whole; and

12. The credit institution must have a documented process for collecting receivable pay-ments in distressed situations; the requisite facilities for collection must be in place, even when the obligor is normally responsible for collections.

(2) Receivables from third parties affiliated with the borrower, especially receivables from subsidiaries and employees, must not be recognised as risk mitigants.

Value of Receivables

Article 106. For the purpose of calculating risk-weighted exposure amounts and expected loss amounts, the exposure value is to be the amount receivable.


Article 107. (1) Credit institutions may use other physical collateral for the purposes of credit risk mitigation if the following requirements are fulfilled: 1. The collateral arrangement must be legally effective and enforceable in all relevant ju-

risdictions, and must enable the credit institution to realise the value of the property within a reasonable timeframe;

2. The credit institution must have a first-priority security interest in the collateral, with legal preferential liens not taken into account in assessing priority;

3. the value of the collateral must be monitored at least once per year; more frequent monitoring must be carried out where the market is subject to sharp fluctuations;

4. The loan agreement and any related collateral agreements must include detailed de-scriptions of the collateral as well as detailed specifications of the manner and frequency of revaluation;

5. The types of physical collateral accepted by the credit institution as well as its policies and practices governing the appropriate amount of each collateral type relative to the exposure amount must be clearly documented in internal lending policies and proce-dures;

6. The credit institution's lending policies with regard to transaction structure must address appropriate collateral requirements relative to the exposure amount with regard to:


a) the ability to liquidate the collateral readily; b) the ability to establish a price or market value objectively; c) the probability that the price can be readily obtained; and d) the volatility (or a proxy of the volatility) of the value of the collateral; 7. The initial valuation and revaluation must fully take into account any deterioration or

obsolescence of the collateral, with particular attention to be paid to the effects of the passage of time on fashion- or date-sensitive collateral;

8. the credit institution must have the right to physically inspect the property; the credit institution must also have procedures addressing its exercise of the right to physical in-spection; and

9. the credit institution must have procedures to monitor that the property accepted as collateral is adequately insured against damage.

Value of Other Physical Collateral

Article 108. Credit institutions must value the property at its market value. The market value refers to the estimated amount for which the property would exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction.

Other Types of Collateral

Article 109. (1) Credit institutions may use cash on deposit with, or cash-assimilated in-struments held by, a third party institution for the purposes of credit risk mitigation if the follow-ing requirements are fulfilled: 1. The borrower's claim against the third-party institution is pledged or assigned to the

lending credit institution, and this pledge or assignment is legally effective and enforce-able in all relevant jurisdictions;

2. The third party institution is notified of the pledge or assignment; 3. As a result of the notification, the third-party institution is able to make payments solely

to the lending credit institution or to other parties with the lending credit institution's con-sent; and

4. The pledge or assignment is unconditional and irrevocable.

(2) Credit institutions may use life insurance policies pledged or assigned to the lending credit institution for the purposes of credit risk mitigation if the following requirements are ful-filled: 1. The company providing the life insurance is eligible as a protection provider pursuant to

Article 96; 2. The life insurance policy is pledged or assigned to the lending credit institution; 3. The company providing the life insurance is notified of the pledge or assignment and as

a result may not pay amounts payable under the contract without the consent of the lending credit institution;

4. The declared surrender value of the policy is non-reducible;


5. The lending credit institution must have the right to cancel the insurance policy and to

receive the surrender value immediately in the event of the default of the borrower; 6. The lending credit institution is informed of any non-payments under the policy by the

policyholder; 7. The term of the credit protection must cover the entire term of the loan; where the insur-

ance relationship ends before the loan relationship expires, the credit institution must ensure that the amount deriving from the insurance contract serves the credit institution as collateral until the end of the duration of the loan agreement; and

8. The security interest must be legally effective and enforceable in all jurisdictions which are relevant at the time of the conclusion of the credit agreement.

Leasing

Article 110. Credit institutions may regard exposures arising from leasing transactions as collateralised by the leased property if: 1. the requirements pursuant to Articles 103 to 108 are fulfilled for the specific type of

property leased; 2. The lessor has robust risk management in place with respect to the use of the leased

asset, its age and the planned duration of its use, including appropriate monitoring of the value of the collateral;

3. A legal framework is in place establishing the lessor's ownership of the asset and the lessor's ability to exercise its rights as owner immediately; and

4. Where this has not already been ascertained in calculating LGD, the difference between the value of the unamortised amount and the market value of the collateral must not ex-ceed the credit risk mitigation attributed to the leased asset.

Subsection 3

Minimum Requirements for Personal Collateral

Requirements for All Personal Collateral

Article 111. (1) Credit institutions may use personal collateral for the purpose of credit risk mitigation if the following requirements are fulfilled: 1. The credit protection must be direct; 2. The extent of the credit protection must be clearly defined; 3. The credit protection must be legally effective and enforceable in all jurisdictions which

are relevant at the time of the conclusion of the credit agreement; and 4. The credit protection agreement must not contain any clause the fulfilment of which is

outside the direct control of the lender and which a) would allow the protection provider to cancel the protection unilaterally; b) would increase the effective cost of credit protection as a result of deteriorating credit

quality of the protected exposure;


c) could prevent the protection provider from being obliged to pay out immediately in the

event that the original obligor fails to make any payments due; or d) could allow the protection provider to reduce the maturity of the credit protection.

Operational Requirements

Article 112. (1) Credit institutions must have systems in place to manage concentrations of risk arising from the credit institution's use of personal collateral.

(2) Credit institutions must demonstrate in a transparent manner how their strategy with re-gard to the use of personal collateral interacts with their management of their overall risk profile.

Sovereign and Other Public-Sector Counter-Guarantees

Article 113. (1) If an exposure is secured by personal collateral which is in turn counter-guaranteed by 1. a central government or central bank; 2. a regional government, local authority or public-sector entity whose debt instruments are

treated as exposures to the central government in whose jurisdiction they are estab-lished under the Standardised Approach to Credit Risk;

3. a multilateral development bank which is assigned a risk weight of 0% under the Stan-dardised Approach to Credit Risk; or

4. a public-sector entity whose debt instruments are treated as exposures to credit institu-tions under the Standardised Approach to Credit Risk,

then the exposure can be treated as if it were secured by personal collateral from one of the entities listed above provided that the requirements pursuant to para. 2 are fulfilled.

(2) For the purposes of para. 1, the following requirements apply: 1. The counter-guarantee must cover all credit risk elements of the exposure; 2. The original personal collateral and the counter-guarantee must meet the requirements

set out in points Articles 111, 112 und 114, except that the counter-guarantee need not be direct; and

3. The credit institution can demonstrate at any time that the credit protection is robust, and there are no indications that the counter-guarantee is less than effectively equiva-lent to a direct guarantee issued by the entity in question.

(3) The treatment indicated in para. 1 may also be applied to exposures which are counter-guaranteed by an entity other than those listed in para. 1 if the exposure's counter-guarantee is in turn directly guaranteed by one of the entities listed in para. 1 and the requirements set forth in para. 2 are fulfilled.

Additional Requirements for Personal Collateral other than Credit Derivatives

Article 114. (1) Credit institutions may use personal collateral (excluding credit derivatives) for the purpose of credit risk mitigation if the following requirements are fulfilled in addition to Articles 111 and 112:


1. Upon the qualifying default of or non-payment by the counterparty, the lending credit institution must have the right to pursue the protection provider immediately for any payments due under the exposure for which the protection is provided.

2. Payment by the protection provider must not be subject to the lending credit institution first having to pursue the obligor;

3. The personal collateral must be an obligation assumed in writing by the protection pro-vider; and

4. The personal collateral covers all types of payments the obligor is expected to make in respect of the exposure; where certain types of payment are excluded from the personal collateral, the recognised value of the credit protection must be adjusted to reflect the limited coverage.

(2) In the case of personal collateral covering mortgage loans for residential purposes, the requirements set forth in para. 1 no. 2 and Article 111 no. 4 lit. c must only be fulfilled within an overall time period of 24 months.

Guarantee Schemes Eligible for the Purpose of Credit Risk Mitigation

Article 115. In the case of personal collateral which is provided within the framework of guarantee schemes recognised for this purpose by the competent authority in a Member State, which is provided by one of the entities listed in Article 113 para. 1, or which is counter-guaranteed by one of those entities, the requirements set forth in Article 114 para. 1 no. 1 and no. 2 are to be considered fulfilled if: 1. The lending credit institution has a claim to a provisional payment from the protection

provider calculated to represent a robust estimate of the amount of the economic loss, including losses resulting from the non-payment of interest and other types of payment which the borrower is obliged to make, likely to be incurred by the lending credit institu-tion in proportion to the coverage of the personal collateral; or

2. It can be demonstrated that the loss-protecting effects of the personal collateral, includ-ing losses resulting from the non-payment of interest and other types of payments which the borrower is obliged to make, justify such treatment.

Additional Requirements for Credit Derivatives

Article 116. (1) Credit institutions may use credit derivatives for the purpose of credit risk mitigation if the following requirements are fulfilled in addition to Articles 111 and 112: 1. The credit events specified under the credit derivative must include the following in any

case: a) The failure to pay the amounts due under the terms of the underlying obligation that

are in effect at the time of such failure; b) The insolvency or inability of the obligor to pay its debts, or its failure or declaration in

writing of its general inability to pay its debts as they become due, and analogous events; and

c) The restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fees that results in a credit loss event;


2. In the case of credit derivatives which allow cash settlement, a robust valuation process

must be in place in order to estimate loss reliably; there must be a clearly specified pe-riod for obtaining post-credit-event valuations of the underlying obligation;

3. If the protection purchaser's right and ability to transfer the underlying obligation to the protection provider is required for settlement of the contract, the terms of the underlying obligation must stipulate that any required consent to such transfer must not be unrea-sonably withheld;

4. The identity of the parties responsible for determining whether a credit event has oc-curred must be clearly defined; this determination must not be the sole responsibility of the protection provider; and

5. The protection buyer must have the right to inform the protection provider of the occur-rence of a credit event.

(2) Where the credit events specified under the credit derivative do not include restructuring of the underlying obligation as described in para. 1 no. 1 lit. c, the credit protection may be used for the purpose of credit risk mitigation subject to a reduction in the recognised value pursuant to Article 146.

Mismatches

Article 117. A mismatch between the underlying obligation and the credit derivative's refer-ence obligation or between the underlying obligation and the obligation used for the purpose of determining whether a credit event has occurred is only permissible if: 1. The reference obligation (the obligation) used for the purpose of determining whether a

credit event has occurred, as the case may be, ranks pari passu with or is junior to the underlying obligation; and

2. The underlying obligation and the reference obligation (the obligation) used for the pur-pose of determining whether a credit event has occurred, as the case may be, share the same obligor (i.e., the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.

Double Default

Article 118. (1) Credit institutions may use personal collateral for the purposes of Article 74 para. 1 no. 5 if the following requirements are fulfilled: 1. The underlying obligation is an exposure to a) an undertaking pursuant to Article 22b para. 2 no. 3 Banking Act, with the exception

of insurance and reinsurance undertakings pursuant to Article 2 Insurance Supervi-sion Act;

b) a regional government, local authority or public-sector entity which is not treated as an exposure to a central government under the Internal Ratings Based Approach; or

c) a retail exposure to a small or medium-sized entity pursuant to Article 22b para. 2 no. 4 Banking Act;


2. The underlying obligor must not belong to the same exposure class as the protection

provider; 3. The exposure is secured by one of the following instruments: a) Single-name unfunded credit derivatives or single-name guarantees; b) First-to-default basket products; Article 74 para. 1 no. 5 is to be applied to the expo-

sure in the basket with the lowest risk-weighted exposure amount; c) nth-to-default basket products; this protection is only eligible for consideration for the

purposes of Article 74 para. 1 no. 5 if (n-1)th default protection eligible for the pur-poses of credit risk mitigation has also been obtained or where (n-1) of the assets in the basket has/have already defaulted; in such cases, Article 74 para. 1 no. 5 is to be applied to the exposure in the basket with the lowest risk-weighted exposure amount;

4. The personal collateral must fulfil the requirements set forth in Articles 111, 112, 114, 116 and 117;

5. The risk weight assigned to the exposure prior to the application of Article 74 para. 1 no. 5 must not already factor in any aspect of the personal collateral;

6. The credit institution must have the right to receive payment from the protection provider without first having to take legal action in order to pursue the counterparty for payment;

7. The credit institution must satisfy itself that the protection provider is willing to pay promptly;

8. The personal collateral purchased must absorb all credit losses incurred on the hedged portion of the exposure which arise due to the occurrence of credit events outlined in the contract;

9. Where personal collateral is agreed upon in such a way that the protection provider undertakes to deliver a loan, bond, or contingent liability, there must be legal certainty with regard to deliverability; where a credit institution intends to deliver an obligation other than the underlying exposure, the credit institution must ensure that this obligation is sufficiently liquid so that the credit institution may purchase it for delivery in accor-dance with the contract;

10. The collateral arrangement must be concluded in writing; 11. The credit institution must have processes in place to detect excessive correlation be-

tween the creditworthiness of the protection provider and the obligor of the underlying exposure due to their performance being dependent on common factors beyond the systemic risk factor; and

12. In the case of protection against the dilution risk of purchased receivables, the seller of the purchased receivable must not belong to the same exposure class as the protection provider.


Section 3

Effects of Credit Risk Mitigation

Subsection 1

General Article 119. Where the requirements set forth in Articles 83 to 118 are fulfilled, credit insti-

tutions may modify the risk-weighted exposure amounts under the Standardised Approach to Credit Risk and the risk-weighted exposure amounts and expected loss amounts under the Internal Ratings Based Approach in accordance with the provisions of this section.

Cash, Securities and Commodities under Repurchase Transactions or Securities or Commodities Lending or Borrowing Transactions

Article 120. Cash, securities or commodities purchased, borrowed or received under a re-purchase transaction or a securities or commodities lending or borrowing transaction are to be treated as credit protection. The effect of credit risk mitigation is based on the provisions set forth for each form of credit protection.

Credit-Linked Notes

Article 121. Investments in credit linked notes issued by the lending credit institution may be treated as cash collateral.

On-Balance-Sheet Netting

Article 122. Loans and deposits with the lending credit institution for which on-balance sheet netting is permitted may be treated as cash collateral.

Subsection 2

Master Netting Agreements


Master Netting Agreements Covering Repurchase Transactions, Securities and

Commodities Lending or Borrowing Transactions, and Other Capital Market-Driven Transactions

Article 123. (1) Unless stipulated otherwise in Articles 124 to 127, credit institutions may calculate the fully adjusted exposure value of an exposure (E*) subject to an eligible master netting agreement for repurchase transactions, securities and commodities lending or borrowing transactions, and other capital market-driven transactions by analogously applying the Financial Collateral Comprehensive Method pursuant to Articles 131 to 139. As an alternative, the credit institution may also use an internal model pursuant to Article 128 for the transactions indicated (provided they are not derivatives) and for margin lending transactions subject to a bilateral master netting agreement.

(2) For the purpose of calculating risk-weighted exposure amounts using an Internal Rat-ings Based Approach, the fully adjusted exposure value (E*) is to be taken as the exposure value of the exposures to the counterparty pursuant to Articles 124 to 128 arising from the transactions subject to the master netting agreement. Where an internal model pursuant to Arti-cle 128 is used to calculate the minimum capital requirements, the model results from the previ-ous trading day must be used for this purpose.

Net Position in Commodities and Securities

Article 124. (1) The net position in securities or commodities is to be calculated by sub-tracting the total value of securities or commodities of the same type borrowed, purchased or received under the master netting agreement from the total value of the securities or commodi-ties of the same type lent, sold or provided under the agreement. "Securities of the same type" refers to securities which are issued by the same entity, have the same issue date and maturity, are subject to the same terms and conditions, and are subject to the same liquidation periods pursuant to Articles 132 to 138.

(2) The net position in each currency, other than the settlement currency of the master net-ting agreement, is to be calculated by subtracting the total value of securities denominated in that currency borrowed, purchased or received under the master netting agreement added to the amount of cash in that currency borrowed or received under the agreement from the total value of securities denominated in that currency lent, sold or provided under the agreement added to the amount of cash in that currency lent or transferred under the agreement.

Volatility Adjustments

Article 125. The volatility adjustment appropriate to a given type of security or cash posi-tion is to be applied to the positive or negative net position in securities of that type.

Volatility Adjustment for Foreign Exchange Risk

Article 126. Credit institutions must apply the foreign exchange risk (fx) volatility adjust-ment to the net positive or negative position in each currency other than the settlement currency of the master netting agreement.


Adjusted Exposure Value

Article 127. Credit institutions must calculate the adjusted exposure value (E*) according to the following formula:

E* = max {0, [(∑(E) - ∑(C)) + ∑(|Net position for each security| × Hsec) + (∑|Efx| × Hfx)]},

where: E Where risk-weighted exposure amounts are calculated under the Standardised

Approach to Credit Risk, E is the exposure value for each separate exposure under the agreement that would apply in the absence of the credit protection; where risk-weighted exposure amounts and expected loss amounts are calculated under the Internal ratings Based Approach, E is the exposure value for each separate exposure under the agree-ment that would apply in the absence of the credit protection.

C the value of the securities or commodities borrowed, purchased or received or the cash borrowed or received in respect of each such exposure

Σ(E) the sum of all Es under the agreement Σ(C) the sum of all Cs under the agreement Efx the (positive or negative) net position in a given currency other than the settlement

currency of the agreement as calculated in accordance with Article 124 para. 2. Hsec the volatility adjustment appropriate to a particular type of security Hfx the foreign exchange volatility adjustment E* the fully adjusted exposure value.

Internal Models Approach

Article 128. (1) Credit institutions which use an internal model pursuant to Article 22g para. 8 Banking Act to calculate fully adjusted the exposure value (E*) resulting from the appli-cation of an eligible master netting agreement covering repurchase transactions, securities or commodities lending or borrowing transactions, or capital market-driven transactions other than derivative transactions must fulfil the provisions of paras. 2 to 7 in any case. Internal models may also be used for margin lending transactions if the transactions are covered under a bilat-eral master netting agreement which meets the requirements set forth in Articles 258 to 261.

(2) Credit institutions must apply the internal model consistently to all counterparties and securities with the exception of immaterial portfolios, for which volatility adjustments can be made in accordance with Articles 123 to 127.

(3) Depending on the credit institution's level of activity on the respective markets, the model must account for a sufficient number of risk factors so that all material price risks are captured. Correlation effects between securities positions subject to the master netting agree-ment and the liquidity of the instruments in question must be taken into account appropriately. The internal models used must provide estimates of the potential change in value of the unse-cured exposure amounts (ΣE - ΣC).


(4) The systems used to control the risks arising from transactions subject to master netting agreements must be conceptually sound and be applied correctly. In this context, the model must in any case fulfil the requirements set forth in Article 254 paras. 4 and 5 and Article 255 as well as the following qualitative requirements: 1. The internal risk measurement model used for calculation of potential price volatility for

the transactions is closely integrated into the day-to-day risk management process of the credit institution and serves as the basis for reporting risk exposures to the credit in-stitution's senior management;

2. The credit institution has a separate risk control unit that is independent from front office and reports directly to senior management; this unit must be responsible for designing and implementing the credit institution's risk management system and must produce and analyse daily reports on the output of the risk measurement model and on the appropri-ate measures to be taken in terms of position limits;

3. The daily reports produced by this organisational unit are reviewed by a level of man-agement with sufficient authority to enforce reductions of positions taken and of overall risk exposure;

4. The credit institution has sufficient staff skilled in the use of sophisticated models in this organisational unit;

5. The credit institution has in place procedures for monitoring and ensuring compliance with a documented set of internal policies and controls concerning the overall operation of the risk measurement system;

6. The credit institution's models have a proven track record of reasonable accuracy in measuring risks, which can be demonstrated by back-testing the models' output using at least one year of data;

7. The credit institution conducts a stress testing programme at regular intervals, and the results of these tests are reviewed by senior management and reflected in the policies and limits defined;

8. The credit institution's internal audit unit must review the risk measurement system on a regular basis; this review must include the activities of the organisational unit pursuant to no. 1 as well as those of the front office; and

9. The credit institution's internal audit unit must conduct a review of the risk management system at least once per year.

(5) The models used must fulfil the following quantitative requirements: 1. Calculation is performed at least once per day; 2. A 99th-percentile, one-tailed confidence interval is applied; 3. A 5-day equivalent liquidation period is assumed, except in the case of transactions

other than securities repurchase transactions or securities lending or borrowing transac-tions, where a 10-day equivalent liquidation period is to be used;

4. An effective historical observation period of at least one year is used, except where a shorter observation period is justified by a significant upsurge in price volatility; and

5. The data is updated at least every three months.


(6) Credit institutions may use empirical correlations within risk categories and across risk categories if the system for measuring correlations is sound.

(7) Credit institutions which use the internal models approach must calculate the fully ad-justed exposure value (E*) according to the following formula using the model output from the previous trading day:

E* = max {0, [(∑E - ∑C) + (VaR output from internal model)]},

where: E Where risk-weighted exposure amounts are calculated under the Standardised

Approach to Credit Risk, E is the exposure value for each separate exposure under the agreement that would apply in the absence of the credit protection; where risk-weighted exposure amounts and expected loss amounts are calculated under the Internal ratings Based Approach, E is the exposure value for each separate exposure under the agree-ment that would apply in the absence of the credit protection.

C the current value of the securities borrowed, purchased or received or the cash borrowed or received in respect of each such exposure

Σ(E) the sum of all Es under the agreement Σ(C) the sum of all Cs under the agreement

Subsection 3

Other Real Collateral


Article 129. (1) Credit institutions which use the Standardised Approach to Credit Risk to calculate risk-weighted exposure amounts may choose the Simple Method or the Comprehen-sive Method for the recognition of financial collateral.

(2) Credit institutions which use the Internal Ratings Based Approach must consistently ap-ply the Financial Collateral Comprehensive Method.

Financial Collateral Simple Method

Article 130. (1) In the Simple Method, financial collateral which is eligible for the purpose of credit risk mitigation must be recognised at market value pursuant to Article 102 paras. 1 to 3.

(2) The risk weight which would be assigned under the Standardised Approach to Credit Risk if the lender had a direct exposure to the protection provider is allocated to the portions of the exposure secured by the market value of the credit protection eligible for the purpose of credit risk mitigation. Unless stipulated otherwise in paras. 3 to 5, the risk weight of the collater-alised portion must be a minimum of 20%. The remainder of the exposure must be assigned the risk weight required for an unsecured exposure to the counterparty under the Standardised Approach to Credit Risk.


(3) In the case of repurchase transactions and securities lending or borrowing transactions, a risk weight of 0% is to be assigned to the collateralised portion of the exposure arising from transactions pursuant to Article 138. If the counterparty is not a core market participant pursuant to Article 138 para. 1 no. 7, a risk weight of 10% is to be assigned.

(4) For OTC instruments which are subject to daily marking-to-market, which are collateral-ised by cash or cash-assimilated instruments, and whose exposure values are determined on a daily basis pursuant to Articles 233 to 261, a risk weight of 0% is to be assigned to the collater-alised portion of the exposure where there is no currency mismatch. Where transactions are collateralised by debt securities 1. issued by central governments or central banks; 2. issued by regional governments or local authorities and treated as exposures to the

central government under the Standardised Approach to Credit Risk; 3. issued by multilateral development banks to which a risk weight of 0% is to be assigned

under the Standardised Approach to Credit Risk; and 4. issued by international organisations to which a risk weight of 0% is to be assigned un-

der the Standardised Approach to Credit Risk; then a risk weight of 10% is assigned to the collateralised portion of the exposure.

(5) For other exposures, the collateralised portion of the exposure may be assigned a risk weight of 0% if the exposure and collateral are denominated in the same currency and the col-lateral 1. is in the form of cash on deposit or a cash-assimilated instrument; or 2. is in the form of debt securities pursuant to para. 4 nos. 1 to 4 which are assigned a risk

weight of 0% under the Standardised Approach to Credit Risk and whose market value is discounted by 20%.

Financial Collateral Comprehensive Method

Article 131. (1) In valuing financial collateral for the purposes of the Financial Collateral Comprehensive Method, credit institutions must apply volatility adjustments to the market value of the financial collateral, and currency mismatches must be accounted for appropriately.

(2) In the case of OTC instruments covered by a master netting agreement which is recog-nised for the purpose of credit risk mitigation, an additional adjustment reflecting currency vola-tility must be applied when there is a mismatch between the collateral currency and the settle-ment currency. Where transactions subject to an eligible master netting agreement are settled in multiple currencies, only a single volatility adjustment is to be applied to each transaction for currency volatility.


Volatility Adjustments for the Value of Financial Collateral

Article 132. (1) Except in the case of transactions subject to master netting agreements recognised for the purpose of credit risk mitigation, credit institutions must calculate the volatil-ity-adjusted value of the collateral to be taken into account according to the following formula: 1. CVA = C × (1-HC-Hfx); 2. The volatility-adjusted value of the exposure to be taken into account is to be calculated

as follows: EVA = E x (1+HE), and in the case of OTC instruments, EVA = E;

3. As a result, the fully adjusted value of the exposure, taking into account both volatility and the risk-mitigating effects of collateral, is calculated as follows:

E* = max {0, [EVA - CVAM]}, where: E the exposure value which would be applied under the Standardised Approach to

Credit Risk or the Internal Ratings Based Approach if the exposure were unse-cured; for this purpose, for credit institutions which calculate risk-weighted ex-posure amounts under the Standardised Approach to Credit Risk, the exposure value of off-balance sheet items listed in Annex 1 to Article 22 Banking Act must be 100% of its value rather than the percentages indicated in Article 22a para. 2 no. 2 Banking Act, and for credit institutions which calculate risk-weighted expo-sure amounts under the Internal Ratings Based Approach, the exposure value of the items listed in Article 65 paras. 9 to 11 must be calculated using a con-version factor of 100% rather than the conversion factors or percentages indi-cated in those paragraphs.

EVA the volatility-adjusted exposure value; CVA the volatility-adjusted value of the collateral; CVAM CVA further adjusted for any maturity mismatches pursuant to Articles 151 to

153. HE the volatility adjustment appropriate to the exposure (E), as calculated in

accordance with Articles 132 to 138; HC the volatility adjustment appropriate to the collateral, as calculated in

accordance with Articles 132 to 138; Hfx the volatility adjustment appropriate to the currency mismatch, as calculated in

accordance with Articles 132 to 138; E* the fully adjusted exposure value taking into account volatility and the

risk-mitigating effect of the collateral.

(2) Credit institutions may calculate volatility adjustments either on the basis of supervisory volatility adjustments pursuant to Article 134 or on the basis of own estimates pursuant to Arti-cle 135. Where a credit institution uses the own estimates approach, this approach must be applied to all financial collateral with the exception of immaterial portfolios. Where the collateral is composed of multiple instruments recognised for the purpose of credit risk mitigation, the overall volatility adjustment is to be the weighted sum of volatility adjustments for each instru-ment included in the collateral. The overall volatility adjustment is calculated as follows:


∑=i

ii HaH ,

where: ai the proportion of the instrument to the collateral as a whole Hi the volatility adjustment calculated for that instrument.

Scaling Up Volatility Adjustments

Article 133. Where revaluation is performed less frequently than once per day, credit insti-tutions must apply larger volatility adjustments by scaling up volatility adjustments which are based on daily revaluation in accordance with Articles 134 and 135 using the following formula:

( ) ,1

M

MRM T

TNHH −+=

where: H the volatility adjustment to be applied HM the volatility adjustment given daily revaluation NR the actual number of trading days between revaluations TM the liquidation period for the type of transaction in question.

Supervisory Volatility Adjustments

Article 134. (1) Where the requirement of daily revaluation is fulfilled, credit institutions must use the volatility adjustments indicated in the tables below; the credit quality steps are to be based on assignments under the Standardised Approach to Credit Risk. For secured lending transactions, the liquidation period must be 20 business days. For repurchase transactions (ex-cept where such transactions involve the transfer of commodities or guaranteed rights related to title to commodities) and securities lending or borrowing transactions, the liquidation period must be 5 business days. For other capital market driven transactions, the liquidation period must be 10 business days.


Credit quality step as-sociated with the credit assess-ment of the debt security

Resid-ual

maturity

Volatility adjustment for debt securities issued by entities

indicated in Article 87 para. 1 no. 2

Volatility adjustment for debt securities issued by entities

indicated in Article 87 para. 1 nos. 3 and 4

20-day liquidation period (%)




10-day liquida-tion period (%)


1 ≤ 1 year

0.707 0.5 0.354 1.414 1 0.707

> 1 ≤ 5 years

2.828 2 1.414 5.657 4 2.828

> 5 years

5.657 4 2.828 11.314 8 5.657

2-3 ≤ 1 year

1.414 1 0.707 2.828 2 1.414

> 1 ≤ 5 years

4.243 3 2.121 8.485 6 4.243

> 5 years

8.485 6 4.243 16.971 12 8.485

4 ≤ 1 year

21.213 15 10.607 N/A N/A N/A

> 1 ≤ 5 years

21.213 15 10.607 N/A N/A N/A

> 5 years

21.213 15 10.607 N/A N/A N/A


Credit quality step as-sociated with the credit assess-ment of a short-term debt security

Volatility adjustment for debt securi-ties issued by entities with short-term credit assessments as indi-cated in Article 87 para. 1 no. 2

Volatility adjustment for debt securi-ties issued by entities with short-term

credit assessments as indicated in Article 87 para. 1 nos. 3 and 4

20-day liquida-tion period (%)


5-day liq-uidation period (%)




1 0.707 0.5 0.354 1.414 1 0.707 2-3 1.414 1 0.707 2.828 2 1.414

Other collateral and exposure types




Main index equities, main index convertible bonds

21.213 15 10.607

Other equities or convertible bonds listed on a recognised exchange

35.355 25 17.678

Cash 0 0 0 Gold 21.213 15 10.607

Volatility adjustments for currency mismatches

20-day liquidation period (%) 10-day liquidation period (%) 5-day liquidation period (%)

11.314 8 5.657

(2) In the case of securities not eligible for the purpose of credit risk mitigation or commodi-ties sold or lent under a repurchase transaction or a securities or commodities lending or bor-rowing transaction, credit institutions must apply the same volatility adjustment as for non-main index equities listed on a recognised exchange.


(3) In the case of investment fund shares eligible for the purpose of credit risk mitigation, credit institutions must apply a volatility adjustment equal to the weighted average volatility ad-justments that would apply to the assets in which the fund has invested, with due attention to the liquidation period for the assets as specified in para. 1. In cases where the assets in which the fund has invested are not known to the credit institution, the volatility adjustment is the high-est volatility adjustment that would apply to any of the assets in which the fund has the right to invest.

(4) For unrated debt securities which are issued by institutions and which are eligible for the purpose of credit risk mitigation pursuant to Article 88 para. 1, the volatility adjustment is the same as for securities issued by institutions or corporates with an external credit assessment associated with credit quality step 2 or 3.

Own Estimates of Volatility Adjustments

Article 135. (1) In calculating volatility adjustments, credit institutions may use their own es-timates provided that the quantitative criteria pursuant to Article 136 and the qualitative criteria pursuant to Article 137 are fulfilled.

(2) Volatility adjustments must be calculated for each individual instrument in the case of debt securities which are rated below investment grade by an eligible external credit assess-ment institution and in the case of other financial collateral eligible for the purpose of credit risk mitigation.

(3) Where debt securities are rated as investment grade or better by an eligible external credit assessment institution, the credit institution may calculate a volatility estimate for each category of security. In determining the relevant categories, the credit institution must take the following into account: 1. the type of issuer; 2. the external credit assessment of the securities; and 3. the residual maturity and modified duration of the securities. . Volatility estimates must be representative of the securities included in a category by the credit institution.

(4) Credit institutions are to estimate the volatility of the collateral or currency mismatch without taking into account any correlations between the unsecured exposure, the collateral or exchange rates.

Quantitative Requirements for Own Volatility Adjustments

Article 136. (1) Credit institutions must use a 99th-percentile, one-tailed confidence level when estimating volatility adjustments.

(2) For secured lending transactions, a liquidation period of 20 business days must be as-sumed. For repurchase transactions (except where such transactions involve the transfer of commodities or guaranteed rights related to title to commodities) and securities lending or bor-rowing transactions, a liquidation period of 5 business days must be used. For other capital market driven transactions, a liquidation period of 10 business days must be used.


(3) Credit institutions may estimate volatility adjustments based on shorter or longer liquida-tion periods than the one prescribed in para. 2; in such cases, the liquidation period (TN) pursu-ant to para. 2 for the type of transaction in question must be scaled up or down accordingly using the following formula:

,N

MNM T

THH =

where: HM the volatility adjustment under TM HN the volatility adjustment based on the liquidation period TN TM the respective liquidation period.

(4) Credit institutions must account for the illiquidity of lower-quality assets sufficiently. The liquidation period must be adjusted upwards in cases where there is doubt concerning the li-quidity of the collateral. Credit institutions must ascertain whether the data might understate the potential volatility of financial collateral. Credit institutions must carry out suitable stress tests where such cases are identified.

(5) The historical observation period for calculating volatility adjustments must be a mini-mum of one year in length. For credit institutions which use a weighting scheme or other meth-ods for the historical observation period, the effective observation period must be at least one year in length. In such cases, the weighted average time lag of the individual observations must not be less than 6 months. In the case of a significant upsurge in price volatility, the credit insti-tution must calculate its volatility adjustments using a shorter observation period.

(6) Credit institutions must update their data sets regularly (at least once every three months) and review them whenever market prices are subject to material changes. Volatility adjustments must be recalculated at least every three months.

Qualitative Requirements for Own Volatility Adjustments

Article 137. (1) Credit institutions must use volatility estimates in their day-to-day risk man-agement process, also in relation to its internal exposure limits. Where the liquidation period used by the credit institution in its day-to-day risk management process is longer than that de-fined for the type of transaction in question, the credit institution's volatility adjustments must be scaled up in accordance with the formula set out in Article 133.

(2) Credit institutions must have in place procedures for monitoring and ensuring compli-ance with a documented set of policies and controls for the operation of its system for the esti-mation of volatility adjustments and for the integration of such estimations into its risk manage-ment process.

(3) The entire system used by the credit institution to estimate volatility adjustments must be reviewed by the internal audit unit on a regular basis (at least once per year). This review must at least cover the following aspects:


1. The integration of estimated volatility adjustments into day-to-day risk management; 2. The validation of any significant change in the process of estimating volatility adjust-

ments; 3. The verification of the consistency, timeliness and reliability of data sources used to run

the system for the estimation of volatility adjustments, including the independence of such data sources; and

4. The accuracy and appropriateness of the volatility assumptions.

Application of 0% Volatility Adjustments

Article 138. (1) Where a credit institution uses the Financial Collateral Comprehensive Method to calculate the adjusted exposure value (E*) for repurchase transactions and securities lending or borrowing transactions, a volatility adjustment of 0% may be applied if: 1. The exposure and the collateral are cash or debt securities issued by central govern-

ments or central banks as specified in Article 87 para. 1 no. 2, are eligible for a 0% risk weight under the Standardised Approach to Credit Risk, and are denominated in the same currency;

2. Either the maturity of the transaction is no more than one day or both the exposure and the collateral are subject to daily marking-to-market or daily remargining;

3. The contract stipulates that the time between the last marking-to-market before a failure to remargin by the counterparty and the liquidation of the collateral must not exceed four business days;

4. The transaction is settled across a settlement system which is suitable for the type of transaction;

5. The documentation used for the contract is standard market documentation for such transactions;

6. The transaction is subject to a documented right to terminate the transaction without notice if the counterparty fails to satisfy an obligation to deliver cash or securities or to deliver margin or otherwise defaults; and

7. The counterparty is one of the following core market participants: a) Issuers pursuant to Article 87 para. 1 no. 2 whose instruments are assigned a risk

weight of 0% under the Standardised Approach to Credit Risk; b) Institutions; c) Other financial undertakings whose debt instruments are assigned a 20% risk weight

under the Standardised Approach to Credit Risk or which, in the case of credit institu-tions calculating risk-weighted exposure amounts and expected loss amounts under the Internal Ratings Based Approach, do not have a credit assessment from an eligi-ble external credit assessment institution and are internally rated as having a PD equivalent to that associated with the credit assessments of external credit assess-ment institutions determined by the competent authorities to be associated with credit quality step 2 or above under the rules for the risk weighting of exposures to corpo-rates under the Standardised Approach;


d) Recognised investment funds; e) Regulated pension funds; and f) Recognised clearing houses.

(2) The treatment pursuant to para. 1 is permissible in cases where the competent authority in a Member State allows the treatment pursuant to para. 1 for repurchase transactions or secu-rities lending or borrowing transactions in securities issued by its domestic government.

Weighted Exposure Amounts and Expected Loss Amounts for Financial Collateral

Article 139. (1) Where credit institutions use the Standardised Approach to Credit Risk to calculate risk-weighted exposure amounts, the exposure value for this purpose is to be taken as the adjusted exposure value (E*) calculated in accordance with Article 132. In the case of off-balance-sheet transactions pursuant to Annex 1 to Article 22 Banking Act, the adjusted expo-sure value (E*) is equal to the exposure value prior to the application of the conversion factor pursuant to Article 22a para. 2 no. 2 Banking Act.

(2) Where credit institutions use the Internal Ratings Based Approach to calculate risk-weighted exposure amounts, the LGD for this purpose is to be taken as the effective loss given default (LGD*) calculated in accordance with the following formula:

,**E

ELGDLGD ×=

where: LGD the loss given default which would apply to the exposure in question under Articles 36 to

82 if the exposure were not collateralised; E the exposure value calculated in accordance with Article 132; E* the adjusted exposure value pursuant to Article 132.

Other Collateral Eligible for the Purpose of Credit Risk Mitigation

under the Internal Ratings Based Approach

Article 140. For the purpose of calculating the weighted exposure amount for other eligible collateral under the Internal Ratings Based Approach pursuant to Articles 92 to 94, the loss given default (LGD) is equal to the effective loss given default (LGD*). Where the ratio of the value of the collateral to the exposure value (C/E) the value of C** defined in the table below, LGD* must be set to the respective value as prescribed in the table below. Where the ratio of the value of the collateral to the exposure value is lower than the value defined under C*, LGD* must be set to the LGD determined in accordance with Articles 36 to 82 for an unsecured expo-sure to the counterparty in question. Where the ratio C/E falls between the values defined for C* and C**, then two exposures are to be created, with one of the two attaining the required level of collateralisation (C**).


LGD* for

senior claims

LGD* for subordi-nated claims

Required minimum collateralisation level of the exposure (C*)

Required minimum collateralisation

level of the exposure (C**)

Receivables 35% 65% 0% 125% Residential and commercial real estate

35% 65% 30% 140%


40% 70% 30% 140%

Alternative Valuation of Real Estate Collateral

Article 141. (1) Credit institutions may assign a risk weight of 50% to that portion of an ex-posure which is fully collateralised by residential or commercial real estate located in Austria.

(2) Where the competent authority in another Member State permits the treatment pursuant to para. 1 with regard to residential and commercial real estate located within its territory, the credit institution may also apply para. 1 to the fully collateralised portion of exposures secured by residential or commercial real estate located in that Member State.

Weighted Exposure Amounts and Expected Loss Amounts for Mixed Pools of Collateral

Article 142. Where a credit institution used the Internal Ratings Based Approach to calcu-late weighted exposure amounts and expected loss amounts, the effective loss given default (LGD*) is equal to LGD in the case of exposures collateralised by both financial collateral and other collateral pursuant to Articles 92 to 94. In this context, the volatility-adjusted value of the exposure pursuant to Article 132 para. 1 must be subdivided into parts, with each part covered by only one type of collateral. LGD* is to be calculated separately for each part of the exposure secured by a type of collateral. For the unsecured portion of the exposure, LGD* is equal to the LGD determined in accordance with Articles 32 to 82 for an unsecured exposure to the obligor in question.

Deposits with Third-Party Institutions

Article 143. Deposits with a third-party institution which are eligible for the purpose of credit risk mitigation pursuant to Article 95 no. 1 are to be treated as personal collateral provided by a third-party institution.

Pledged Life Insurance Policies

Article 144. Pledges of life insurance policies which are eligible for the purpose of credit risk mitigation pursuant to Article 95 no. 2 are to be treated as personal collateral provided by the insurance undertaking in question, with the value of the collateral set equal to the surrender value of the insurance policy.


Collateral pursuant to Article 95 no. 3

Article 145. In the case of hedges eligible for the purpose of credit risk mitigation pursuant to Article 95 no. 3, the relevant instruments issued by third-party institutions and repurchased on request may be treated as personal collateral provided by that third-party institution, with the value of the collateral set equal to: 1. the face value as the value of the protection in cases where instruments are repur-

chased at face value; and 2. the amount calculated by analogous application of the method for debt securities pursu-

ant to Article 88 as the value of the protection in cases where instruments are repur-chased at market value.

.

Subsection 4

Personal Collateral

Valuation of Personal Collateral

Article 146. (1) Credit institutions must assume that amount which the protection provider has undertaken to pay in the event that the borrower defaults or fails to make payments due or another agreed credit event occurs as the value of personal collateral eligible for the purpose of credit risk mitigation pursuant to Articles 96 to 99.

In the case of a credit derivative which is eligible for the purpose of credit risk mitigation pursuant to Article 98 and in which the restructuring of the underlying obligation (involving for-giveness or postponement of principal, interest or fees) that results in a credit loss event for the lender is not considered a credit event: 1. the value calculated in accordance with para. 1 is to be reduced by 40% in cases where

the amount the protection provider has undertaken to pay is not higher than the expo-sure value; or

2. the value calculated in accordance with para. 1 may be no higher than 60% of the expo-sure value in cases where the amount the protection provider has undertaken to pay is higher than the exposure value.

Personal Collateral Denominated in Different Currencies

Article 147. In cases where the personal collateral is denominated in a currency other than that of the exposure, the value of the credit protection is to be reduced by a volatility adjustment according to the following formula:

),1(* fxHGG −×=


where: G* the value G adjusted for any foreign exchange risk; G the value of the collateral pursuant to Article 146; Hfx the volatility adjustment for currency mismatches between the credit protection and the

underlying obligation. Credit institutions must use the supervisory volatility adjustments pursuant to Article 134 or their own estimates of volatility adjustments pursuant to Article 135.

Weighted Exposure Amounts and Expected Loss Amounts

for Securitisation Transactions

Article 148. Where the credit institution transfers part of its credit risk in one or more tranches, the provisions governing securitisations pursuant to Articles 156 to 178 are to be ap-plied. Where materiality thresholds are defined below which no payment may be made in the event of loss, such thresholds are considered to be equivalent to retained first-loss positions and to give rise to a tranched transfer of risk.

Weighted Exposure Amounts and Expected Loss Amounts under the Standardised Approach to Credit Risk

Article 149. (1) Where a credit institution uses the Standardised Approach to Credit Risk to calculate its risk-weighted exposure amounts, the risk-weighted exposure amounts are to be calculated as follows for this purpose: 1. Where the amount secured by personal collateral is greater than or equal to the expo-

sure amount, the risk weight for exposures to the protection provider is to be applied in lieu of the risk weight for exposures to the obligor; the secured amount GA is calculated on the basis of the value determined in accordance with Article 147 and adjusted in ac-cordance with Articles 151 to 153; and

2. Where the amount secured is lower than the exposure amount and the secured and unsecured portions are of equal seniority, the risk-weighted exposure amount is to be calculated according to the following formula:

,)( gGrGE AA ×+×−

where: E the exposure value; GA the value calculated in accordance with Article 147 and adjusted in accordance

with Articles 151 to 154; r the risk weight of exposures to the obligor as determined under the

Standardised Approach to Credit Risk; g the risk weight of exposures to the protection provider as determined under the

Standardised Approach to Credit Risk;


(2) Exposures or parts of exposures may be treated in accordance with Article 4 paras. 4

and 5 if:

1. they are guaranteed by the central government or central bank; and 2. the guarantee is denominated in the domestic currency of the borrower and the expo-

sure is funded in that currency.

Weighted Exposure Amounts and Expected Loss Amounts under the Internal Ratings Based Approach

Article 150. (1) Where a credit institution uses the Internal Ratings Based Approach to cal-culate its risk-weighted exposure amounts and expected loss amounts, the credit institution may use the PD of the protection provider, or a PD between that of the protection provider and that of the borrower, for the covered portion of an exposure for the purpose of determining the PD pursuant to Articles 68 to 72. This is based on the adjusted value of the credit protection (GA). In the case of subordinated exposures and non-subordinated personal collateral, the LGD to be applied may be that associated with a corresponding senior claim.

(2) For the uncovered portion of the exposure, the PD applied must be that of the borrower and the LGD applied must be that of the underlying exposure.

Subsection 5

Accounting for Maturity Mismatches

Maturity Mismatches

Article 151. (1) Where the residual maturity of the credit protection is less than that of the protected exposure (maturity mismatch), the credit protection may not be recognised for the purpose of credit risk mitigation if: 1. the original maturity of the credit protection is less than 1 year; 2. the protected exposure is a short-term exposure which is subject to a one-day floor in-

stead of a one-year floor with regard to the effective maturity (M) pursuant to Article 70 para. 4;

3. the protection has a residual maturity of less than three months and its maturity is less than that of the protected exposure.

4. the protection is in the form of financial collateral and the credit institution applies the Financial Collateral Simple Method pursuant to Article 130.

(2) The effective maturity of the protected exposure is the longest possible remaining time before the obligor is scheduled to fulfil its obligations; this period is subject to a maximum of five years. Para. 3 notwithstanding, the maturity of the credit protection is equal to the time period until the earliest date on which the protection may terminate or be terminated.


(3) Where the protection seller has an option to terminate the protection, the maturity of the protection is to be taken as the time period until to the earliest date on which that option may be exercised. Where the protection buyer has an option to terminate the protection and the terms of the arrangement offer a positive incentive for the protection buyer to terminate the transaction before its contractual maturity, the maturity of the protection is to be taken as the time period until the earliest date on which that option may be exercised. Otherwise, such an option may be disregarded in assessing the maturity of the protection.

(4) Where a credit derivative may terminate prior to the expiration of any grace period re-quired for a default on the underlying obligation to occur as a result of a failure to pay, the ma-turity of the protection determined in accordance with paras. 2 and 3 is to be reduced by the amount of the grace period.

Maturity Mismatches in Financial Collateral

Article 152. Where the credit institution uses the Financial Collateral Comprehensive Method to value financial collateral eligible for the purpose of credit risk mitigation, the maturity of the exposure and that of the collateral must be reflected in the adjusted value of the collateral according to the following formula in the case of a maturity mismatch:

,*)(*)(tTttCC VAVAM −

−×=

where: CVA the volatility-adjusted value of the financial collateral pursuant to Article 132 para. 1 or

the exposure amount, whichever is lower; T the number of years remaining until the maturity date of the exposure calculated in

accordance with Article 151 paras. 2 to 4, or five years, whichever is lower; t the number of years remaining until the maturity date of the collateral calculated in

accordance with Article 151 paras. 2 to 4, or T, whichever is lower; t* 0.25. The value of the collateral adjusted in this way for the maturity mismatch (CVAM) is to be inserted as CVA into the formula for the fully adjusted exposure value (E*) pursuant to Article 132 para. 1.

Maturity Mismatches in Personal Collateral

Article 153. In the case of maturity mismatches in connection with personal collateral eligi-ble for the purpose of credit risk mitigation, the maturity of the exposure and that of the collateral must be reflected in the adjusted value of the collateral according to the following formula:

,*)(*)(*tTttGGA −

−×=


where: GA G* adjusted for the maturity mismatch G* the amount of the personal collateral pursuant to Article 146, or pursuant to Article 147

in the case of a currency mismatch; t the number of years remaining until the maturity date of the collateral calculated in

accordance with Article 151 paras. 2 to 4, or T, whichever is lower; T the number of years remaining until the maturity date of the exposure calculated in

accordance with Article 151 para. 2 to 4, or five years, whichever is lower; t* 0.25. The value of the collateral adjusted in this way (GA) is to be taken as the value of the protection for the purposes of Articles 146 to 150.

Subsection 6

Basket Protection Article 154. (1) Where credit protection is obtained for a number of exposures under such

terms that the first default among the exposures triggers payment and that this credit event ter-minates the contract, the credit institution may modify the risk-weighted exposure amount and, where applicable, the expected loss amount of the exposure which would produce the lowest risk-weighted exposure amount in the absence of the credit protection under the Standardised Approach to Credit Risk or under the Internal Ratings Based Approach as appropriate in accor-dance with the provisions of this regulation if the exposure amount is less than or equal to the value of the protection.

(2) Where credit protection is obtained for a number of exposures under such terms that the nth default among the exposures triggers payment under the credit protection, the credit institu-tion may only recognise the protection in the calculation of risk-weighted exposure amounts and, where applicable, of expected loss amounts if protection has also been obtained for de-faults 1 to n-1 or when n-1 defaults have already occurred. In such cases, the methodology must follow that defined under para. 1 for first-to-default derivatives with the appropriate modifi-cations for nth-to-default products.

Subsection 7

Combinations of Credit Risk Mitigation in the Standardised Approach

Article 155. (1) Where a credit institution which calculates risk-weighted exposure amounts under the Standardised Approach to Credit Risk uses more than one form of credit risk mitiga-tion for a single exposure, that exposure must be subdivided into individual portions covered by each credit risk mitigation technique and the risk-weighted exposure amount for each portion must be calculated separately under the Standardised Approach to Credit Risk.

(2) Where credit protection provided by a single protection provider has differing maturities, a similar approach to that described in para. 1 is to be applied.


Chapter 4

Securitisation Positions

Section 1

Calculation of Risk-Weighted Exposure Amounts and Expected Loss Amounts

Effective Transfer of Exposures in a Traditional Securitisation

Article 156. In a traditional securitisation, exposures are considered to be transferred effec-tively if: 1. A significant part of the credit risk arising from the securitised exposures has been trans-

ferred to a third party; 2. The securitisation documentation reflects the economic substance of the transaction; 3. A legal opinion has been obtained which confirms that the securitised receivables have

been put beyond the reach of the originator credit institution and its creditors; 4. The securities issued in the transaction do not represent payment obligations of the

originator credit institution; 5. The originator credit institution does not maintain effective or indirect control over the

transferred exposures; effective control over the transferred exposures is considered maintained if the originator has the right to repurchase the previously transferred expo-sures from the transferee in order to realise their benefits or if the originator is obligated to re-assume the transferred risk; the originator credit institution's retention of servicing rights and obligations related to the exposures does not as such constitute control over the exposures;

6. The securitisation documentation does not require the originator credit institution to im-prove securitisation positions in the event of a deterioration in the credit quality of the securitised exposures or exposure pool, except in the case of early amortisation provi-sions; and

7. Clean-up call options may only be agreed upon if the following criteria are fulfilled: a) The clean-up call option is exercisable at the discretion of the originator credit institu-

tion; b) The clean-up call option may only be exercised when 10% or less of the original value

of the securitised exposures remains unamortised; and c) The clean-up call option is not structured to provide credit enhancement or to avoid

allocating losses to investors in securitisation tranches.


Effective Transfer of Credit Risk in a Synthetic Securitisation

Article 157. In a synthetic securitisation, the credit risk arising from exposures is consid-ered to be transferred effectively if: 1. A significant part of the credit risk arising from the securitised exposures has been trans-

ferred to a third party by means of credit protection; 2. The securitisation documentation reflects the economic substance of the transaction; 3. The credit protection used to transfer credit risk fulfils the requirements set forth in Arti-

cles 83 to 118; for the purposes of this chapter, securitisation special purpose entities are not recognised as eligible providers of personal collateral;

4. A legal opinion is obtained which confirms the enforceability of the credit protection in all relevant jurisdictions; and

5. The credit protection used to transfer credit risk do not contain terms or conditions which a) impose significant materiality thresholds below which credit protection is not triggered

if a credit event occurs in relation to the securitised exposures; b) allow the protection to be terminated due to deterioration in the credit quality of the

underlying exposures; c) require the originator credit institution to improve securitisation positions, except in the

case of early amortisation provisions; d) increase the costs of credit protection or the yield payable to holders of positions in

the securitisation in response to a deterioration in the credit quality of the securitised exposures.

Calculation of Risk-Weighted Exposure Amounts for Exposure Portfolios Securitised in a Synthetic Securitisation pursuant to Article 22d para. 2 Banking Act

Article 158. (1) In calculating risk-weighted exposure amounts for securitised exposures where the conditions set forth in Article 157 are fulfilled, the originator credit institution of a syn-thetic securitisation must apply the calculation methods set out in Articles 160 to 179 with due attention to maturity mismatches pursuant to Article 159. In the case of credit institutions which calculate risk-weighted exposure amounts and expected loss amounts using an Internal Ratings Based Approach, the expected loss amount for these exposures must be set to zero.

(2) The originator credit institution is to calculate risk-weighted exposure amounts with re-gard to all tranches in the securitisation in accordance with the provisions of this chapter as well as the provisions governing the recognition of credit risk mitigation pursuant to Articles 83 to 118.

Treatment of Maturity Mismatches in Synthetic Securitisations

Article 159. In calculating risk-weighted exposure amounts pursuant to Article 158 para. 1, the originator credit institution of a synthetic securitisation must account for maturity mismatches between the credit protection by which the tranching is achieved and the securitised exposures as follows:


1. The maturity of the credit protection is to be determined in accordance with the provi-

sions governing credit risk mitigation pursuant to Articles 83 to 155; in this context, the longest maturity of any of the exposures, subject to a maximum of five years, is to be applied; and

2. Where the originator credit institution calculates risk-weighted exposure amounts in accordance with Articles 160 to 164, any maturity mismatch which is assigned a risk weight of 1250% is to be disregarded in the calculation of risk-weighted exposure amounts for tranches; for all other tranches, the risk-weighted exposure amount ad-justed for the maturity mismatch is to be calculated as follows:

,*)()()(

*)(*)()(* ⎥

⎦

⎤⎢⎣

⎡−−

×+⎥⎦

⎤⎢⎣

⎡−−

×=tTtTAssRW

tTttSPRWRW

where: RW* the risk-weighted exposure amounts as specified in Article 22 para. 1

no. 1 Banking Act; RW*(Ass) the risk-weighted exposure amounts for exposures if they had not been

securitised, calculated on a pro-rata basis; RW(SP) the risk-weighted exposure amounts based on the calculation pursuant

to Article 158 para. 1 under the assumption that no maturity mismatch exists;

T the maturity of the underlying exposures, expressed in years; t the maturity of the credit protection, expressed in years; and t* = 0.25.

Calculation of Risk-Weighted Exposure Amounts – General Principles

Article 160. (1) For the purpose of calculating risk-weighted exposure amounts for securiti-sation positions, credit institutions must assigned the position a weight based on a credit as-sessment from an eligible external credit assessment institution or calculated in accordance with Articles 161 to 179. The risk-weighted exposure amounts of a securitisation position are to be calculated by applying the relevant risk weight to the exposure value of the position.

(2) Subject to the provisions of para. 3, 1. the exposure value of an on-balance-sheet securitisation position must be its balance

sheet value in cases where a credit institution calculates risk-weighted exposure amounts in accordance with Articles 161 to 164;

2. the exposure value of an on-balance sheet securitisation position must be measured gross of value adjustments in cases where a credit institution calculates risk-weighted exposure amounts in accordance with Articles 165 to 174; and

3. the exposure value of an off-balance-sheet securitisation position must be its nominal value multiplied by a conversion factor as defined in this chapter; unless otherwise specified, this conversion factor is to be 100%.


(3) The exposure value of a securitisation position arising from a derivative listed in An-nex 2 to Article 22 Banking Act is to be determined in accordance with Articles 233 to 261.

(4) Where a securitisation position is secured by real collateral, the exposure value applica-ble to that position may be modified in accordance with Articles 83 to 155.

(5) In cases where a credit institution has two or more overlapping positions in a securitisa-tion, to the extent that the positions overlap only the position or portions of a position producing the higher risk-weighted exposure amounts are to be to included in the credit institution's calcu-lation of risk-weighted exposure amounts. "Overlapping" means that the positions wholly or partially represent an exposure to the same risk such that to the extent of the overlap there is a single exposure.

Calculation of Risk-Weighted Exposure Amounts under the Standardised Approach to Credit Risk

Article 161. (1) Credit institutions which use the Standardised Approach to Credit Risk must calculate the risk-weighted exposure amounts of a position which has a credit assessment from an eligible external credit assessment institution by assigning a risk weight to the exposure value of the position in accordance with the table below; assignments are to be carried out in accordance with Article 21b para. 6 Banking Act.

Positions with short-term credit assessments Credit quality step

1 2 3 All other credit assessments

Risk weight 20% 50% 100% 1 250%

Positions without short-term credit assessments Credit quality step

1 2 3 4 5 or lower

Risk weight 20% 50% 100% 350% 1 250%

(2) Where a position does not have a credit assessment from an eligible external credit as-sessment institution and the composition of the pool of exposures securitised is known to the credit institution at all times, the credit institution may calculate the risk-weighted exposure amount by applying the weighted average risk weight that would be applied to the securitised exposures under the provisions of the Standardised Approach to Credit Risk if the credit institu-tion were to hold the exposures, multiplied by a concentration ratio. The concentration ratio is equal to the sum of the nominal amounts of all the tranches divided by the sum of the nominal amounts of the tranches junior to or pari passu with the tranche in which the position is held, including that tranche itself. The resulting risk weight must not be higher than 1250% or lower than any risk weight applicable to a more senior rated tranche.


(3) In cases where a credit assessment from an eligible external credit assessment institu-tion is not available and para. 2 does not apply, the position is to be assigned a risk weight of 1250%.

(4) Originator or sponsor credit institutions may limit the risk-weighted exposure amounts for securitisation positions to the risk-weighted exposure amounts which would be applied to the exposures if they had not been securitised. In this context, any past due exposures and high-risk exposures must be assigned a risk weight of 150%.

Treatment of Securitisation Positions in a Second Loss Tranche or Better in an ABCP Programme under the Standardised Approach to Credit Risk

Article 162. Securitisation positions may be assigned a risk weight which is equal to 100% or the highest risk weight to be applied to one of the securitised exposures under the Standard-ised Approach to Credit Risk, whichever is higher, if: 1. the securitisation position is in a tranche which is economically in a second loss position

or better in the securitisation and the first loss tranche provides meaningful credit en-hancement to the second loss tranche;

2. the quality of the securitisation position is equivalent to investment grade or better; and 3. the securitisation position is held by a credit institution which does not hold a position in

the first loss tranche.

Treatment of Unrated Liquidity Facilities under the Standardised Approach to Credit Risk

Article 163. (1) For the purpose of determining the exposure value of a liquidity facility, credit institutions may apply a conversion factor of 20% to the nominal amount of the facility where its original maturity is one year or less and a conversion factor of 50% in cases where the original maturity of the liquidity facility is longer if: 1. the documentation of the liquidity facility clearly identifies and limits the circumstances

under which the facility may be drawn; 2. the liquidity facility may not be drawn in order to provide credit support to cover losses

already incurred at the time of the drawing; 3. the liquidity facility is not used to provide permanent or regular funding for the securitisa-

tion; 4. the repayment of drawings on the liquidity facility is not subordinated to the claims of

investors other than claims arising in respect of interest rate or currency derivative con-tracts, fees or other such payments;

5. the repayment of drawings on the liquidity facility must not be subject to waiver or defer-ral;

6. the liquidity facility can no longer be drawn after all applicable credit enhancements from which the liquidity facility would benefit are exhausted; and


7. the liquidity facility includes a provision that stipulates an automatic reduction in the

amount that can be drawn by the amount of exposures which are in default; in this con-text, an exposure is considered to be in default where the criteria pursuant to Article 22b para. 5 no. 2 Banking Act are fulfilled or where the pool of securitised exposures con-sists of instruments with credit assessments from eligible external credit assessment in-stitutions and the liquidity facility is terminated if the average quality of the pool falls be-low investment grade.

(2) For the purpose of calculating the exposure value, a conversion factor of 0% may be applied to the nominal amount of a liquidity facility if the requirements set forth in para. 1 nos. 1 to 6 are fulfilled and 1. the liquidity facility may be drawn only in the event of a general market disruption; or 2. the liquidity facility is unconditionally cancellable and the repayment of drawings on the

liquidity facility are senior to any other claims on the cash flows arising from the secu-ritised exposures.

(3) Credit institutions must apply the highest weight which would apply to any of the secu-ritised exposures under the Standardised Approach to Credit Risk if the credit institution held the exposures itself.

Reduction of Risk-Weighted Exposure Amounts under the Standardised Approach

Article 164. Credit institutions which deduct the underlying exposure amounts from own funds pursuant to Article 23 para. 13 no. 4d Banking Act are to reduce the maximum risk-weighted exposure amount pursuant to Article 161 para. 4 by 1250% of the amount deducted.

Calculation of Risk-Weighted Exposure Amounts under the Internal Ratings Based Approach

Article 165. (1) Under the Internal Ratings Based Approach, credit institutions must calcu-late risk-weighted exposure amounts for securitisation positions in accordance with Articles 166 to 174.

(2) The Ratings Based Method pursuant to Article 166 is to be applied to positions with credit assessments from eligible external credit assessment institutions and to positions for which an inferred rating can be used.

(3) The Supervisory Formula Method pursuant to Article 169 is to be applied to positions without credit assessments from eligible external credit assessment institutions except where the Internal Assessment Approach for ABCP programmes pursuant to Article 168 is permitted.

(4) In cases where the credit institution is neither an originator nor a sponsor, it must notify the FMA of its intention to use the Supervisory Formula Method.

(5) Originator or sponsor credit institutions must assign a risk weight of 1250% to positions which do not have ratings and for which an inferred rating cannot be used in cases where calcu-lating Kirb would not be expedient and the requirements set forth in Article 168 para. 1 are not fulfilled.


(6) Credit institutions which are neither originators nor sponsors must assign a risk weight of 1250% to positions which do not have ratings and for which an inferred rating cannot be used unless the Supervisory Formula Method is used and the requirements set forth in Article 168 para. 1 are fulfilled.

Ratings Based Method

Article 166. (1) Under the Ratings Based Method, credit institutions must calculate the risk-weighted exposure amount of a rated securitisation position by assigning to the exposure value the risk weight applicable according to the table below and multiplied by 1.06; the assignment of credit assessments to credit quality steps is to be carried out in accordance with Article 21b para. 6 Banking Act.

Positions with short-term credit assessments Credit quality step Risk weight

A B C 1 7% 12% 20% 2 12% 20% 35% 3 60% 75% 75%

all other credit quality steps

1 250% 1 250% 1 250%

Positions without short-term credit assessments Credit quality step Risk weight

A B C 1 7% 12% 20% 2 8% 15% 25% 3 10% 18% 35% 4 12% 20% 35% 5 20% 35% 35% 6 35% 50% 50% 7 60% 75% 75% 8 100% 100% 100% 9 250% 250% 250%

10 425% 425% 425% 11 650% 650% 650%

below 11 1 250% 1 250% 1 250%

(2) The risk weights in Column A are to be assigned to positions in the most senior tranche of the securitisation. When determining whether a tranche is the most senior, credit institutions may disregard amounts due under interest rate or currency derivative contracts, fees due or other similar payments.


(3) Positions in the most senior tranche of a securitisation may be assigned a risk weight of 6% if that tranche is senior in every respect to another tranche of the securitisation the positions of which would be assigned a risk weight of 7% pursuant to para. 1; and 1. this is justified due to the loss absorption qualities of subordinate tranches in the secu-

ritisation; and 2. (b) either the position has a credit assessment assigned by an eligible external credit

assessment institution and associated with credit quality step 1 in the tables above, or, if the position is unrated, the requirements set forth in Article 167 are fulfilled; in this con-text, "reference positions" refer to positions in the subordinate tranche which would re-ceive a risk weight of 7%.

(4) Positions in a securitisation where the effective number of securitised exposures is lower than six are to be assigned a risk weight from Column C. In calculating the effective num-ber of exposures, multiple securitised exposures to one obligor must be treated as a single ex-posure. The effective number of exposures is calculated as follows:

,)(

2

2

∑∑

=

ii

ii

EAD

EADN

where EADi is the sum of the exposure values of all exposures to the ith obligor. In the case of resecuritisation, the credit institution must rely on the number of securitisation exposures in the pool. If the portfolio share associated with the largest exposure (C1) is available, N may be computed as 1/C1.

(5) All other positions are to be assigned a risk weight from Column B.

(6) For securitisation positions under the Ratings Based Method, credit institutions may ap-ply credit risk mitigation techniques in accordance with Articles 171 and 172.

Use of Inferred Ratings under the Internal Ratings Based Approach

Article 167. Credit institutions are to transfer an inferred rating to a position without a credit assessment from a recognised external credit assessment institution if: 1. the reference positions are subordinate to the securitisation position in all respects; 2. the maturity of the reference positions must be the same as or later than that of the un-

rated position; and 3. any inferred rating is updated on an ongoing basis to reflect any changes in the credit

assessment of the reference positions. The inferred rating must be the same as the credit assessment of those rated positions (refer-ence positions) which are the most senior positions and are subordinate to the unrated position in all respects.


Internal Assessment Approach for Positions in ABCP Programmes


Article 168. (1) Credit institutions may transfer an internally inferred rating to an ABCP pro-gramme position without a credit assessment from an eligible external credit assessment institu-tion in accordance with para. 2 if the following requirements are fulfilled: 1. The positions in the commercial paper issued by the ABCP programme are rated posi-

tions; 2. the internal assessment of the credit quality of the position reflects the publicly available

assessment methodology of at least one eligible external credit assessment institution for the rating of securities backed by exposures such as those underlying the securitisa-tion;

3. The eligible external credit assessment institutions used pursuant to no. 2 include those external credit assessment institutions which have provided a rating for the commercial paper issued by the ABCP programme; quantitative elements, such as stress factors, used in assessing the position with regard to a particular credit quality must be at least as conservative as those used in the relevant assessment methodology of the external credit assessment institutions in question;

4. In developing its internal assessment methodology, the credit institution must take into consideration the relevant published rating methodologies of the eligible external credit assessment institutions which rate the commercial paper of the ABCP programme; this consideration must be documented and updated regularly as specified in no. 7;

5. The credit institution's internal assessment methodology must include rating grades; there must be a direct correspondence between such rating grades and the credit as-sessments from eligible external credit assessment institutions; this correspondence is to be documented;

6. The internal assessment methodology must be used in the credit institution's internal risk management processes;

7. A qualified unit which is independent of the ABCP programme business line and the corresponding customer relationships must carry out regular reviews of the internal as-sessment process and the quality of the internal assessments of the credit quality of the credit institution's exposures to an ABCP programme.

8. the credit institution must track the performance of its internal ratings over time, evaluate the performance of its internal assessment methodology and make adjustments as nec-essary;


9. the ABCP programme must incorporate underwriting standards in the form of credit and

investment guidelines; in deciding on an asset purchase, the programme administrator must consider the type of asset to be purchased, the type and monetary value of the exposures arising from the provision of liquidity facilities and credit enhancements, the loss distribution, and the legal and economic isolation of the transferred assets from the entity selling the assets; in addition, a credit analysis of the asset seller's risk profile must be performed and must include an analysis of past and expected future financial performance, current market position, expected future competitiveness, leverage, cash flow, interest coverage and obligor rating; moreover, the seller's underwriting standards, servicing capabilities, and collection processes must be reviewed;

10. The ABCP programme's underwriting standards must define minimum recognition crite-ria for assets. In particular, these criteria must:

a) exclude the purchase of assets which are significantly past due or defaulted; b) limit excess concentration to an individual obligor or geographic area; and c) limit the tenor of the assets to be purchased; 11. The ABCP programme must have collection policies and processes which take into

account the operational capability and credit quality of the servicer; 12. The programme must mitigate seller/servicer risk using various methods; 13. the aggregated estimate of loss on an asset pool that the ABCP programme is consider-

ing purchasing must take into account all sources of potential risk, such as credit and di-lution risk; where the seller-provided credit enhancement is sized on the basis of credit-related losses only, then a separate reserve must be established for dilution risk, if dilu-tion risk is material for the particular exposure pool; in defining the required enhance-ment level, the programme must review several years of historical information, including losses, delinquencies, dilutions, and the turnover rate of the receivables; and

14. The ABCP programme must incorporate structural features such as wind-down triggers into the purchase of exposures in order to mitigate potential credit deterioration in the underlying portfolio.

(2) Credit institutions must assign a rating grade pursuant to para. 1 as an internal inferred rating to positions without credit assessments from an eligible external credit assessment insti-tution. The assigned rating must correspond to the credit assessments associated with that rating grade. Where the derived rating is at the investment grade level or better at the inception of the securitisation, it is to be considered equivalent to a credit assessment from an eligible external credit assessment institution for the purposes of calculating risk-weighted exposure amounts.


Supervisory Formula Method

Article 169. (1) Under the Supervisory Formula Method, credit institutions must assign to securitisation positions a risk weight equal to 7% or the weight calculated according to the for-mula below, whichever is higher:

[ ] [ ] ,)(5.12T

LSTLS −+×

where:

[ ] [ ] [ ] ,)1)((

)(

⎪⎭

⎪⎬⎫

⎪⎩

⎪⎨⎧

>−×+−+

≤= −

KirbrxifeKirbrdKirbrKxKKirbr

KirbrxifxxS

KirbrxKirbr

ω

ω

where:

).],1;[]),;[1(()1(][]),;[1()1(1

)1(

1)1(

)1()1(2

1

2

)1(25.0)()1(

)1(

cbaxBetaxbaxBetahxKbaKirbrBetahd

cgbcgaf

ccg

hvKirbrKirbrc

hKirbrvf

NKirbrELGDKirbrKirbrELGDv

hKirbrc

NELGDKirbrh

++−⋅−=−⋅−−=

−⋅=×=

−−

=

−−−

+⎟⎟

⎠

⎞

⎜⎜

⎝

⎛−

−+

=

−+−=

−=

−=

τ

where: τ = 1000; ω = 20; and where: Beta [x; a, b] the cumulative beta distribution with parameters a and b evaluated at x; T the ratio of the nominal amount of the tranche to the sum of the exposure

values of the exposures that have been securitised. In this context, the ex-posure value of a derivative pursuant to Annex 2 to Article 22 Banking Act where the current replacement cost is not a positive value is the potential future credit exposure calculated in accordance with Articles 231 to 259.

Kirbr the ratio of Kirb to the sum of the exposure values of the exposures that have been securitised. Kirbr is expressed as a decimal;


L the ratio of the nominal amount of all tranches subordinate to the tranche in

which the position is held to the sum of the exposure values of the expo-sures that have been securitised. Capitalised future income must not be in-cluded in the measured L. Amounts due from counterparties in connection with derivative instruments listed in Annex 2 to Article 22 Banking Act that represent tranches junior to the tranche in question may be measured at their current replacement cost (without the potential future credit exposures) in calculating the credit enhancement level.

N the effective number of exposures pursuant to Article 166 para. 4.

(2) The exposure-weighted average loss given default (ELGD) is calculated as follows:

,∑

∑ ×=

ii

iii

EAD

EADLGDELGD

where LGDi represents the average LGD associated with all exposures to the ith obligor and LGD is determined under the Internal Ratings Based Approach. In the case of resecuritisation, an LGD of 100% must be applied to the securitised positions. When default and dilution risk for purchased receivables are treated in an aggregate manner within a securitisation, the LGD in-put is to be constructed as a weighted average of 100% of the LGD for credit risk and 75% of the LGD for dilution risk. The weights are to be treated as stand-alone capital charges for credit risk and dilution risk.

(3) If the exposure value of the largest securitised exposure (C1) is no more than 3% of the sum of the exposure amounts of the securitised exposures, then, for the purposes of the Super-visory Formula Method, the credit institution may apply an LGD of 50% and set N equal to ei-ther:

{ } ,0,1max1 1

11 ⎟⎟

⎠

⎞⎜⎜⎝

⎛−⎟

⎠⎞

⎜⎝⎛

−−

+= mCm

CCCCN mm

Or

.1

1CN =

Cm is the ratio of the sum of the exposure values of the largest m exposures to the sum of the exposure amounts of the exposures securitised. The level of m used may be set by the credit institution. Where the securitisations also include retail exposures, h and v may be set to zero.

(4) For securitisation positions under the Supervisory Formula Method, credit institutions may apply credit risk mitigation techniques in accordance with Articles 171 and 173.


Liquidity Facilities under the Internal Ratings Based Approach

Article 170. (1) Credit institutions which use the Internal Ratings Based Approach to calcu-late risk-weighted exposure amounts and expected loss amounts may apply a conversion factor of 0% to the nominal value of a liquidity facility when calculating the exposure value if the re-quirements set forth in Article 163 para. 2 are fulfilled.

(2) Credit institutions which use the Internal Ratings Based Approach to calculate risk-weighted exposure amounts and expected loss amounts may apply a conversion factor of 20% to the nominal value of a liquidity facility when calculating the exposure value if the facility can only be drawn in the case of a general market disruption and the requirements set forth in Arti-cle 163 para. 2 are fulfilled.

(3) In cases where calculating risk-weighted exposure amounts for securitised exposures as if they had not been securitised would not be expedient, credit institutions may, as an excep-tion: 1. assign to a liquidity facility which is an unrated position the highest weight which would

be applied to one of the securitised exposures under the Standardised Approach to Credit Risk if the liquidity facility were not securitised;

2. apply a conversion factor of 20% to the nominal amount for the purpose of determining the exposure value of the position if the requirements set forth in para. 2 are fulfilled; and

3. apply a conversion factor of 50% to the nominal amount of the liquidity facility for the purpose of determining the exposure value of the position if the facility has an original maturity of one year or less.

(4) In all other cases, a conversion factor of 100% is to be applied to the nominal amount of the liquidity facility for the purpose of calculating the exposure value.

Recognition of Credit Risk Mitigation for Securitisation Positions under the Internal Ratings Based Approach

Article 171. In calculating risk-weighted exposure amounts under the Internal Ratings Based Approach, credit institutions may recognise real and personal collateral subject to Arti-cles 83 to 155.

Calculation of Minimum Capital Requirements for Securitisation Positions with Credit Risk Mitigation under the Ratings Based Method

Article 172. Credit institutions which calculate risk-weighted exposure amounts using the Ratings Based Method may adjust the exposure value and the risk-weighted exposure amount for a securitisation position for which credit protection eligible for the purpose of credit risk miti-gation exists in accordance with Articles 83 to 155 and using the Standardised Approach to Credit Risk.


Calculation of Minimum Capital Requirements for Securitisation Positions with Credit Risk Mitigation under the Supervisory Formula Method

Article 173. (1) Credit institutions which calculate risk-weighted exposure amounts using the Supervisory Formula Method may determine the actual risk weight of the position by divid-ing its risk-weighted exposure amount by its exposure value and then multiplying by 100.

(2) In the case of full protection by real collateral, the risk-weighted exposure amount of the securitisation position is to be calculated by multiplying the position's exposure value adjusted for the effect of the real collateral (E*) by the actual risk weight pursuant to para. 1.

(3) In the case of full protection by personal collateral, the risk-weighted exposure amount of the securitisation position is to be calculated by multiplying GA under Article 149 by the risk weight assigned to the protection provider. This amount is added to that amount resulting from the multiplication of the actual risk weight pursuant to para. 1 by the securitisation position's exposure amount reduced by GA.

(4) In the case of partial protection, credit institutions may apply the provisions pursuant to paras. 1 to 3 if the protection covers the first loss or losses on a proportional basis in the secu-ritisation position. In other cases, credit institutions must treat the securitisation position as two or more positions, with the uncovered portion being considered the position with the lower credit quality. In calculating the risk-weighted exposure amount for this position, credit institutions must apply Article 169 subject to the modifications that 1. T must be adjusted to e* in the case of real collateral and to T-g in the case of personal

collateral; e* denotes the ratio of E* to the total notional amount of the underlying pool, where E* is the adjusted exposure amount of the securitisation position calculated in ac-cordance with Articles 83 to 155 under the Standardised Approach to Credit Risk, taking the amount of the securitisation position to be E; g is the ratio of the nominal amount of credit protection to the sum of the exposure amounts of the securitised exposures; and

2. In the case of personal collateral, the risk weight of the protection provider must be ap-plied to that portion of the position which does not fall within the adjusted value of T.

Reduction of Risk-Weighted Exposure Amounts under the Internal Ratings-Based Approach

Article 174. (1) Credit institutions which use the Internal Ratings Based Approach to calcu-late risk-weighted exposure amounts and expected loss amounts may deduct 1250% of the amount of value adjustments made in respect of the securitised exposures from the risk-weighted exposure amount of a securitisation position to which a risk weight of 1250% is ap-plied. Where value adjustments are taken into account for this purpose, they may no longer be taken into account for the purpose of calculating expected loss amounts pursuant to Article 82.

(2) Credit institutions which use the Internal Ratings Based Approach to calculate risk-weighted exposure amounts and expected loss amounts may reduce the risk-weighted expo-sure amount of a securitisation position by 1250% of the amount of any value adjustments made in respect of that position.

(3) If the exposure value of a securitisation position is deducted from own funds in accor-dance with Article 23 para. 13 no. 4d Banking Act, then:


1. the exposure value of the position may be derived from the risk-weighted exposure

amounts, taking into account any reductions pursuant to paras. 1 and 2; 2. the calculation of the exposure value may reflect real collateral eligible for the purpose

of credit risk mitigation in a manner consistent with Articles 171 to 173; and 3. where the Supervisory Formula Method is used and L < Kirbr and [L+T] > Kirbr, the po-

sition may be treated as two positions with L equal to Kirbr for the more senior of the positions.

(4) Originator credit institutions, sponsor credit institutions, or other credit institutions which can calculate Kirb need only recognise the risk-weighted exposure amounts calculated for secu-ritisation positions up to the level of risk-weighted exposure amounts which would arise if the securitised assets had not been securitised and were on the balance sheet of the credit institu-tion plus the expected loss amounts of those exposures. Credit institutions which calculate ex-posure values in accordance with para. 3 must reduce the maximum risk-weighted exposure amount by 1250% of the amount pursuant to para. 3.

Calculation of Additional Risk-Weighted Exposure Amounts for Securitisations of Revolving Exposures with Early Amortisation Provisions

under the Standardised Approach to Credit Risk

Article 175. (1) For securitisation transactions pursuant to 22e para. 1 Banking Act, origina-tor credit institutions must calculate an additional risk-weighted exposure amount with regard to the sum of investors' interest and the originator's interest. Where these are calculated under the Standardised Approach to Credit Risk, 1. investors' interest is equal to the exposure value of the notional part of the pool of drawn

amounts, less the originator's interest; and 2. the originator's interest is equal to the percentage share of the cash flows generated by

the collection of the exposure value and interest as well as other associated amounts which are not available to make payments to investors or sponsors; the corresponding percentage share of the exposure value of the overall pool sold into the structure deter-mines the notional exposure amount of that part of the pool of drawn amounts sold into the securitisation as the originator's interest; the originator's interest must not be subor-dinate to the investors' interest.

(2) The exposures of the originator credit institution arising from its rights in respect of the originator's interest must be treated as a pro rata exposure to the securitised exposures as if they had not been securitised.

Calculation of Additional Risk-Weighted Exposure Amounts for Securitisations of Revolving Exposures with Early Amortisation Provisions


Article 176. (1) Where originator credit institutions must calculate an additional risk-weighted exposure amount with regard to investors' interest and the originator's interest for securitisation transactions pursuant to 22e para. 1 Banking Act, and that amount is calculated using the Internal Ratings Based Approach,


1. investors' interest equals the exposure value of the notional part of the pool of drawn

amounts not falling within no. 2 lit. a plus the exposure value of that notional part of the pool of undrawn amounts of credit lines, the drawn amounts of which have been sold into the securitisation, not falling within no. 2 lit. b; and

2. the originator's interest is equal to the sum of a) the notional exposure value of that part of a pool of drawn amounts sold into a secu-

ritisation, which is calculated as follows; the percentage share of the cash flows gen-erated by the collection of the exposure amount and interest as well as other associ-ated amounts which are not available to make payments to investors or sponsors is relevant; the corresponding percentage share of the exposure amount of the overall pool sold into the structure determines the notional exposure amount of that part of the pool of drawn amounts sold into the securitisation; plus

b) the exposure value of that part of the pool of undrawn amounts of credit lines the drawn amounts of which have been sold into the securitisation and is calculated as follows: the percentage share of the total amount of these undrawn amounts is equal to the percentage share of the exposure value described under no. 1 with reference to the notional exposure amount of that part of the pool of drawn amounts sold into the securitisation.

(2) The originator's interest must not be subordinate to the investors' interest.

(3) The exposures of the originator credit institution arising from its rights in respect of the first summand in the originator's interest pursuant to para. 1 no. 2 lit. a must be considered a pro rata exposure to the securitised exposures as if they had not been securitised in one amount. The originator credit institution's pro rata exposures to the undrawn amounts of credit lines the drawn amounts of which have been sold into the securitisation are to be set to an amount equal to the second summand in the originator's interest pursuant to para. 1 no. 2 lit. b.

Securitisations subject to early amortisation provisions and consisting of retail exposures which are uncommitted and unconditionally cancellable without prior notice

Article 177. (1) Credit institutions must compare the three-month average excess spread level with the excess spread levels at which excess spread is required to be trapped where securitisations are subject to an early amortisation provision of retail exposures which are un-committed and unconditionally cancellable without prior notice, and where the early amortisation is triggered by the excess spread level falling to a specified level. This trapping point refers to that amount of realised excess spread from exposures included in the securitised portfolio at or below which excess spread is no longer paid out to the originator or third parties but retained in the securitised portfolio in order to compensate for future defaults in that portfolio.

(2) Where the securitisation does not require excess spread to be trapped, credit institu-tions must set the trapping point at 4.5 percentage points above than the excess spread level at which early amortisation is triggered.

(3) Credit institutions must determine the applicable conversion factor by means of the cur-rent level of the three-month average on the basis of the table below.


Securitisations subject to a

controlled early amortisation provision

Securitisations subject to a non-controlled early amortisation provision

Three-month average excess spread

Conversion factor Conversion factor

Above Level A 0% 0% Level A 1% 5% Level B 2% 15% Level C 10% 50% Level D 20% 100% Level E 40% 100%

where: Level A: a level of excess spread lower than 133.33% of the trapping level of excess

spread but not less than 100% of that trapping level; Level B: a level of excess spread lower than 100% of the trapping level of excess spread

but not less than 75% of that trapping level; Level C: a level of excess spread lower than 75% of the trapping level of excess spread

but not less than 50% of that trapping level; Level D: levels of excess spread lower than 50% of the trapping level of excess spread

but not less than 25% of that trapping level; and Level E: levels of excess spread lower than 25% of the trapping level of excess spread.

Conversion Factor for Other Securitisations Subject to Early Amortisation Provisions

Article 178. (1) Credit institutions must apply a conversion factor of 90% to securitisations which are subject to a controlled early amortisation provision for revolving exposures. An early amortisation provision is considered to be controlled if: 1. the originator credit institution has an appropriate capital/liquidity plan in place to ensure

that it has sufficient capital and liquidity available in the event of early amortisation; 2. throughout the duration of the transaction, there is pro-rata sharing between the origina-

tor's interest and the investors' interest with regard to payments of interest and principal, expenses, losses and recoveries based on the balance of receivables outstanding at one or more reference points during each month;

3. the amortisation period is long enough to justify the expectation that 90% of the total debt outstanding at the beginning of the early amortisation period will have been repaid or recognised as in default; and

4. repayment is no more rapid than would be the case in straight-line amortisation over the period pursuant to no. 3.

(2) Credit institutions must apply a conversion factor of 100% to securitisations which are subject to a non-controlled early amortisation provision for revolving exposures.


Highest Minimum Capital Requirement for Securitisations of Revolving Exposures

Article 179. (1) For the total additional risk-weighted exposure amount pursuant to 22e para. 1 Banking Act with regard to positions in investors' interest and originators' interest, the maximum risk-weighted exposure amount originator credit institutions must calculate is the amount indicated in no. 1 or no. 2, whichever is higher. 1. The additional risk-weighted exposure amount pursuant to Article 22e para. 1 Banking

Act with regard to positions in investors' interest; or 2. the risk-weighted exposure amounts which would be calculated by an originator credit

institution with regard to positions in investors' interest if this notional part of the total pool of drawn or undrawn amounts of credit lines, the drawn amounts of which have been sold into the securitisation, had not been securitised.

(2) In calculating the maximum amount pursuant to para. 1, credit institutions are to disre-gard the deduction of net gains pursuant to Article 23 para. 1 no. 2 Banking Act.

Section 2

Use of Credit Assessments from External Credit Assessment Institutions

Requirements for Credit Assessments

Article 180. In the calculation of risk-weighted exposure amounts pursuant to Articles 156 to 179, a credit assessment from an eligible external credit assessment institution must fulfil the following requirements: 1. There must be no mismatch between the types of payments reflected in the credit as-

sessment and the types of payments to which the credit institution or group of credit in-stitutions is entitled under the contract giving rise to the securitisation position in ques-tion; and

2. The credit assessments must be available publicly to the market; credit assessments are only considered to be publicly available if:

a) they have been published in a publicly accessible forum and are included in the eligi-ble external credit assessment institution's transition matrix; and

b) are not only made available to a limited number of entities.

Use of Credit Assessments

Article 181. (1) Credit institutions may nominate one or more eligible external credit as-sessment institutions whose credit assessment(s) will be used in the calculation of risk-weighted exposure amounts for securitisation positions.

(2) Credit institutions must apply the credit assessments of eligible external credit assess-ment institutions to securitisations in a consistent manner.


(3) Credit institutions must not use a credit assessment from one eligible external credit as-sessment institution for securitisation positions in certain tranches and a credit assessment from another eligible external credit assessment institution for securitisation positions in other tranches within the same structure which have been assigned a credit assessment by the first eligible external credit assessment institution.

(4) Where a securitisation position has two credit assessments from eligible external credit assessment institutions, the credit institution must apply the less favourable credit assessment.

(5) Where a securitisation position has more than two credit assessments from eligible ex-ternal credit assessment institutions, the two most favourable credit assessments are to be used. If the two most favourable assessments are different, the less favourable of the two must be used.

(6) Where credit protection eligible under the Standardised Approach to Credit Risk is pro-vided directly to a securitisation special purpose entity and that protection is reflected in the credit assessment of a position by a nominated eligible external credit assessment institution, the risk weight associated with that credit assessment may be used. If the protection is not eli-gible for the purpose of credit risk mitigation, the credit assessment is not to be recognised. In cases where the credit protection is not provided to the securitisation special purpose entity but directly to a securitisation position, the credit assessment is not to be recognised.

Part 3: Operational Risk

Chapter 1

Basic Indicator Approach

Minimum Capital Requirements

Article 182. For credit institutions which apply the Basic Indicator Approach, the minimum capital requirement for operational risk is equal to 15% of the relevant indicator pursuant to Arti-cle 22j para. 2 Banking Act.

Relevant Indicator

Article 183. The relevant indicator is equal to the three-year average of operating income.

Basis of the Relevant Indicator

Article 184. (1) The three-year average is to be calculated on the basis of the values at the end of the last business year and the preceding business years. Business estimates may be used when audited figures are not available.


(2) Where operating income is negative or equal to zero for any given observation, this fig-ure is not to be taken into account in the calculation of the three-year average. The relevant indicator must be calculated as the sum of positive figures divided by the number of positive figures.

(3) Operating income refers to the sum of items in the income statement of a credit institu-tion pursuant to Annex 2 to Article 43 Part 2 nos. 1 to 7 Banking Act. In this addition, each ele-ment is to be included with its positive or negative sign. Credit institutions which prepare con-solidated financial statements in accordance with international accounting standards pursuant to Article 59a Banking Act may calculate the relevant indicator on the basis of those data which come closest to the items in Annex 2 to Article 43 Part 2 nos. 1 to 7 Banking Act.

(4) The indicator is to be calculated before the deduction of any provisions and operating expenses. Operating expenses must also include fees paid for the outsourcing of services ren-dered by third parties which 1. are not a parent or subsidiary undertaking of the credit institution, nor a subsidiary of a

parent which is also the parent of the credit institution; and 2. are not credit institutions as defined in Article 1 Banking Act or Article 4 (1) of Directive

2006/48/EC.

(5) The following items are not to be included in the calculation: 1. Realised profits or losses from the sale of non-trading book items; 2. Income from extraordinary or irregular items; 3. Income derived from insurance. Where the revaluation of trading book items is part of the income statement, revaluation may be included in the calculation. Where Article 56 para. 5 Banking Act is applied, the revaluations posted to the income statement must be included in the calculation.

Chapter 2

Standardised Approach

Minimum Capital Requirements

Article 185. (1) Credit institutions which apply the Standardised Approach for the purpose of calculating minimum capital requirements for operational risk must calculate the relevant indicator for each individual business line pursuant to Article 186 and the three-year average of operating income pursuant to Article 184 paras. 1 and 3 to 5 separately.

(2) A negative minimum capital requirement in a business line may be imputed to the whole. Where the sum of the operating income distributed across the business lines and weighted with the percentages in accordance with Article 186 for a given year is negative, then the input to the average for that year is to be zero.


(3) Credit institutions which apply an alternative relevant indicator pursuant to Article 22k para. 8 Banking Act to the retail banking and commercial banking business lines for the purpose of calculating minimum capital requirements for operational risk must apply an indicator equal to the three-year average of the total nominal amount of loans and advances pursuant to para. 2 multiplied by 0.035.

Business Lines

Article 186. The following activities and percentages are to be assigned to the business lines pursuant to Article 22k para. 3 Banking Act:

Business line Activities PercentageUnderwriting of financial instruments and/or placing of financial instruments on a firm commitment basis Services related to underwriting Investment advising Advising for undertakings on capital structure, industrial strategy and related matters, and advising and services relating to mergers and the purchase of undertakings

Corporate finance

Investment research and financial analysis and other forms of general recommendation relating to transactions in financial instruments

18%

Dealing on own account Money broking Reception and transmission of orders in relation to one or more financial instruments Execution of orders on behalf of clients Placing of financial instruments without a firm commitment basis

Trading and sales

Operation of multilateral trading facilities

18%

Reception and transmission of orders in relation to one or more financial instruments Execution of orders on behalf of clients Retail brokerage Placing of financial instruments without a firm commitment basis

12%

Acceptance of deposits and other repayable funds Lending Financial leasing

Commercial banking

Guarantees and commitments

15%


Business line Activities PercentageAcceptance of deposits and other repayable funds Lending Financial leasing

Retail banking

Guarantees and commitments

12%

Money transmission services Payment and settlement

Issuing and administering means of payment 18%

Agency services

Safekeeping and administration of financial instruments for the account of clients as well as related services such as cash/collateral management

15%

Portfolio management Management of investment funds Asset management Other forms of asset management

12%

Principles for Mapping Business Lines

Article 187. (1) Credit institutions which use the Standardised Approach must have specific policies and criteria in place in order to map their business activities and the relevant indicator to the business lines pursuant to Article 22k para. 3 Banking Act. These policies and criteria must be documented, subjected to independent review at least once per year and adjusted as neces-sary.

(2) The directors of the credit institution are responsible for the following mapping policies in the assignment of business activities to the individual business lines: 1. All activities must be mapped into business lines in a mutually exclusive and jointly ex-

haustive manner; 2. Any activity which cannot be readily mapped into a business line but which represents

an ancillary function to an activity pursuant to Article 186 must be allocated to the busi-ness line it supports. In cases where an ancillary activity supports more than one busi-ness line, a transparent mapping criterion must be used;

3. In cases where an activity cannot be mapped into a particular business line, the busi-ness line yielding the highest percentage pursuant to Article 186 must be used. The same business line also applies to any associated ancillary activities;

4. Where internal pricing methods are used to allocate the relevant indicator between business lines, the costs generated in one business line which are imputable to a differ-ent business line may be reallocated to the latter business line to which they pertain; and

5. The mapping of activities into business lines for the purpose of calculating minimum capital requirements for operational risk must be consistent with the criteria used for credit and market risks;

(3) In the retail and commercial banking business lines, the loans and advances must con-sist of the total amounts drawn in the corresponding credit portfolios. In the commercial banking business line, securities not held in the trading book must also be included.


Chapter 3

Advanced Measurement Approach Article 188. Credit institutions which use the Advanced Measurement Approach pursuant

to Article 22l Banking Act must fulfil the requirements set forth in Articles 189 to 193 in order to ensure the proper capture of risks.

Quantitative Standards

Article 189. (1) In calculating their minimum capital requirements, credit institutions must include expected and unexpected losses, unless expected loss is already captured adequately by internal business practices. The operational risk measure must capture potentially severe tail loss events and achieve a soundness standard comparable to a 99.9% confidence interval over a one-year period.

(2) In order to fulfil the soundness standard pursuant to para. 1, the operational risk meas-urement system must include the following elements: 1. Internal data pursuant to Article 190; 2. External data pursuant to Article 191; 3. Scenario analysis pursuant to Article 192; and 4. Factors reflecting the business environment and internal control systems pursuant to

Article 193. Credit institutions must have an appropriately documented approach for weighting the use of these four elements in their operational risk measurement systems.

(3) The operational risk measurement system must capture the major drivers of risk which affect the tails of the loss distributions.

(4) Correlations in operational risk losses across individual operational risk estimates may be recognised only if the system used to measure correlations is sound and accounts for the uncertainty surrounding any such correlation estimates, particularly in periods of stress. Credit institutions must validate their correlation assumptions using appropriate quantitative and quali-tative techniques.

(5) The risk measurement system must be internally consistent and must avoid the multiple counting of qualitative assessments or risk mitigation techniques.

Internal Data

Article 190. (1) The credit institution's internal loss data must capture all material activities and exposures from all appropriate sub-systems and geographical locations. Activities and ex-posures may only be excluded where they do not have a material impact on the overall risk estimates both from an individual and combined perspective. Appropriate minimum thresholds must be defined for internal loss events.


(2) When first applying the Advanced Measurement Approach, the credit institution must base its internally generated measurements of operational risk on a minimum historical obser-vation period of three years. Each year, this period must be increased in length by one year until the relevant data cover a period of five years.

(3) In addition to information on gross loss amounts, the loss database must contain infor-mation on the date of each loss event, any recoveries of gross loss amounts, as well as descrip-tive information on the drivers or causes of each loss event.

(4) There must be specific criteria for assigning loss data arising from an event in a central-ised function or an activity that spans more than one business line, as well as from related events over time.

(5) Credit institutions must assign their internal historical loss data to business lines and to defined event types using documented and objective criteria. Operational risk losses which are related to credit risk and have historically been included in internal credit risk databases must be recorded and separately identified in operational risk databases. Such losses will not be subject to a minimum capital requirement for operational risk as long as they continue to be treated as credit risk for the purposes of calculating minimum capital requirements. Operational risk losses which are related to market risks must be included in the scope of the minimum capital require-ment for operational risk.

(6) There must be documented procedures for assessing the ongoing materiality of histori-cal loss data. This must also reflect the situations in which judgement overrides, scaling or other adjustments may be applied, to what extent they may be applied and who is authorised to make such decisions.

External Data

Article 191. (1) The credit institution's operational risk measurement system must use rele-vant external data.

(2) Credit institutions must have in place a systematic process for determining the situations in which external data is used and define the methodology used to incorporate the data in their measurement systems.

(3) Credit institutions must document the conditions and practices for the use of external data and subject them to independent review at least once per year.

Scenario Analysis

Article 192. Credit institutions must employ scenario analyses based on expert assess-ments and in conjunction with external data in order to evaluate their exposure to high-severity events. Such assessments must be validated over time and re-assessed on the basis of com-parisons to actual loss experience in order to ensure their reasonableness.


Business Environment and Internal Control Factors

Article 193. (1) The credit institutions' risk assessment methodology must capture the key business environment and internal control factors which can change the institutions' operational risk profile.

(2) The sensitivity of risk estimates to changes in these factors and the relative weighting of the various factors must be well reasoned. In addition to capturing changes in risk due to changes in risk controls, the risk assessment methodology must also capture potential in-creases in risk due to greater complexity of activities or due to increased business volume.

(3) Credit institutions must document their risk assessment methodology and subject it to regular independent review.

(4) Credit institutions must re-assess the process and outcomes through comparisons to actual internal loss experience and relevant external data.

Recognition of Insurance and Other Risk Mitigation Techniques

Article 194. (1) Credit institutions may recognise insurance contracts and other risk transfer mechanisms as risk mitigation techniques pursuant to Article 22l para. 2 Banking Act in calculat-ing minimum capital requirements for operational risk under the Advanced Measurement Ap-proach if it can be demonstrated that a substantial risk mitigation effect is achieved, and that the insurance and insurance framework of the credit institution fulfil the following requirements: 1. The insurance contract must have an initial term of no less than one year. 2. For insurance contracts with a residual term of less than one year, the credit institution

must apply appropriate haircuts which reflect the declining residual term of the policy, up to a full 100% haircut for policies with a residual term of 90 days or less;

3. The insurance contract must have a minimum notice period for cancellation of 90 days; 4. The insurance contract must not contain any exclusions or limitations which are trig-

gered by supervisory action or, in the case of a failed credit institution, which prevent the credit institution, its receiver or liquidator from recovering for damages suffered or ex-penses incurred by the credit institution, except in the case of events occurring after the initiation of bankruptcy proceedings in respect of the credit institution, provided that the insurance contract excludes any fine, penalty or damages resulting from actions by the competent authorities;

5. Calculations of the risk-mitigating effect of insurance must reflect the insurance cover-age in a manner that is transparent in its relationship to, and consistent with, the likeli-hood and impact of loss as used in the determination of minimum capital requirements for operational risk;

6. The insurance must be provided by a third party, or, in the case of insurance through captives or affiliated companies, the exposure must be transferred by means of reinsur-ance which itself fulfils the qualifying criteria/approval requirements set forth in Arti-cle 2 Securities Supervision Act; and

7. The framework for recognising insurance contracts must be justified and documented.


(2) The methodology for recognising insurance contracts must in any case include the fol-lowing factors by means of discounts or haircuts: 1. The residual term of the insurance contract, if less than one year, pursuant to

para. 1 no. 2; 2. The cancellation terms applicable to the insurance contract, if less than one year; and 3. The uncertainty of payment as well as mismatches in the coverage of insurance poli-

cies.

Part 4: Risk Types Pursuant to Article 22o para. 2 Banking Act

Chapter 1

Trading Book

Section 1

General

Trading Intent

Article 195. Credit institutions which hold positions for trading purposes must fulfil the fol-lowing requirements: 1. The credit institution must have a documented trading strategy for these positions which

is approved by senior management and includes the expected holding period; 2. The credit institution must have policies and procedures for the active management of

the positions, which must in any case fulfil the requirements pursuant to lit. a to e: a) The positions are entered into on a trading desk; b) Position limits must be defined, and their adequacy must be monitored regularly in

light of the defined trading strategy; c) Traders must have the autonomy to enter into and manage positions within agreed

limits and according to the agreed strategy; d) Positions must be reported to senior management as part of the institution’s risk

management process; and e) Positions must be monitored using market information sources with regard to the

positions' marketability or the ability to hedge the positions or their component risks; this assessment must include the quality and availability of market inputs to the valua-tion process, the levels of market turnover and the sizes of positions traded on the market; and

3. There must be clearly defined policies and procedures for monitoring the positions held by the credit institution against the institution's trading strategy, including the monitoring of turnover.


Assignment to the Trading Book

Article 196. (1) Credit institutions must have adequate policies and procedures in place for determining which positions are included in the trading book for the purpose of calculating minimum capital requirements. Compliance with these policies and procedures must be docu-mented and regularly monitored.

(2) Credit institutions must have clearly defined procedures and processes in place for the overall management of the trading book, such as in particular: 1. The activities regarded as trading and as part of the trading book for the purpose of

calculating minimum capital requirements; 2. The extent to which a position can be marked to market on a daily basis by reference to

an active, liquid two-way market; 3. For positions which are marked to model, the extent to which a) all material risks of the position can be identified; b) all material risks of the position can be hedged with instruments for which an active,

liquid two-way market exists; and c) reliable estimates can be derived for the key assumptions and parameters used in the

valuation model; 4. The extent to which credit institutions are able and required to generate position valua-

tions which can be validated externally in a consistent manner; 5. The extent to which the credit institutions are prevented by legal restrictions or other

operational requirements from effecting liquidation or hedges of the position in the short term;

6. The extent to which the credit institution is able and required to actively manage the risk associated with positions within its trading activities; and

7. The extent to which the credit institution can transfer risks or positions between the trad-ing book and the non-trading book, and the criteria for such transfers.

(3) Credit institutions may treat positions pursuant to Article 23 para. 3 nos. 3 and 4 Bank-ing Act as equity or debt instruments in cases where the credit institution is an active market maker in those positions and has in place adequate systems and controls for the trading of eli-gible regulatory capital instruments.

(4) Credit institutions may treat term trading-related repo-style transactions which are not accounted for in the trading book as part of the trading book in the calculation of minimum capi-tal requirements as long as all such repo-style transactions are treated in this way. For the pur-poses of this provision, trading-related repo-style transactions refer to those which meet the requirements of Article 22n para. 2 Banking Act and Article 195, and in which both legs are in the form of either cash or securities that can be included in the trading book. Regardless of where they are booked, all repo-style transactions are subject to a charge for counterparty credit risk in the non-trading book.


Internal Hedges

Article 197. (1) An internal hedge is a position which materially or completely offsets the risk of one or more non-trading book positions. Positions arising from internal hedges are to be assigned to the trading book in cases where they are held with trading intent, where they fulfil the requirements pursuant to Article 195, where the valuation rules pursuant to Articles 198 to 202 are observed, and where 1. The internal hedge is not primarily intended to reduce minimum capital requirements; 2. The internal hedge is properly documented and subject to special internal approval and

audit procedures; 3. The internal hedge is effected at market conditions; 4. The market risk generated by the internal hedge is dynamically managed in the trading

book within the authorised limits; and 5. The internal hedge is monitored using adequate procedures.

(2) Assignment pursuant to para. 1 has no impact on the calculation of minimum capital re-quirements applicable to the non-trading-book side of the internal hedge.

(3) Where a credit institution hedges a non-trading book exposure with a credit derivative assigned to the trading book, that exposure may only be regarded as hedged for the purpose of calculating minimum capital requirements in cases where the credit derivative is purchased by a recognised protection provider and fulfils the requirements set forth in Article 116 with regard to the hedged exposure. Where the credit derivative is recognised for the purpose of calculating minimum capital requirements for an exposure not held in the trading book, neither the internal nor the external credit derivative hedge can be included in the trading book for the purpose of calculating minimum capital requirements.

Section 2

Valuation Methods

Marking to Market

Article 198. Credit institutions must mark to market each position assigned to the trading book pursuant to Article 22n Banking Act at least on a daily basis. Positions are to be valued on the basis of close-out prices which are sourced independently.

Marking to Model

Article 199. (1) Credit institutions must mark their positions to model in cases where direct marking to market is not possible. In this method, position values are to be benchmarked or otherwise calculated using market data (market risk factors).

(2) In marking to model, credit institutions must fulfil the following requirements: 1. The directors must be aware of the parts of the trading book which are subject to mark-

ing to model and must be informed of the inaccuracy this creates in risk/return reports;


2. Wherever possible, the market data used for marking to model must be derived from the

same sources as the market prices indicated in Article 198; the appropriateness of model parameters and market input used to value specific positions must be reviewed regularly;

3. Credit institutions must rely on valuation methods which represent accepted market practice for financial instruments and commodities, where available;

4. Models developed by the credit institution itself must be based on appropriate assump-tions which have been reviewed and assessed by sufficiently qualified parties who were not involved in the process of developing the model; the model must be developed and approved independently of the front office; the model must be tested by an independent party; in particular, such tests must include the software implementation and the as-sessment of the underlying mathematical formulae;

5. Credit institutions must have appropriate procedures in place for controlling changes to the model; a backup copy of the model prior to changes must be stored and used to check valuations when changes are implemented;

6. Risk management must be aware of the weaknesses of the models chosen and account for those weaknesses appropriately in the valuation output; and

7. The valuation model must be reviewed regularly in order to verify the accuracy of the model's output; in particular, this review must include an assessment of the continued appropriateness of the assumptions used, an analysis of profit and loss in relation to changes in the relevant risk factors, and a comparison of actual close-out prices to the model's output.

Independent Price Verification

Article 200. In addition to marking to market or marking to model on a daily basis, credit in-stitutions must perform independent price verification on a monthly basis (or more frequently depending on the nature of trading activities) in order to verify the appropriateness and inde-pendence of valuations. This verification must be carried out by a unit which is independent of the front office. Where no independent market sources are available or pricing sources are sub-jective, credit institutions are to carry out prudent valuations which account for valuation re-serves. Daily marking to market may be performed by traders.

Valuation Adjustments or Reserves

Article 201. (1) Credit institutions must apply appropriate rules to the consideration of valuation adjustments or reserves. These rules must specifically cover valuation adjustments or reserves for unearned credit spreads, early termination, investing and funding costs, close-out costs, future administrative costs and model risk. The appropriateness and expedience of these rules must be reviewed on a regular basis.


(2) For positions which may be less liquid due to market conditions or for internal reasons, the rules pursuant to para. 1 must also account for the amount of time that would be necessary to hedge out the positions, the volatility and average level of bid/offer spreads, the availability of market quotes including the number and identity of market makers (Article 56 para. 1 Stock Exchange Act [Börsegesetz – BörseG]), the average and volatility of trading volumes, market concentration, the aging of positions, the extent to which valuation relies on marking to model, and the impact of other model risks.

(3) Credit institutions must review the necessity of valuation adjustments or reserves when marking to model or using third-party valuations.

(4) Valuation adjustments or reserves which give rise to material losses in the current fi-nancial year must be deducted from own funds in accordance with Article 23 para. 13 no. 2 Banking Act.

(5) Profits and non-material losses arising from valuation adjustments or reserves must be 1. included in the calculation of net trading book profits; or 2. added to/deducted from the additional own funds intended to cover minimum capital

requirements for market risk.

(6) Where valuation adjustments and reserves exceed those required under the relevant accounting standards, the excess amount is to be treated in accordance with para. 4 if the valuation adjustments and reserves give rise to material losses; otherwise, para. 5 is to be ap-plied to the excess amount.

Systems and Controls

Article 202. Credit institutions must maintain adequate systems and controls in order to provide prudent and reliable estimates of the prices of their trading book positions. At a mini-mum, these systems and controls must provide for the following: 1. Documented policies and procedures for the process of valuation; 2. Reporting lines for the department accountable for valuation which are clear and inde-

pendent of the front office; and 3. Reporting lines which ultimately lead to the relevant director.

Section 3

General Provisions Regarding Position Risk


Netting of Positions and Currency Translation

Article 203. (1) The excess of a credit institution's long positions over its short positions in

the same equities, debt instruments, convertible bonds pursuant to Article 174 para. 1 Stock Corporation Act 1965 (Aktiengesetz 1965 – AktG; Federal Law Gazette No. 98/1965 as last amended by Federal Law Gazette I No. 120/2005), financial futures, options and warrants is that institution's net position in each of those instruments. In calculating the net position, the credit institution must treat positions in derivative instruments as position in the underlying or notional securities using the methods set forth in Article 204 paras. 1 to 4.

(2) Convertible bonds pursuant to Article 174 para. 1 Stock Corporation Act are to be treated as positions in equities and may be netted off against equities to which the conversion privilege refers if: 1. The period until the day on which the instrument can be converted into equities is less

than three months, or, in cases where conversion has already been possible, the period until the next possible conversion is less than one year; and

2. The convertible bond is traded at a premium lower than 10%; the premium is calculated as the market price of the convertible bond less the market price of the equity instrument into which the bond can be converted, with the result expressed as a percentage of the market price of the share.

(3) For the purpose of calculating general position risk, credit institutions may net off similar long and short positions in derivative instruments on interest-based underlying instruments (de-rivative interest positions) if the following requirements are fulfilled (matched pairs approach): 1. The positions are denominated in the same currency; 2. The reference rates for positions in floating-rate instruments or the nominal interest

rates for positions in fixed-interest instruments match; rates are considered to match if the reference rates for floating-rate instruments or the nominal interest rates for fixed-interest instruments differ by a maximum of 15 basis points;

3. The next interest fixing dates for floating-rate instruments or the residual maturities for fixed-interest instruments are closely matched within the following limits:

a) for periods of less than one month: same day; b) for periods between one month and one year: seven days; c) for periods of more than one year: 30 days.

(4) Credit institutions are to calculate net positions in original currency and then translate them into EUR at the applicable spot foreign exchange rate.

Treatment of Derivatives

Article 204. (1) For the purpose of calculating position risk, credit institutions must treat in-terest-rate futures, forward-rate agreements (FRAs) and forward commitments to buy or sell debt instruments as combinations of long and short positions. In this context, the procedure pursuant to nos. 1 to 3 is to be applied:


1. A long interest-rate futures position is to be treated as a combination of a borrowing

transaction maturing on the delivery date of the futures contract and the holding of an asset with the same maturity date as that of the instrument or notional position underly-ing the futures contract.

2. A sold forward-rate agreement is to be treated as a long position with a maturity date equal to the settlement date plus the contract period, and as a short position with a ma-turity date equal to the settlement date.

3. A forward commitment to buy a debt instrument is to be treated as a combination of a borrowing transaction maturing on the delivery date and a long (spot) position in the debt instrument itself.

(2) Swaps are to be treated as notional on-balance-sheet instruments.

(3) Options which are not subjected to the scenario matrix method must be treated as if they were positions equal in value to the amount of the underlying instrument to which the op-tion refers, multiplied by its delta for the purpose of calculating position risk. This also applies to warrants. The calculated positions may be netted off against any offsetting positions in the iden-tical underlying securities or derivatives.

(4) For the purpose of hedging the other risks associated with options (gamma and vega risk), credit institutions must apply recognised methods and use them in the calculation of mini-mum capital requirements.

(5) In calculating sensitivities (delta, gamma and vega factors) pursuant to paras. 3 and 4, credit institutions must use suitable IT-assisted option pricing models uniformly for similar option transactions in line with empirical mathematical methods and common market practices. These models must be submitted to the FMA and the Oesterreichische Nationalbank immediately along with detailed and extensive descriptions.

(6) For credit derivatives, credit institutions must use the nominal value of the credit deriva-tive contract. For the purpose of calculating minimum capital requirements for specific position risk, the maturity of the credit derivative (and not that of the obligation) is to be used, except in the case of total return swaps. For the purpose of calculating minimum capital requirements for the general and specific position risk of the party assuming the credit risk (protection seller), the positions are to be calculated as follows: 1. A total return swap represents a long position in the reference obligation, for which the

minimum capital requirement for general and specific position risk is to be calculated and a short position in the form of a notional government bond with a maturity equivalent to the period until the next interest fixing date, for which the minimum capital require-ment for general position risk is to be calculated;

2. In the case of a credit default swap, the specific position risk is to be calculated for a synthetic long position based on an obligation in the reference position; if premium or in-terest payments are due under the product, these cash flows must be represented as notional positions in government bonds; as an alternative, a long position in the credit derivative may be assumed in cases where the credit default swap has a credit assess-ment and the requirements for qualifying debt instruments pursuant to Article 207 para. 3 are fulfilled;


3. A single-name credit-linked note represents a long position in the form of a bond issued

by the issuer of the credit-linked note, for which the general and specific position risk must be covered, and a synthetic long position in the obligation of the reference entity, for which the specific position risk must be covered; as an alternative, a long position in the note may be assumed in cases where the single-name credit-linked note has a credit assessment and the requirements for qualifying debt instruments pursuant to Arti-cle 207 para. 3 are fulfilled;

4. In addition to a long position in the note, with regard to specific position risk a multiple-name credit linked note which provides proportional protection represents a position in each reference entity, with the total notional amount of the contract assigned across the positions according to the proportion of the notional amount of the obligation of a refer-ence entity included in the basket to the notional value of the overall basket. In cases where more than one obligation of a reference entity can be selected, the obligation with the highest risk weight determines the specific risk; in such cases, the maturity of the credit derivative contract (not that of the obligation) is used; as an alternative, a single long position in relation to the issuer of the credit-linked note may be used to calculate the specific position risk in cases where a multiple-name credit-linked note has an ex-ternal credit assessment and the requirements for qualifying debt instruments pursuant to Article 207 para. 3 are fulfilled;

5. A first-asset-to-default credit derivative represents a position in the amount of the no-tional value based on an obligation to any reference entity of the credit derivative; where the minimum capital requirement for the specific position risk of this position is higher than the amount of the maximum credit event payment, the maximum payment amount may be used as the minimum capital requirement for the specific position risk of a first-asset-to-default credit derivative;

6. An nth-asset-to-default credit derivative represents a position in the amount of the no-tional value based on an obligation to any reference entity of the credit derivative in-cluded in the basket, less n-1 obligations to reference entities which give rise to the low-est minimum capital requirement for specific position risk; where the minimum capital requirement for the specific position risk of this position is higher than the amount of the maximum credit event payment, the maximum payment amount may be used as the minimum capital requirement for the specific position risk of an nth-asset-to-default credit derivative; and

7. If a first-asset-to-default or nth-asset-to-default derivative has a credit assessment and the requirements for qualifying debt instruments pursuant to Article 207 para. 3 are ful-filled, then the minimum capital requirement for specific risk which reflects the rating of the derivative may be calculated.


(7) For the party transferring the credit risk (protection buyer), in the calculation of the minimum capital requirement the risk positions are to be determined as the mirror image of those of the protection seller pursuant to para. 6, with the exception of a credit-linked note (which does not create a short position in the issuer). In cases where a call option in combina-tion with a step-up exists at a given point in time, that point in time is to be treated as the matur-ity of the protection. In the case of a credit derivative which can be exercised as soon as a credit event has occurred for the nth time in a basket and that credit event terminates the contract, the credit institution (as the protection buyer) may apply the lowest minimum capital requirement for specific position risk.

Position Risk in Repurchase Transactions and Securities Lending or Borrowing Transactions

Article 205. In the case of repurchase transactions and securities lending transactions in the trading book, credit institutions must include the securities and rights relating to title to secu-rities on the lending or borrowing side in the calculation of general and specific position risk.

Section 4

Special Provisions Regarding Position Risk

General and Specific Position Risk

Article 206. The position risk in interest rate instruments and equities comprises specific and general position risk. In this context, the following applies: 1. Specific position risk refers to the risk of a price change in an instrument due to factors

related to its issuer or, in the case of a derivative instrument, the issuer of the underlying instrument; and

2. General position risk refers to the risk of a price change in a position due to a) a change in the level of interest rates in the case of interest rate instruments; and b) to a broad equity-market movement where these factors are unrelated to the specific

attributes of individual securities in the case of equities.

Specific Position Risk Associated with Interest Rate Instruments

Article 207. (1) Credit institutions are to classify the net positions calculated in accordance with Article 203 para. 1 and funds invested in the money market in the relevant categories indi-cated in the table below on the basis of the issuer and obligor, external or internal credit as-sessment, and residual maturity; the positions must then be multiplied by the relevant risk weights. The minimum capital requirement for specific position risk is calculated as the sum of the weighted long and short positions added up without attention to plus/minus signs.


Positions Minimum capital requirement for specific position risk

Debt securities issued or guaranteed by central governments, or issued by central banks, interna-tional organisations, multilateral development banks or Member States' regional governments or local authorities which would qualify for credit qual-ity step 1 or which would receive a 0% risk weight under the Standardised Approach to Credit Risk

0%

Debt securities issued or guaranteed by central governments, or issued by central banks, interna-tional organisations, multilateral development banks or Member States' regional governments or local authorities which would qualify for credit qual-ity step 2 or 3 under the Standardised Approach to Credit Risk; Debt securities issued or guaranteed by institu-tions which would qualify for credit quality step 1 or 2 under the Standardised Approach to Credit Risk; Debt securities issued or guaranteed by corpo-rates which would qualify for credit quality step 1 or 2 under the Standardised Approach to Credit Risk; Other qualifying positions as specified in para. 6

0.25% (residual term to final maturity

6 months or less)

1.00% (residual term to final maturity greater than 6 months, less than or equal to

24 months)

1.60% (residual term to final maturity

exceeding 24 months)

Debt securities issued or guaranteed by central governments, or issued by central banks, interna-tional organisations, multilateral development banks, Member States' regional governments or local authorities, or institutions which would qualify for credit quality step 4 or 5 under the Standard-ised Approach to Credit Risk; Debt securities issued or guaranteed by institu-tions which would qualify for credit quality step 3 under the Standardised Approach to Credit Risk; Debt securities issued or guaranteed by corpo-rates which would qualify for credit quality step 3 or 4 under the Standardised Approach to Credit Risk; Exposures for which a credit assessment from a nominated external credit rating institution is not available

8%


Positions Minimum capital requirement for specific position risk

Debt securities issued or guaranteed by central governments, or issued by central banks, interna-tional organisations, multilateral development banks, Member States' regional governments or local authorities, or institutions which would qualify for credit quality step 6 under the Standardised Approach to Credit Risk; Debt securities issued or guaranteed by corpo-rates which would qualify for credit quality step 5 or 6 under the Standardised Approach to Credit Risk

12%

(2) In calculating specific position risk, credit institutions must disregard the following: 1. Long and short positions in their own issues; 2. Deposits received on the money market; 3. Funding for trading book positions; and 4. Derivatives based on underlying instruments without issuers.

(3) Credit institutions which use the Internal Ratings Based Approach may use internal rat-ings to rate the credit quality of issuers and obligors in order to achieve a weight distribution pursuant to para. 1 as long as the PD associated with the internal rating is lower than or equal to that PD associated with the corresponding credit quality step for exposures to corporates under the Standardised Approach to Credit Risk.

(4) In calculating specific position risk pursuant to para. 1, credit institutions must assign a weight of 8% or 12% to debt instruments issued by non-qualifying issuers.

(5) In the case of securitisation exposures which 1. would be subject to a deduction pursuant to Article 23 para. 14 no. 8 Banking Act or 2. would be assigned a risk weight of 1250% pursuant to Article 161 the minimum capital requirement must not be lower than if no. 1 or 2 were applied. In the case of unrated liquidity facilities, the capital requirement must not be lower than that resulting from Articles 156 to 179.

(6) Other qualifying positions pursuant to para. 1 include: 1. Long and short positions which have a credit assessment from an eligible external credit

assessment institution which corresponds at least to investment grade under the Stan-dardised Approach to Credit Risk;

2. Long and short positions with a probability of default under the Internal Ratings Based Approach which, because of the solvency of the issuer, is not higher than the probability of default of the positions indicated in no. 1;

3. Long and short positions which do not have a credit assessment from an eligible exter-nal credit assessment institution and which fulfil the following requirements:


a) they are sufficiently liquid; b) their investment quality is at least equivalent to that of the assets indicated in no. 1; c) they are traded on a recognised exchange pursuant to Article 2 no. 32 Banking Act;

and 4. Long and short positions in assets which were issued by institutions and which fulfil the

following requirements: a) they are sufficiently liquid; b) their investment quality is at least equivalent to that of the assets indicated in no. 1;

and 5. Securities issued by credit institutions whose credit quality would be equivalent to or

higher than credit quality step 2 under the Standardised Approach to Credit Risk and which are subject to supervisory and regulatory arrangements comparable to those of the Community.

General Position Risk Associated with Interest Rate Instruments

Article 208. (1) Credit institutions are to calculate the general position risk associated with interest rate instruments on the basis of maturity pursuant to para. 3 or on the basis of modified duration pursuant to para. 4.

(2) Minimum capital requirements are to be calculated separately for each currency.

(3) Where general position risk is calculated on the basis of maturity, the procedure com-prises three fundamental steps. First, all positions must be weighted according to their maturity pursuant to no. 1. Second, the positions are to be matched in cases where weighted positions are held along with opposite weighted positions within the same maturity band. In the third step, the positions are to be matched in cases where the opposite weighted positions fall into different maturity bands, with the size of this offset depending on whether the two positions fall into the same zone. In this context, a "zone" refers to a group of maturity bands. Specifically, credit insti-tutions must apply the following procedure: 1. Credit institutions must assign their net positions to the appropriate maturity bands in the

table under no. 4; this is to be done on the basis of residual maturity in the case of fixed interest rate instruments and on the basis of the period until the next interest fixing date in the case of floating interest rate instruments; moreover, interest rate instruments with a nominal interest rate of 3% or higher must be distinguished from interest rate instru-ments with a nominal interest rate of less than 3%, and those instruments must be clas-sified accordingly in Column 2 or 3 of the table under no. 4; the credit institution must then multiply each interest rate instrument with the weight indicated in Column 4 of the table under no. 4 for the corresponding maturity band;

2. Subsequently, credit institutions must calculate the sum of weighted long positions and the sum of weighted short positions for each maturity band; the amount of the weighted long position which is matched by the weighted short position in a given maturity band is the matched weighted position in that band, while the residual long or short position is the unmatched weighted position for the same maturity band; the credit institution must then calculate the total of the matched weighted positions in all maturity bands;


3. Calculation of positions in each zone: a) Credit institutions are to calculate the total amounts of unmatched weighted long posi-

tions for each maturity band in each of the zones indicated in the table under no. 4 in order to obtain the unmatched weighted long position for each zone;

b) Credit institutions are to calculate the total amounts of unmatched weighted short positions for each maturity band in each of the zones indicated in the table under no. 4 in order to obtain the unmatched weighted short position for each zone;

c) That part of the unmatched weighted long position for a zone which is offset by the unmatched weighted short position for the same zone is the matched weighted posi-tion for that zone;

d) That part of the unmatched long position or unmatched short position that cannot be matched in accordance with lit. c is the unmatched position for the given zone;

4. The following zones and maturity bands are to be defined:

Zone Maturity bands Weight

(%)

Assumed interest rate change (%)

Nominal interest rate of 3% or higher

Nominal interest rate lower than 3%

Column (1)

Column (2)

Column (3)

Column (4)

Column (5)

Zone 1 0 ≤ 1 month > 1 month ≤ 3 months > 3 months ≤ 6 months > 6 months ≤ 12 months

0 ≤ 1 month > 1 months ≤ 3 months > 3 months ≤ 6 months > 6 months ≤ 12 months

0.00 0.20 0.40 0.70

- 1.00 1.00 1.00

Zone 2 > 1 months ≤ 2 years > 2 years ≤ 3 years > 3 years ≤ 4 years

> 1.0 year ≤ 1.9 years > 1.9 years ≤ 2.8 years > 2.8 years ≤ 3.6 years

1.25 1.75 2.25

0.90 0.80 0.75

Zone 3 > 4 years ≤ 5 years > 5 years ≤ 7 years > 7 years ≤ 10 years > 10 years ≤ 15 years > 15 years ≤ 20 years

> 20 years

> 3.6 years ≤ 4.3 years > 4.3 years ≤ 5.7 years > 5.7 years ≤ 7.3 years > 7.3 years ≤ 9.3 years > 9.3 years ≤ 10.6 years > 10.6 years ≤ 12.0 years > 12.0 years ≤ 20.0 years > 20.0 years

2.75 3.25 3.75 4.50 5.25 6.00 8.00

12.50

0.75 0.70 0.65 0.60 0.60 0.60 0.60 0.60

5. The credit institution must then calculate the amount of the unmatched weighted long or

short position in Zone 1 which is matched by the unmatched weighted short or long po-sition in Zone 2; this is referred to in no. 9 as the matched weighted position between Zones 1 and 2; subsequently, the same calculation must be performed for the remaining part of the unmatched weighted position in Zone 2 and the unmatched weighted position in Zone 3 in order to calculate the matched weighted position between Zones 2 and 3;


6. Credit institutions reverse the sequence in no. 5 and calculate the matched weighted

position between Zones 2 and 3 before calculating the matched weighted position be-tween Zones 1 and 2.

7. The remainder of the unmatched weighted position in Zone 1 must then be matched with the amount remaining for Zone 3 after the latter has been matched with Zone 2 in order to determine the matched weighted position between Zones 1 and 3.

8. The residual positions arising from the three separate matching calculations in nos. 5 and 7 must be added up.

9. The minimum capital requirement is calculated as the sum of the positions pursuant to lit. a to g:

a) 10% of the sum of the matched weighted positions in all maturity bands; b) 40% of the matched weighted position in Zone 1; c) 30% of the matched weighted position in Zone 2; d) 30% of the matched weighted position in Zone 3; e) 40% of the matched weighted positions between Zones 1 and 2 and between Zones

2 and 3 (in accordance with no. 5); f) 150% of the matched weighted position between Zones 1 and 3; and g) 100% of the residual unmatched weighted positions.

(4) Where general position risk in interest rate instruments is calculated using a system based on duration, credit institutions must apply the following uniform procedure: 1. Credit institutions must use the market price of each fixed-rate instrument as a basis in

order to calculate its yield to maturity, which is the implied discount rate for that instru-ment; in the case of floating-rate instruments, credit institutions must use the market price of each instrument as a basis in order to calculate its yield on the assumption that the principal is due when the interest rate can next be changed;

2. Subsequently, credit institutions must calculate the modified duration for each instru-ment according to the following formula: Duration (D):

,

)1(

)1(

1

1

∑

∑

=

=

+

+= m

tt

t

m

tt

t

rC

rtC

D

,)1(

)(r

DDurationdurationModified

+=

where: r yield to maturity (pursuant to no. 1); Ct cash payments in time t; m total maturity (pursuant to no. 1);


3. Then the instruments must be assigned to the appropriate zones in the table below on

the basis of the instruments' modified duration:

Zone Modified duration Assumed interest rate change (%) 1 0 – 1.0 1.0 2 > 1.0 – 3.6 0.85 3 > 3.6 0.7

4. Then the duration-weighted position for each instrument is to be calculated for each

instrument by multiplying its market price by the modified duration and by the assumed interest-rate change in each zone;

5. Credit institutions must calculate their duration-weighted long positions and duration-weighted short positions within each zone; the amount of duration-weighted long posi-tions which are matched by the amount of duration-weighted short positions within each zone equals the matched duration-weighted position for that zone; credit institutions must then calculated the unmatched duration-weighted position for each zone and sub-sequently apply the procedure for unmatched weighted positions pursuant to para. 3 nos. 5 to 8;

6. The minimum capital requirement is calculated as the sum of the positions pursuant to lit. a to d:

a) 2% of the matched duration-weighted position for each zone; b) 40% of the matched duration-weighted positions between Zones 1 and 2 and be-

tween Zones 2 and 3; c) 150% of the matched duration-weighted position between Zone 1 and Zone 3; and d) 100% of the residual unmatched duration-weighted positions.

Specific and General Position Risk Associated with Equity Instruments

Article 209. (1) Credit institutions must add up all net long positions and net short positions in accordance with Article 203. The sum of the two figures is equal to the credit institution's overall gross position. The overall net position is the difference (without attention to plus/minus signs) between the net long position and the net short position in equities, calculated separately for each national equity market.

(2) The minimum capital requirement for the specific position risk associated with equities amounts to 4% of the overall gross position. This percentage is to be reduced to 2% for those equities which fulfil all of the following requirements: 1. The equities must be issued by an undertaking that has issued exchange-traded debt

instruments which are to be assigned a weight of less than 8% for specific position risk; 2. The equities must be highly liquid; equities qualify as highly liquid if they are included in

an index of most heavily traded instruments which is published by a recognised ex-change;

3. The equities must not be associated with special risk due to a lack of creditworthiness on the part of the issuer; and


4. No individual position may exceed 5% of the total value of the credit institution's equity

portfolio; this percentage is increased to 10% for individual positions provided that the total value of such positions does not exceed 50% of the overall equity portfolio.

(3) The minimum capital requirement for the general position risk associated with equities amounts to 8% of the overall net positions determined in accordance with para. 1.

General and Specific Position Risk Associated with Stock-Index Futures

Article 210. (1) Stock-index futures, the delta-weighted equivalents of options on stock-index futures and stock indices (referred to collectively below as "stock-index futures") may be broken down into the individual equities constituting an index or treated as separate positions. These positions may be netted against opposite positions in stock-index futures in the case of identical indices and matching maturities. Maturities are considered to be matched within the following limits: 1. For periods of less than one month: same day; 2. For periods between one month and one year: seven days; and 3. For periods over one year: 30 days.

(2) Where stock-index futures are broken down into individual equity positions, such posi-tions may be netted against opposite positions in the same equities. The minimum capital re-quirement for the risk that the value of the stock-index future will not move fully in line with that of the underlying equities amounts to 0.5% of the matched position after the index is broken down.

(3) Where a stock-index future is treated as a separate equities position, the minimum capi-tal requirement for general and specific position risk is to be calculated in accordance with Arti-cle 209. By way of derogation from this provision, those stock-index futures whose underlying instrument is the Austrian Traded Index (ATX) of the Vienna Stock Exchange (Wiener Börse) or an index consisting of at least 20 equities traded on a recognised exchange are to be disre-garded in the calculation of specific position risk. Such stock-index futures must only be in-cluded in overall net positions.

Investment Fund Shares in the Trading Book

Article 211. (1) In the case of investment fund shares which fulfil the requirements for as-signment to the trading book pursuant to Article 22n Banking Act, credit institutions must calcu-late minimum capital requirements in accordance with paras. 2 to 9.

(2) The minimum capital requirement for the general and specific position risk associated with an investment fund share amounts to 32% of the market value of the investment fund share. (2) The aggregate minimum capital requirement for general and specific position risk as well as foreign exchange risk must not exceed 40% of that amount. For credit institutions which calculate their minimum capital requirements for general and specific position risk in accordance with paras. 4 to 6, the total of the amounts determined in this way must not exceed the minimum capital requirement indicated in the first sentence.


(3) Unless stipulated otherwise, the netting of positions underlying an investment fund against other positions of credit institutions is not permitted.

(4) Credit institutions may calculate the minimum capital requirement for general and spe-cific position risk in accordance with paras. 6 to 8 if: 1. The investment fund shares are issued by a company established in an EEA Member

State; 2. The prospectus for the investment fund or an equivalent document includes the follow-

ing information: a) all categories of assets in which the investment fund is authorised to invest; and b) the relative limits and the methods used to calculate those limits in cases where in-

vestment limits apply to investments in certain categories of assets; c) the maximum leverage in cases where leverage is permitted; and d) a strategy for limiting the resulting counterparty credit risk in cases where investments

in OTC instruments or repo-style transactions are permitted, 3. The investment fund prepares a semi-annual and annual report on the basis of which

the receivables and liabilities as well as income and operations during the reporting pe-riod can be assessed;

4. The investment fund shares are redeemable in cash out of the investment fund's assets on a daily basis at the request of the shareholder;

5. The investment fund's assets are segregated from the assets of the company; and 6. The credit institution ensures adequate risk assessment for the investment fund.

(5) The minimum capital requirement for the general and specific position risk associated with investment fund shares from third countries may be calculated in accordance with paras. 6 to 8 if the requirements pursuant to para. 4 nos. 2 to 6 are fulfilled and the competent authority responsible for investment funds has granted its consent.

(6) In cases where the credit institution is aware of the actual composition of the investment assets in which it has invested through the investment fund shares, the minimum capital re-quirement for general and specific position risk is to be calculated on the basis of the actual composition of the investment assets in accordance with Articles 203 to 210 or, with FMA ap-proval, in accordance with Article 22p Banking Act. Netting is permitted between positions in the underlying investments of the CIU and other positions held by the institution, as long as the institution holds a sufficient quantity of units to allow for redemption/creation in exchange for the underlying investments.

(7) Credit institutions may calculate minimum capital requirements for general and specific risk in accordance with Articles 203 to 210 or, with FMA approval, in accordance with Article 22p Banking Act on the basis of the composition of an externally generated index or a fixed basket of equities or debt instruments if: 1. The purpose of the investment fund is to replicate the composition and performance of

an externally generated index or fixed basket of equities or debt securities (exchange-traded fund); and


2. The correlation coefficient between the daily price movements of the investment fund

share and the index or basket of equities or debt securities it tracks comes to at least 0.9 over a minimum period of six months; the correlation coefficient is to be calculated on the basis of daily returns between the exchange-traded fund and the index or basket of equities or debt securities it tracks.

(8) In cases where the credit institution is not aware of the actual composition of the in-vestment fund on a daily basis, the credit institution may calculate the minimum capital require-ment for general and specific position risk in accordance with Articles 203 to 210 or, with FMA approval, in accordance with Article 22p Banking Act as follows: 1. It is assumed that the investment fund first invests to the maximum extent allowed in the

prospectus or equivalent document in the class of assets which attract the highest capi-tal requirement for general and specific position risk; this step is to be repeated in de-scending order until the maximum total investment limit is reached; the positions in the investment fund share are treated as direct investments in the assumed positions; and

2. Where leverage is permitted, this is accounted for by increasing the positions in the investment fund share in proportion to the maximum exposure with regard to the as-sumed investment items resulting from the limits specified in the prospectus or an equivalent document.

(9) Credit institutions may rely on third parties to calculate minimum capital requirements for general and specific position risk for investment fund shares, provided that the correctness of the calculations and their reports is ensured.

Specific Position Risk Associated with Trading Book Positions Hedged by Credit Derivatives

Article 212. (1) Where a trading book position is hedged by a credit derivative, the mini-mum capital requirement is to be determined for the specific risk associated with both positions.

(2) A full offset of the specific position risk may be applied in such a way that the minimum capital requirement amounts to zero for both sides of the position if the values of the two posi-tions always move in opposite directions and broadly to the same extent.

(3) To the extent that risk is transferred in the transaction, the capital requirement for spe-cific position risk for the position which requires the higher minimum capital charge may be re-duced by 80%. The minimum capital requirement for the specific risk of the opposing position is to be set to zero if: 1. The values of the two positions always move in opposite directions; 2. There is an exact match between the reference position and the position to be secured; 3. The credit derivative and the position to be secured have identical maturity dates; 4. The credit derivative and the position to be secured are denominated in the same cur-

rency; and 5. The key features of the credit derivative contract do not cause price movements of the

credit derivative to deviate materially from the price movements of the position to be se-cured.


(4) A partial offset may be applied in which only the specific position risk of the position at-tracting the higher minimum capital requirement and the specific position risk of the opposing position is set to zero if the value of the two sides of the position usually move in opposite direc-tions.

Underwriting

Article 213. (1) Credit institutions must capture the underwriting of securities as a long po-sition in the security in question in the amount of the net position. The net position is to be cal-culated as the gross position less those securities which are underwritten by third parties on the basis of a written agreement. In the case of underwriting within the framework of a public offer-ing pursuant to Article 1 para. 1 no. 1 Capital Market Act (Kapitalmarktgesetz – KMG; Federal Law Gazette No. 625/1991 as last amended by Federal Law Gazette I No. 48/2006) the weighted net position is to be applied. The weighted net position is calculated by multiplying the net position with the following weights: 1. From the day on which the underwriting guarantee is provided until the end of working

day 0: 5%; 2. Working day 1: 10%; 3. Working days 2 to 3: 25%; 4. Working day 4: 50%; 5. Working day 5: 75%; 6. After working day 6: 100%.

(2) Working day 1 pursuant to para. 1 no. 2 is the working day on which the credit institution becomes unconditionally committed to accepting a known quantity of securities at an agreed price.

Settlement Risk

Article 214. In the case of transactions in debt instruments, equities, foreign currencies and commodities (with the exception of repurchase transactions and reverse repurchase transac-tions as well as securities and commodities lending and borrowing transactions) which are still not settled after their due delivery dates, the minimum capital requirement is to be calculated as follows: In the first step, the difference between the agreed settlement price and the current market price of the securities, foreign currencies or commodities must be calculated. The mini-mum capital requirement is equal to the sum of the difference amounts involving a loss to the credit institution, weighted with the respective factors in the table below. These difference amounts may not be netted off against difference amounts in the credit institution's favour.


Number of working days after

due settlement date Weighting factor

(%) 5-15 8 16-30 50 31-45 75

46 or more 100

Free Deliveries

Article 215. (1) Free deliveries are considered to have been provided in cases where a credit institution 1. pays for securities or commodities before their delivery, or delivers securities or com-

modities before receiving payment; and 2. in the case of cross-border transactions, at least one day has elapsed since the pay-

ment or delivery.

(2) Minimum capital requirements for free deliveries are to be calculated in accordance with the following table:

Type of transaction

Up to the first con-tractually agreed

payment or the first contractually agreed

delivery leg

From the first contractually agreed

payment / first contractually agreed delivery leg up to four days after the second contractually agreed

payment / second contractually agreed

delivery leg

From the fifth business day after the second contractually agreed

payment or the second contractually agreed delivery leg until the

settlement of the transaction

Free delivery No calculation of minimum capital

requirement

Treatment as an exposure

Deduction of value transferred plus current

positive exposure amount from own funds

(3) In defining a risk weight for free delivery exposures with counterparties to which no other non-trading-book exposure exists and which are treated as exposures in Column 3 of the table under para. 2, credit institutions may assign PDs to counterparties on the basis of external ratings. As an alternative, credit institutions may assign the risk weights pursuant to the Stan-dardised Approach to Credit Risk, provided that those risk weights are assigned to all relevant exposures or a risk weight of 100% is assigned to all such exposures. Credit institutions which use their own estimates of loss given default (LGD) may apply the LGD pursuant to Article 69 para. 1 no. 5 to free delivery exposures which are treated as exposures in Column 3 of the table in para. 2, provided that they apply this LGD to all relevant exposures. In cases where the posi-tive exposure amount resulting from free delivery transactions is not material, credit institutions may apply a risk weight of 100% to these exposures.


(4) In the case of a system-wide failure of a settlement or clearing system, credit institutions may suspend the calculation of minimum capital requirements in accordance with Articles 214 and 215 until the situation is rectified. During such periods, the last minimum capital require-ment calculated is to be applied.

Counterparty Credit Risk

Article 216. (1) Credit institutions are to calculate the minimum capital requirement to cover counterparty credit risk in the trading book for the following: 1. Free deliveries; 2. OTC derivatives and credit derivatives; 3. Repurchase transactions and reverse repurchase transactions as well as securities and

commodities lending and borrowing transactions based on securities or commodities assigned to the trading book;

4. Margin lending transactions based on securities or commodities; and 5. Long settlement transactions.

(2) The risk-weighted exposure amounts must be calculated using the Standardised Ap-proach to Credit Risk or the Internal Ratings Based Approach.

(3) In the calculation of risk-weighted exposure amounts only the Financial Collateral Com-prehensive Method may be used.

(4) In the case of repurchase transactions or borrowing transaction assigned to the trading book, all financial instruments which can be assigned to the trading book in accordance with Article 22n Banking Act are considered eligible collateral for the purpose of credit risk mitigation. In the case of OTC derivatives, commodities which can be assigned to the trading book may be used as collateral for the purpose of credit risk mitigation. For the purpose of calculating volatil-ity adjustments, financial instruments or commodities which are not covered by Articles 83 to 155 Annex VIII of Directive 83/155/EC and are lent, sold or provided, or borrowed, purchased or received by way of collateral or otherwise under such a transaction, and for which the credit institutions use supervisory volatility adjustments pursuant to Articles 119 to 150, are to be treated in the same way as non-main-index equities listed on a recognised exchange. In cases where credit institutions use their own volatility adjustments pursuant to Articles 119 to 150 for financial instruments and commodities not covered by Articles 83 to 150, the volatility adjust-ments are to be calculated individually. Credit institutions which use internal models pursuant to Article 128 may also use such models for the trading book.

(5) In connection with the use of master netting agreements covering repurchase transac-tions, securities or commodities lending or borrowing transactions, or other capital market-driven transactions, netting across positions in the trading book and in the non trading book is only permitted in cases where the following conditions are fulfilled: 1. All transactions are marked to market on a daily basis; and 2. Any items borrowed, purchased or received under the transaction may be recognised as

collateral under the Internal Ratings Based Approach without the application of para. 5.


(6) Where a credit derivative assigned to the trading book forms part of an internal hedge pursuant to Article 197 and the credit protection/collateral may be used for the purpose of credit risk mitigation in accordance with Articles 111 to 118, the counterparty credit risk for that posi-tion may be set to zero.

(7) The minimum capital requirement for counterparty credit risk in the trading book is equal to 8% of the total risk-weighted exposure amounts.

Expected Loss Amounts for Counterparty Credit Risk

Article 217. In cases where minimum capital requirements for counterparty credit risk are calculated using the Internal Ratings Based Approach in accordance with Article 216, the follow-ing applies to the calculation of expected loss amounts pursuant to Article 82: 1. Those value adjustments for counterparty credit risk pursuant to Article 216 which were

made to account for the credit quality of the counterparty may be included in the sum of value adjustments and provisions; such value adjustments may not be assigned to other own funds components; and

2. The expected loss amount for counterparty credit risk pursuant to Article 216 may be set to zero if the credit risk of the counterparty is adequately taken into account.

Chapter 2

Options Risk

General

Article 218. For the purpose of calculating the minimum capital requirement for the risks associated with options (delta, gamma and vega risk), credit institutions may use the scenario matrix method as set forth in Article 204 para. 3 in conjunction with Article 221. As a simplified alternative, credit institutions may also use the delta-plus method pursuant to Article 204 para. 4. In such cases, the minimum capital requirement for delta risk is to be calculated in ac-cordance with Article 204 and the minimum capital requirement for the other risks associated with options (gamma and vega risk) are to be calculated in accordance with Articles 219 and 220. Under the delta-plus method, the gamma risk and vega risk are to be captured separately for each option position, including hedging positions. Sensitivities are to be calculated in accor-dance with Article 204 para. 5 using a suitable option pricing model chosen by the credit institu-tion. Gamma and vega effects as well as the minimum capital requirements calculated using the scenario matrix method must be translated into EUR at the prevailing spot exchange rate.


Gamma Risk

Article 219. (1) The gamma factor refers to the sensitivity of the delta factor pursuant to Ar-ticle 2 no. 49 Banking Act with regard to changes in the price of the underlying instrument. In order to determine gamma risk, the gamma effect for each individual option is to be calculated using the following equation:

,5.0 2CUfactorGammaVolumeeffectGamma ×××=

where: CU: change in the underlying instrument of the option.

(2) The change in the underlying instrument of the option is determined as follows: 1. Options on bonds: the market price multiplied by the weight indicated in Column 4 of the

table under Article 208 para. 3 no. 4; 2. Options on other interest-based instruments: the change in the interest rate indicated in

Column 5 of the table under Article 208 para. 3 no. 4, expressed in basis points; 3. Options on equities, foreign currencies and gold: the market price multiplied by 0.08;

and 4. Options on commodities: the market price multiplied by 0.15. 5. In the case of options on foreign currencies, the market price multiplied by 0.04 may be

used for matched positions in closely correlated currencies pursuant to Article 223 para. 2 no. 2.

(3) The volume indicated in the formula under para. 1 is to be specified as follows: 1. Options on bonds: nominal value divided by 100; 2. Options on other interest-based instruments: nominal value: 3. Options on equities: number of shares; and 4. Options on foreign currencies and gold: nominal value.

(4) The individual gamma effects are to be assigned to risk categories according to the un-derlying instrument. For this purpose, the following procedure is to be applied: 1. The gamma effects of options based on bonds or other interest-based instruments are

to be aggregated by maturity band as indicated in Column 2 of the table under Arti-cle 208 para. 3 no. 4 in cases where the maturity band method is used, or by duration band as indicated in Column 2 of the table under Article 208 para. 4 no. 3 where the du-ration method is used;

2. The gamma effects of options based on equities must be aggregated separately by na-tional market;

3. The gamma effects of options based on foreign currencies or gold are to be aggregated for the same currency pairs or for the same currency/gold pairs; and

4. The gamma effects of options based on commodities are to be aggregated for all option transactions based on the same commodity.


(5) Each option on an underlying instrument has either a positive or a negative gamma ef-fect. The individual gamma effects are to be added within each risk category so that a positive or negative net gamma effect results for each risk category. Only the negative net gamma ef-fects are to be included in the calculation of the minimum capital requirement.

(6) The minimum capital requirement for gamma risk is equal to the total absolute amount of negative net gamma effects.

Vega Risk

Article 220. (1) The vega factor refers to the sensitivity of the option price to fluctuations in the volatility of the underlying instrument. Purchased options are to be shown with a plus sign, sold (written) options with a minus sign. In the calculation of vega risk, a proportional change of 25% in the volatility of the underlying instrument is assumed. In the case of sold options, the risk to the option seller lies in an increase in volatility; in the case of purchased options, the risk to the option holder lies in a decrease in volatility. In order to determine vega risk, the vega effect for each individual option is to be calculated using the following equation:

,25.0 VolatilityfactorVegaVolumeeffectVega ×××=

(2) The elements indicated in the formula under para. 1 are to be determined as follows: 1. The volume is to be determined in accordance with Article 219 para. 3; 2. The vega factor is to be taken from the relevant option pricing model; on the basis of the

current volatility of the underlying instrument, the vega factor of an option is to be calcu-lated for a volatility change of one percentage point;

3. A value of 0.25 is to be applied as the assumed relative change in volatility pursuant to para. 1; and

4. The volatility is to be applied as a value in percentage points; for example, if the volatility is 20%, this value will be 20.

(3) Individual vega risks may be netted within each risk category pursuant to Article 219 para. 4. The minimum capital requirement for overall vega risk is equal to the total absolute amount of vega risks not matched within the risk categories.

Scenario Matrix Method

Article 221. (1) Given FMA approval, credit institutions may also calculate minimum capital requirements for option transactions, including the other positions in the trading book or overall foreign exchange position which are demonstrated to be secured by those option transactions, using the scenario matrix method. For such option transactions, the calculation of the minimum capital requirement for delta risk pursuant to Article 204 para. 3 is not applied. The other posi-tions in the trading book or in the overall foreign exchange position which are demonstrated to be secured by those option transactions are not to be treated in accordance with the provisions governing general position risk pursuant to Articles 208 to 210 or the provisions governing open foreign exchange positions and gold pursuant to Article 223.


(2) On the basis of their underlying instruments, option transactions are to be aggregated into risk categories pursuant to Article 219 para. 4. As an exception, options on bonds or other interest-based instruments may also be aggregated by other criteria provided that this results in at least six risk categories and no more than three of the maturity bands indicated in Column 2 of the table under Article 208 para. 3 no. 4 are aggregated.

(3) All of the option transactions aggregated in the risk categories, including the other posi-tions secured by those option transactions, must be revalued for various combinations of simul-taneous changes in the price of the underlying instrument and the volatility. In this context, the following changes are to be assumed: 1. A volatility change of +/-25% of the current volatility; 2. A price change of +/-8% in the case of equities, foreign currencies and gold; 3. A price change of +/-15% in the case of commodities; and 4. The highest of the upward and downward interest rate changes indicated in the table

under Article 208 para. 3 no. 4 in the case of interest-based instruments. In all risk categories, the spread pursuant to no. 1 is to be subdivided into equal increments on the basis of at least three values including the current value, and in the case of no. 2 on the basis of seven values including the current value.

(4) The minimum capital requirement for each risk category consists of the absolute amount of the highest loss arising from all of the combinations pursuant to para. 3.

Chapter 3

Commodities Risk and Foreign Exchange Risk

Minimum Capital Requirement for Commodities Risk

Article 222. (1) In calculating commodities risk, credit institutions must proceed as follows: 1. Each position in commodities or commodity derivatives is to be expressed in terms of

the standard unit of measurement. The spot price in each commodity is to be expressed in EUR;

2. Positions in gold or gold derivatives are considered subject to foreign-exchange risk and treated in accordance with Article 223 or Article 22p Banking Act for the purpose of cal-culating market risk.

3. Positions which serve the sole purpose of stock financing are to be excluded from the calculation of commodities risk;

4. The interest-rate and foreign-exchange risks not covered by other provisions stipulated here are to be included in the calculation of general position risk for interest-based in-struments pursuant to Article 208 and in the calculation of foreign-exchange risk pursu-ant to Article 223.

5. In cases where the short position falls due before the long position, the credit institution must also guard against the risk of a supply shortage which may arise in some markets.


6. The excess of a credit institution's long or short positions over its short or long positions

in the same commodity and identical commodity futures, options and warrants is its net position in each commodity for the purposes of para. 15. Positions in derivative instru-ments pursuant to paras. 2 to 4 are to be regarded as positions in the underlying com-modity; and

7. The following positions are to be regarded as positions in the same commodity: a) Positions in different sub-categories of the same commodity in cases where the sub-

categories are deliverable against each other; and b) Positions in similar commodities if they are close substitutes and if a minimum corre-

lation of 0.9 between their price movements can be clearly established over a mini-mum period of one year.

(2) Commodity futures and forward commitments to buy or sell individual commodities must be incorporated in the measurement system as notional amounts in terms of the standard unit of measurement and assigned a maturity with reference to expiry date.

(3) Commodity swaps where one side of the transaction is a fixed price and the other the current market price are to be incorporated into the maturity ladder approach as a series of po-sitions equal to the notional amount of the contract, with one position corresponding with each payment on the swap and slotted into the maturity ladder set out in the table under para. 8. The positions are long positions if the institution pays a fixed price and receives a floating price, and short positions if the institution receives a fixed price and pays a floating price. Commodity swaps where the sides of the transaction are in different commodities are to be reported in the relevant reporting ladder for the maturity ladder approach.

(4) Options on commodities or on commodity derivatives are to be treated as if they were positions equal in value to the amount of the underlying to which the option refers, multiplied by its delta. The latter positions may be netted off against any offsetting positions in identical un-derlying commodities or commodity derivatives.

(5) For the purpose of hedging the other risks associated with commodities options (gamma and vega risk), credit institutions must apply recognised methods and use them in the calcula-tion of minimum capital requirements.

(6) For the purpose of calculating sensitivities (delta, gamma and vega factors) pursuant to paras. 4 and 5, credit institutions must use suitable IT-assisted option pricing models uniformly for similar option transactions in line with empirical mathematical methods and common market practices.

(7) Warrants relating to commodities are to be treated in the same way as commodity op-tions.

(8) For each commodity, credit institutions must use a separate maturity ladder according to the table below. All positions in that commodity and all positions which are regarded as posi-tions in the same commodity pursuant to para. 1 no. 7 are to be assigned to the appropriate maturity bands. Physical stocks are to be assigned to the first maturity band.


Maturity band

(1) Spread rate (%)

(2) 0 ≤ 1 month 1.50

> 1 month ≤ 3 months 1.50 > 3 months ≤ 6 months 1.50 > 6 months ≤ 12 months 1.50

> 1 year ≤ 2 years 1.50 > 2 years ≤ 3 years 1.50

> 3 years 1.50

(9) Positions in the same commodity or those which are regarded as positions in the same

commodity pursuant to para. 1 no. 7 may be offset and assigned to the appropriate maturity bands on a net basis for the following: 1. Positions in contracts maturing on the same date; or 2. Positions in contracts maturing within ten days of each other if the contracts are traded

on markets which have daily delivery dates.

(10) Credit institutions must calculate the sum of the long positions and the sum of the short positions in each maturity band. The sum of long positions which are matched by the sum of short positions in a given maturity band is the matched position in that band, and the residual long or short position is the unmatched position for the same band.

(11) That part of the unmatched long or short position for a given maturity band which is matched by the unmatched short or long position for a maturity band further out is the matched position between two maturity bands. That part of the unmatched long or unmatched short posi-tion which cannot be matched in this way is the unmatched position.

(12) The credit institution's minimum capital requirement for each commodity is to be calcu-lated on the basis of the relevant maturity ladder as the sum of the following: 1. The sum of the matched long and short positions, multiplied by the appropriate spread

rate as indicated in Column 2 of the table in para. 8 for each maturity band and by the spot price for the commodity;

2. The matched position between two maturity bands for each maturity band into which an unmatched position is carried forward, multiplied by a carry rate (Article 103 no. 11d Banking Act) of 0.6% and by the spot price for the commodity; and

3. The residual unmatched positions, multiplied by an outright rate (Article 103 no. 11d Banking Act) of 15% and by the spot price for the commodity.

(13) The credit institution's overall minimum capital requirement for commodities risk is to be calculated as the sum of the minimum capital requirements calculated for each commodity in accordance with para. 12.

(14) The minimum capital requirement for commodities and commodity derivatives may also be calculated in accordance with the provisions of nos. 1 and 2. The credit institution's minimum capital requirement equals the sum of the following elements:


1. 15% of the net position, be it long or short, multiplied by the spot price for the commod-

ity; and 2. 3% of the gross position, long plus short, multiplied by the spot price for the commodity.

(15) The credit institution's minimum capital requirement for commodities risk is to be calcu-lated as the sum of the minimum capital requirements calculated for each commodity in accor-dance with para. 14.

Minimum Capital Requirement for Foreign Exchange Risk

Article 223. (1) In cases where a credit institution's overall foreign exchange position as calculated in accordance with paras. 3 and 4 exceeds 2% of its eligible own funds, the minimum capital requirement for foreign exchange risk will amount to 8% of the overall foreign exchange position.

(2) By way of derogation from para. 1, credit institutions may use the following procedure to calculate their minimum capital requirements, provided that this is done in a uniform and sus-tainable manner: 1. The minimum capital requirement after the deduction of matched positions in demon-

strably closely correlated currencies amounts to 8%; 2. The minimum capital requirement for the matched position in closely correlated curren-

cies amounts to 4%. Two currencies are considered to be demonstrably closely correlated if the probability of a loss – calculated on the basis of daily exchange-rate data for the preceding three years – occurring on equal and opposite positions in those currencies over the following ten working days is at least 99%, where such a loss is 4% or less of the value of the matched position in question; the immateriality threshold of 2% of eligible own funds is not applied in the alternative procedure. The minimum capital requirement for matched positions in currencies of Member States partici-pating in the second stage of the Economic and Monetary Union may be set to 1.6% of the value of such matched positions.

(3) The net amount of open foreign exchange positions in each currency and in gold is to be calculated by adding the positions pursuant to nos. 1 to 6, with due attention to plus/minus signs: 1. Net spot position: all asset items less all liability items, including accrued interest, in the

currency in question, as well as the net spot position in gold; in this context, asset items which are deducted from own funds in accordance with Article 23 para. 13 nos. 3, 4 and 4a Banking Act, as well as participations and shares in affiliated undertakings in foreign currencies may be disregarded where these are held as fixed assets and account for no more than 2% of the credit institution's eligible own funds;

2. Net forward position: all amounts to be received less all amounts to be paid under for-ward exchange transactions and forward gold transactions, including currency and gold futures and the principal in currency swaps not included in the spot position;

3. Guarantees, irrevocable commitments and similar instruments which are certain to be called and likely to be irrecoverable; if denominated in the same currency, the actual value of the recourse claim on the initial obligor may be applied as an opposing position;


4. At the discretion of the credit institution, the net amount of income/expenses not yet

realised but already fully hedged by forward exchange transactions or similar transac-tions; if exercised, this discretion must be applied consistently and uniformly in each cur-rency;

5. the net delta equivalent of the total book of foreign-currency and gold options; for the purpose of hedging the other risks associated with options (gamma and vega risk), credit institutions may apply recognised methods and use them in the calculation of for-eign exchange risk;

6. the market value of options not covered by no. 5; 7. In the case of investment fund shares, the actual foreign exchange positions of the in-

vestment fund are to be taken into account for the purpose of calculating the net amount; in determining the currency composition of the investment fund, credit institu-tions may rely on information from third parties provided that the correctness of such in-formation is ensured; in cases where the credit institution is not aware of the actual cur-rency composition, it must be assumed that the investment fund has invested in foreign currency positions up to the maximum extent allowed according to the fund's prospectus or an equivalent document; where leverage is permitted in investment fund shares as-signed to the trading book, it must be assumed that the investment fund is leveraged to the maximum extent allowed according to the fund's prospectus or an equivalent docu-ment; the position thus assumed is to be treated as a separate currency according to the treatment of positions in gold; in cases where the direction of the fund's investment is known, the long position may be added to the net total amount of long positions and the short position may be added to the net total amount of short positions; netting such positions prior to the calculation is not permitted.

The calculations pursuant to nos. 1 to 7 are not to include those foreign exchange positions for which a certain exchange ratio between the euro and another currency (exchange rate risk) is guaranteed by the federal government. The net present value may also be used in the calcula-tion of net open positions in each currency and in gold.

(4) The net amounts in each currency and in gold, expressed as long and short positions, are to be translated into EUR at the middle spot FX rate. Subsequently, the long and short posi-tions, except for the position in EUR, must be added up separately to determine the total of the net short positions and the total of the net long positions. The higher of these two totals is the credit institution's net total of foreign-exchange and gold positions (overall foreign-exchange position).

(5) Par. 3 notwithstanding, present values may be used in the calculation of net open posi-tions in each currency and in gold.


Chapter 4

Market Risk Models

General

Article 224. Credit institutions which use internal market risk models (models) pursuant to Article 22p para. 1 Banking Act must in any case fulfil the criteria set forth in Articles 225 to 232 in order to ensure that risk is captured properly in accordance with Article 22p para. 5 nos. 1 to 8. The values at risk pursuant to Article 22p para. 1 Banking Act are to be included in the model uniformly and consistently across organisational units in the credit institution and group of credit institutions. In cases where the model also captures specific position risks, the credit institution must indicate separately how the model accounts for those risks in its application for special approval pursuant to Article 21e Banking Act.

Qualitative Standards

Article 225. (1) The credit institution must establish a separate risk control unit which is in-dependent of the front office and for which sufficient resources are provided.

(2) The risk control unit must carry out the initial validation and all follow-up validations of the model. Moreover, this unit must produce and analyse a report on the output of the model application on a daily basis. Where not produced by the risk control unit itself, the documents and partial calculations necessary for this purpose must be provided by other organisational units. In the report, the risk control unit must evaluate the relationship between value-at-risk measures , trading limits and the utilization of limits. In addition, the risk control unit must report directly and immediately to senior management.

(3) The reliability of model conditions, data sources and risk measurement methods must be reviewed regularly.

(4) In each calendar quarter and whenever otherwise necessary, the risk control unit must conduct a systematic and comprehensive stress-testing programme in accordance with Arti-cle 230. The main features of this programme are to be defined in the risk management manual. In particular, the stress test scenarios must address the illiquidity of markets in stressed market conditions, concentration risk, one-way markets, event risks and jump-to-default risks, the omis-sion of non-linear product components, deep out-of-the-money positions, positions subject to the gapping of prices and other risks which are not captured appropriately by the model.

(5) The results of stress tests must be: 1. presented to the directors immediately, who must in turn subject the results to strategic

analysis with regard to the credit institution's risk-bearing capacity; 2. notified in writing to the FMA and the Oesterreichische Nationalbank by 15 January,

15 April, 15 July and 15 October for the preceding calendar quarter; and 3. reflected in the credit institution's defined risk policy principles and in the limits set for

employees and organisational units engaged in trading.


(6) In cases where stress tests reveal weaknesses, the credit institution must immediately take measures to limit the resulting risks appropriately. The main features of this procedure are to be defined in the risk management manual.

(7) Each banking day, the risk control unit must conduct back-testing for the previous busi-ness day in accordance with the provisions of Article 228.

(8) Risk management is an essential component of the duty of diligence of directors pursu-ant to Article 39 para. 1 Banking Act. In particular, the following must be ensured: 1. In-depth risk analyses must be carried out prior to the launch of new products; 2. The directors must subject the risk control unit's daily reports to strategic analysis with

regard to the credit institution's risk-bearing capacity; 3. The directors and risk control unit must be authorised to enforce reductions of positions

taken by individual traders and reductions of the credit institution's overall position; for the other responsible persons in the credit institution who are authorised to assign limits, this applies with regard to the limits assigned;

4. Decision-making powers and areas of responsibility are to be clearly defined between the individual organisational units; and

5. Formal organizational structures and actual operational procedures must be consistent with one another.

(9) The limits for employees and organizational units engaged in trading must be defined and adapted as necessary with due attention to the model application. The credit institution's traders, directors and any other units concerned must have precise knowledge of these limits.

(10) The model must be part of the credit institution's day-to-day risk management process; its output must be integrated into the planning, monitoring and management of the credit institu-tion's market risk profile.

(11) The credit institution must have a procedure in place to ensure compliance with docu-mented policies, workflows and controls in the application of the model. The model must be documented by means of a risk management manual which must include risk control policies, a description of the model and the empirical methods used to measure market risk. In addition, the credit institution must document the manner in which historical data series are adapted.

(12) Credit institutions must have procedures in place to ensure that the model is validated by a unit which is independent of the model development process. In particular, validation must include a review of whether the model is conceptually sound and captures all material risks. Such a validation must be conducted when the model is initially developed and when any sig-nificant changes are made to the model. In addition, credit institutions must carry out validations at regular intervals and whenever necessary, but especially in the case of significant structural changes on the market or significant changes in the composition of the portfolio which might lead to the model no longer capturing risks appropriately. As new methods or best practices evolve, institutions must make use of these advances. In addition to back-testing, the validation of the model must include the following in particular:


1. Tests to demonstrate that the assumptions underlying the model are appropriate and do

not underestimate the risk; 2. The credit institution's own model validation tests with regard to its risks and portfolio

structure; and 3. The use of hypothetical portfolios to ensure that the internal model is able to account for

specific structural features such as material basis risks and concentration risks.

(13) The internal audit unit must regularly review the risk management process as well as the model with attention to the activities of the front office and of the risk control unit. This re-view must comprise the following in particular: 1. The adequacy of the documentation of the risk management system and processes; 2. The organisation of risk management for the overall credit institution; 3. The integration of value-at-risk measures into day-to-day risk management; 4. The approval process for the risk pricing models and valuation systems used by em-

ployees in the front and back office; 5. The review of changes to the model; 6. The scope of market risks captured by the model; 7. The quality of the management information system; 8. The accuracy and completeness of position data; 9. The verification of the consistency, timeliness and reliability of the data sources used in

the models, including the independence of such data sources; 10. The accuracy and appropriateness of assumptions regarding volatility and correlations; 11. The accuracy of the model's valuation and risk transformation calculations, especially

the adjustment to ten business days pursuant to Article 227 para. 1 no. 3, and 12. The proper execution of back-testing in accordance with para. 7 and Article 228.

Market Risk Factors

Article 226. (1) Market risk factors such as market rates and market prices are to be de-fined in such a way that the risks arising from the positions included in the model in accordance with Article 22p para. 1 Banking Act are covered.

(2) When calculating value-at-risk measures for the general position risk of interest-based financial instruments, credit institutions must account for the following risk factors in particular: 1. The model's calculations must simulate the yield curve; the yield curve must be divided

into maturity segments for each currency in order to capture variations in the volatility of interest rates for different maturities; as a rule, one risk factor must correspond to each maturity segment; in the case of complex strategies, a larger number of risk factors is required in order to capture the interest rate risk precisely; in any case, a minimum of six risk factors must be included in the model calculation for the purpose of determining value-at risk measures for the yield curve;


2. The model must include separate risk factors for spread risk in cases where substantial

positions have been taken with a view to profiting from this risk; spread risk refers to the risk that movements in the interest rates of financial instruments of different issuers are not perfectly correlated.

(3) In calculating value-at-risk measures for foreign-exchange and gold positions, the credit institution must account for risk factors for gold as well as those foreign currencies in which the credit institution has taken positions. In the case of investment fund shares pursuant to Arti-cle 223 para. 3 no. 7, the actual foreign exchange positions in the investment fund are to be used in the calculation of the net amount. In determining the currency composition of the in-vestment fund, credit institutions may rely on information from third parties, provided that the correctness of such information is adequately ensured. In cases where the credit institution is not aware of the actual currency composition, it must be assumed that the investment fund has invested in foreign currency positions up to the maximum extent allowed according to the fund's prospectus or an equivalent document. In cases where leverage is permitted in investment fund shares assigned to the trading book, it must be assumed that the investment fund is leveraged to the maximum extent allowed according to the fund's prospectus or an equivalent document. The position thus assumed is to be treated as a separate currency according to the treatment of positions in gold. In cases where the direction of the fund's investment is known, the long posi-tion may be added to the net total amount of long positions and the short position may be added to the net total amount of short positions. Netting such positions prior to the calculation is not permitted.

(4) In calculating value-at-risk measures for equities, the credit institution must include the risk factors pursuant to nos. 1 and 2 for those equity markets on which the credit institution hold positions. 1. The credit institution must use at least one risk factor for each equity market at which

the credit institution holds positions; risk factors for individual sectors of the equities market may be included; positions in individual equities or in sector indices may be ex-pressed in beta equivalents based on that market index; the beta equivalent is to be de-termined using recognised procedures;

2. Risk factors are to be applied for the volatility of individual equities in cases where the position in that equity exceeds 5% of the overall equities position in the trading book.

(5) In calculating value-at-risk measures for commodities positions, the credit institution must account for risk factors for those commodities markets on which the credit institution hold positions. For the purposes of inclusion in the model, commodities positions are to be valued at their market prices. The following are considered to be market prices: 1. The exchange prices in the case of commodities; 2. The exchange prices of the underlying commodities in the case of derivative instru-

ments; 3. The delta equivalents in the case of option positions; 4. In cases where no exchange prices are available or no liquid market exists, values cal-

culated on the basis of current market conditions may be used as market prices.


(6) In cases where commodities positions account for less than 1% of the credit institution's eligible own funds or the consolidated eligible own funds of the group of credit institutions, the definition of simple risk factors is sufficient. In this context, a risk factor is determined for each commodity price. In cases where this limit is exceeded, the model must also account for a commodity's convenience yield, which is calculated from the price movements of derivative positions and spot positions. The convenience yield represents the benefit from the immediate availability of physical commodities as a result of the ability to profit from temporary shortages on the market. Credit institutions must account for market characteristics, in particular delivery dates and the scope provided to traders to close out positions.

Quantitative Standards

Article 227. (1) Value-at-risk measures must be calculated at the close of business each day in accordance with nos. 1 to 6: 1. The calculation must be based on a 99th-percentile, one-tailed confidence interval; 2. The method chosen for the purpose of calculating potential value-at-risk measures must

be indicated in the risk management manual and applied consistently; 3. The calculation of the value-at-risk measure is to be based on a holding period of ten

days; where this is theoretically justified for the respective model concept used, it is also permissible to use value-at-risk measures calculated on the basis of a shorter holding period and adjusted to a ten-day period using a suitable method;

4. The historical observation period used in calculating value-at-risk measures must be at least one year in length;

5. The data sets as well as the resulting interim calculations which are used in the calcula-tion of value-at-risk measures, especially variances and covariances, must be updated every three months (or immediately whenever necessary); and

6. Empirical correlations within the risk categories of interest rates, exchange rates, equity prices and commodity prices as well as the related option volatilities may be incorpo-rated in every category of risk factors; where correlations across risk categories are used, the credit institution must demonstrate that its system for measuring correlations is conceptually sound, implemented correctly and applied consistently.

(2) The risks associated with options and option-like positions which exhibit a non-linear re-lationship to changes in the option's underlying instrument must be taken into account in an appropriate manner. In particular, the precise gamma and vega risk must be captured.


Back-Testing Methods

Article 228. (1) In back-testing, the value-at-risk measures determined by the model on a daily basis must be compared ex post to the trading results. Hypothetical trading outcomes based on the hypothetical changes in a portfolio's value which would arise if the end-of-day positions were to remain unchanged, or actual daily trading outcomes may be used. The method chosen for the credit institution must be applied in a uniform and consistent manner. Valuations for the purpose of determining trading outcomes must be based on current market prices. In cases where back-testing is based on actual trading outcomes, those components which distort trading outcomes (especially commission income) are to be disregarded. Back-testing must be based on value-at-risk measures calculated using a holding period of one day for the positions.

(2) An exception is considered to arise in cases where a negative trading outcome exceeds the value-at-risk measure determined by the model. The occurrence of an exception, its size and the reason for its occurrence must be reported to the FMA and the Oesterreichische Na-tionalbank within five working days.

(3) Individual exceptions in the calculation of the multiplier pursuant to Article 229 para. 1 are permissible in cases where the exception cannot be attributed to the model's lack of predic-tive power. The credit institution may only disregard such approved exceptions in cases where the total number of exceptions, that is, prior to approval, lies in the green or yellow zone of the table under Article 229 para. 1.

(4) In cases where the back-testing methodology chosen by a credit institution is deemed deficient, the FMA will require the credit institution to take appropriate measures to improve its back-testing programme.

Methods of Determining the Multiplier

Article 229. (1) In the course of the initial approval of the model, the multiplier pursuant to Article 22p para. 2 no. 2 Banking Act is to be defined separately for each credit institution on the basis of the expert opinion of the Oesterreichische Nationalbank. The multiplier is composed of the minimum value three, an add-on between zero and one based on the results of back-testing, and an add-on between zero and one based on the degree to which the requirements for model approval pursuant to Article 21e para. 1 nos. 1 to 7 Banking Act are fulfilled. Subse-quently, the multiplier must be adjusted by the credit institution on the basis of the exceptions identified in back-testing in accordance with the table below; this is to be performed at the be-ginning of each ensuing calendar quarter for the duration of that quarter. The adjustment must be based on the largest number of exceptions identified in the course of the preceding calendar quarter on the basis of daily back-testing for a period of 250 business days.


Zone Number of exceptions Increase in multiplier based

on back-testing results Green zone 0 0.00 1 0.00 2 0.00 3 0.00 4 0.00 Yellow zone 5 0.40 6 0.50 7 0.65 8 0.75 9 0.85 Red zone 10 or more 1.00

(2) The largest number of exceptions identified pursuant to para. 1 in the preceding calen-dar quarter as well as the multiplier for the current quarter must be notified to the FMA and the Oesterreichische Nationalbank immediately.

(3) Where the number of exceptions falls in the red zone, an expert option must be ob-tained from the Oesterreichische Nationalbank on the question of whether the model still en-sures the proper capture of risks. The credit institution may continue to use the model until ap-proval is revoked by the FMA, unless the requirements for revocation pursuant to para. 4 are fulfilled.

(4) In cases where the number of exceptions falls in the red zone and a negative trading outcome calculated on the basis of back-testing pursuant to Article 228 para. 1 exceeds the minimum capital requirement pursuant to Article 22p para. 2 Banking Act from the model appli-cation, then the proper capture of risks is no longer ensured and the approval of the model will be revoked by the FMA.

(5) The adjustment of the multiplier pursuant to para. 1 must be confirmed by the bank auditor in the annex to the audit report on the annual financial statements.

Stress-Testing Methods

Article 230. (1) The stress-testing programme must include those factors which may lead to extraordinary losses or gains in connection with the positions covered by the model pursuant to Article 22p para. 1 Banking Act or which make risk management and risk control significantly more difficult. In particular, these factors include low-probability events in all significant risk types. The stress scenarios must reflect the effects of such events on positions with linear and non-linear price characteristics. In particular, the possible occasions for carrying out a stress-testing programme include the following:


1. Changes in data relevant to the market; 2. The inclusion of new products in the internal model; 3. A substantial increase in trading volumes; or 4. Specific events concerning the credit institution or group of credit institutions.

(2) Stress tests must include quantitative and qualitative criteria as well as the market risk and liquidity components of market disruptions. The quantitative criteria must define plausible stress scenarios. The qualitative criteria are to be used in order to assess the extent to which the credit institution's own funds can be used to cover large potential losses. In addition, the credit institution must develop possible measures which it can take in order to reduce its risk and avoid losses.

(3) The credit institution must prepare transparent documentation on the following types of internal stress tests: 1. A comparison of the largest losses in the trading book and in commodities positions,

calculated using the back-testing method chosen by the credit institution, with eligible own funds during a reporting period;

2. Stress tests in the form of measurements of the portfolio of substantial market turbu-lence in past years; and

3. Stress tests in the form of measurements of the portfolio of potential problem situations in the future.

(4) Stress scenarios prescribed by the FMA must be analysed with the stress tests devel-oped by the credit institution. In the course of evaluating models, the Oesterreichische National-bank may also prescribe such stress scenarios.

Combinations of Models and Standardised Methods

Article 231. A credit institution may use a model which does not cover all of the positions indicated in Article 22p para. 1 Banking Act if the capital requirements for those positions are covered through combinations with standardised procedures. Positions must generally be uni-formly assigned to either the model or the standardised method within each group institution and within each risk category pursuant to Article 22p para. 1 Banking Act. Credit institutions may only change their chosen combinations of models and standardised methods after notifying the FMA and the Oesterreichische Nationalbank in writing of the need for such changes in ac-cordance with Article 21e para. 4 no. 1 Banking Act. In cases where a material change to a model is notified, the procedure pursuant to Article 21e para. 1 Banking Act must be applied before the change is introduced.


Criteria for the Approval of Models Used to Calculate Minimum Capital Requirements for Specific Position Risk and Incremental Default Risk

Article 232. (1) The use of the model to calculate minimum capital requirements for specific position risk and incremental default risk is only permissible if: 1. The model explains the historical price variation in the portfolio; 2. The model explains concentration in terms of magnitude and changes in the composi-

tion of the portfolio; 3. The model is robust to an adverse environment; 4. The model is validated through back-testing with a view to assessing whether specific

risk is captured accurately; this back-testing may also be performed on the basis of rele-vant sub-portfolios provided that the sub-portfolios are chosen in a consistent manner;

5. The model accounts for name-related basis risk; and 6. The model captures event risk.

(2) For the purpose of calculating minimum capital requirements for specific position risk, credit institutions must fulfil the following requirements: 1. The impact of event risks which are beyond a ten-day holding period and a 99th-

percentile confidence interval and are therefore not reflected in the credit institution's daily value-at-risk measures must be factored into the internal calculation of minimum capital requirements; and

2. Credit institutions must conservatively assess the risk arising from illiquid positions and positions with limited price transparency under realistic market scenarios, and the model must fulfil minimum data standards; proxies may be used only in cases where the avail-able data are insufficient or do not reflect the true volatility of a position or portfolio.

(3) As new techniques and best practices evolve, institutions must make use of these ad-vances.

(4) Credit institutions must have in place an approach to calculating minimum capital re-quirements to capture the default risk of trading book positions which is incremental to the risks captured in the value-at-risk measure. In order to avoid double counting in the calculation of incremental default risk, credit institutions may take into account the extent to which default risk has already been incorporated into the value-at-risk calculation. This applies in particular to positions which could and would be closed within 10 days in the event of adverse market condi-tions or other indications of deterioration in the credit environment. Credit institutions which cap-ture their incremental default risk through a surcharge must have procedures in place for vali-dating the model.

(5) Credit institutions must demonstrate that the approach used for incremental default risk meets reliability standards comparable to those of the Internal Ratings Based Approach under the assumption of a constant level of risk and adjusted where appropriate to reflect the impact of liquidity, concentrations, hedging and optionality.

(6) Credit institutions which do not capture incremental default risk using an internally de-veloped approach must calculate the surcharge using a method which is consistent with either the Standardised Approach to Credit Risk or the Internal Ratings Based Approach.


(7) For securitisation exposures which 1. would be subject to a deduction pursuant to Article 23 para. 14 no. 8 Banking Act; or 2. would be assigned a risk weight of 1250% pursuant to Article 22e Banking Act and Arti-

cles 161 to 179; the minimum capital requirement must not be lower than if no. 1 or 2 were applied.

(8) Credit institutions which are dealers in these exposures may apply a different treatment from that specified in para. 7 in cases where, in addition to trading intent, a two-way market exists for the securitisation exposures or, in the case of synthetic securitisations which rely solely on credit derivatives, a two-way market exists for the securitisation exposures themselves or all of their underlying risk components. Credit institutions which apply such a different treat-ment must have the market data to ensure that the concentrated default risk of these positions in the internal model for measuring incremental default risk is consistent with the requirements set forth in paras. 4 to 6.

(9) For the purposes of para. 8, a two-way market is considered to exist where there are in-dependent good faith offers to buy and sell so that a price reasonably related to the last sales price or to current good faith competitive bid and offer quotations can be determined within one day and settled at such a price within a relatively short time in accordance with trade custom.

Part 5

Counterparty Credit Risk of Derivative Instruments, Repurchase Transactions, Securities or Commodities Lending or Borrowing

Transactions, Long Settlement Transactions and Margin Lending Transactions

Chapter 1

Specification of Application Article 233. (1) Regardless of the method chosen, the exposure value for a given counter-

party is equal to the sum of the exposure values calculated for each netting set with that coun-terparty.

(2) For the purpose of calculating minimum capital requirements for counterparty credit risk, the exposure value is to be set to zero in the following cases: 1. For sold credit default swaps not included in the trading book where they are treated as

credit protection provided by the credit institution and are subject to the minimum capital requirement pursuant to Article 22 para. 1 no. 1 Banking Act for the full notional amount;


2. For credit derivatives acquired in order to hedge exposures not included in the trading

book or an exposure subject to counterparty credit risk where the minimum capital re-quirement for the hedged exposure is calculated in accordance with Articles 146 to 150 or, given approval by the FMA, in accordance with Article 74 para. 1 no. 5; and

3. For derivative transactions, repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions outstanding with a central counterparty and which have not been rejected by the central counterparty provided that the central counterparty's exposures subject to counterparty credit risk are fully collateralised on a daily basis.

(3) For the purpose of determining minimum capital requirements pursuant to Article 22 para. 1 no. 1 Banking Act, the exposure value is to be set to zero for exposures to central coun-terparties arising from derivative transactions, repurchase transactions, securities or commodi-ties lending or borrowing transactions, long settlement transactions and margin lending transac-tions, provided that the central counterparty's exposures subject to counterparty credit risk are fully collateralised on a daily basis.

Chapter 2

Mark-to-Market Method Article 234. In applying the Mark-to-Market Method pursuant to Article 22 para. 5 Banking

Act, credit institutions must proceed as follows: 1. In the first step, the current market value must be determined for each transaction;

amounts beyond market price changes that are to be received from the counterparty in the event the transaction is wound up reflect the positive market value of the transaction at hand; where no liquid market exists for a transaction, the value calculated on the ba-sis of current market conditions may be used as the market price; the total of all transac-tions with positive market values equals the potential replacement cost;

2. In the second step, in order to capture the potential future credit exposure a general add-on is to be calculated by multiplying the notional values of all transactions by the fol-lowing percentages:


Residual maturity

Interest-rate contracts

Foreign-exchange

contracts and contracts

concerning gold

Contracts concerning

equities

Contracts concerning

precious met-als except

gold

Contracts con-cerning commodi-ties and contracts pursuant to no. 6 of Annex 2 to Arti-cle 22 Banking Act

One year or less

0.0% 1.0% 6.0% 7.0% 10.0%

Over one year, not

exceeding five years

0.5% 5.0% 8.0% 7.0% 12.0%

Over five years

1.5% 7.5% 10.0% 8.0% 15.0%

a) In the case of single-currency 'floating/floating' interest rate swaps with interest rate

adjustment periods, no general add-on is to be calculated; b) In the case of contracts with multiple exchanges of principal, the percentages must be

multiplied by the number of remaining payments still to be made according to the con-tract.

c) In the case of contracts which are structured to settle outstanding exposure following specified payment dates and where the contractual terms are reset in such a way that the market value of the contract equals zero on these specified dates, the residual maturity according to the table is equal to the time until the next reset date; in the case of interest-rate contracts which meet these requirements and have a remaining maturity of over one year, the notional values must be assigned a weight of at least 0.5%.

3. For the purpose of calculating the potential future credit exposure of a total return swap or credit default swap assigned to the trading book, the notional value is multiplied by the following percentages:

a) Where the reference position of the credit derivative as a trading book position is a qualifying position pursuant to Article 207 para. 6: 5%;

b) Where the reference position of the credit derivative as a trading book position is not a qualifying position pursuant to Article 207 para. 6: 10%;

c) Where the credit derivative is a credit default swap in which the credit institution acts as the protection seller, the potential future credit exposure may be set to 0%; this does not apply in cases where the credit default swap is subject to closeout upon the insolvency of the protection buyer even where the underlying reference position has not defaulted;


4. In the case of an nth-to-default credit derivative assigned to the trading book, the per-

centage used to calculated the potential future credit exposure depends on the refer-ence obligation with the nth lowest credit quality; for this reference obligation, it is neces-sary to determine whether it is a qualifying item pursuant to Article 207 para. 6 and thus subject to a percentage of 5%, or whether it is not a qualifying item pursuant to Arti-cle 207 para. 6 and thus subject to a percentage of 10%;

5. In order to obtain the exposure value of the derivative, the potential replacement cost and the general add-on must be added together.

Chapter 3

Original Exposure Method

Article 235. When applying the Original Exposure Method, credit institutions are to calcu-late the exposure value of the derivative by multiplying the notional value of each contract by the following percentages:

Original maturity Interest-rate contracts Foreign-exchange contracts

and contracts concerning gold

One year or less 0.5% 2.0% Over one year, not exceed-

ing two years 1.0% 5.0%

Additional allowance for each additional year

1.0% 3.0%

For interest-rate contracts, the original or residual maturity may be chosen; the maturity method chosen must be indicated in the report pursuant to Article 74 para. 2 Banking Act.

Chapter 4

Standardised Method Article 236. Credit institutions may use the Standardised Method to determine exposure

values for OTC derivative transactions and long settlement transactions. Under this method, credit institutions must determine the risk positions for each transaction, including collateral, calculate the balances of risk positions within the hedging sets, and finally determine the expo-sure value on the basis of netting sets. In this context, a hedging set refers to a group of risk positions from the transactions within a single netting set for which only their balance is relevant for determining the exposure value.


Payment Leg

Article 237. (1) In an OTC derivative transaction with a linear risk profile and stipulating the exchange of a financial instrument for a payment, the payment leg refers to that part of the transaction in which payment is effected. Transactions which involve the exchange of payments against payments consist of two payment legs. The payment legs must comprise the contractu-ally agreed gross payments, including the notional amount of the transaction. In calculating the payment leg, credit institutions may disregard interest-rate risk if the residual maturity of the transaction is less than one year.

(2) Credit institutions may treat transactions which consist of two payment legs denomi-nated in the same currency as a single aggregate transaction.

Assignment to Risk Positions

Article 238. (1) Credit institutions must map transactions with a linear risk profile with equi-ties (including equity indices), precious metals including gold or other commodities as the un-derlying financial instruments to a risk position in the respective equity, equity index or precious metal (including gold) or commodity, and to an interest rate risk position for the payment leg. In cases where the payment leg is denominated in a foreign currency, it must also be mapped to a risk position in the respective currency.

(2) Credit institutions must map transactions with a linear risk profile and a debt instrument as the underlying instrument to an interest rate risk position for the debt instrument and another interest rate risk position for the payment leg. In cases where the transaction provides for an exchange of payment against payment, each of the associated payment legs is to be mapped to an interest rate risk position. Where the underlying debt instrument is denominated in a foreign currency, the debt instrument must be mapped to a risk position in that currency. In cases where a payment leg is denominated in a foreign currency, it must again be mapped to a risk position in that currency.

(3) The exposure value assigned to a foreign exchange basis swap is zero.

Size of Risk Position

Article 239. (1) The size of the risk position from a transaction with a linear risk profile is calculated by multiplying the market price (translated into the credit institution's domestic cur-rency) by the quantity of the underlying financial instruments or commodities.

(2) For debt instruments and payment legs, the size of the risk position is calculated by mul-tiplying the notional value of the outstanding gross payments (including the notional amount) expressed in the credit institution's domestic currency by the interest-rate sensitivity of the debt instrument or payment leg. In this context, the interest-rate sensitivity refers to the sensitivity of the value of the debt instrument or payment leg in relation to the interest rate. Contractual agreements with multiplying effects must be taken into account in the calculation of the notional value.


(3) The size of the risk position from a credit default swap is calculated by multiplying the notional value of the reference debt instrument by the remaining maturity of the credit default swap.

(4) The size of the risk position from an OTC derivative with a non-linear risk profile, includ-ing options and swaptions but excluding transactions in which the underlying is a debt instru-ment, is calculated by first multiplying the market price (translated into the credit institution's domestic currency) by the quantity of the underlying financial instruments or commodities and then multiplying this product by the price sensitivity of the OTC derivative transaction. In this context, the price sensitivity refers to the sensitivity of the value of the OTC derivative transac-tion to the price of the underlying financial instruments or commodities.

(5) The size of the risk position from an OTC derivative which has a non-linear risk profile, including options and swaptions, and in which the underlying is a debt instrument, is calculated by first multiplying notional value of the outstanding gross payments (including the notional amount) expressed in the credit institution's domestic currency by the interest-rate sensitivity of the debt instrument or payment leg in accordance with para. 2, and then multiplying this product by the price sensitivity of the OTC derivative transaction in accordance with para. 4. Contractual agreements with multiplying effects must be taken into account in the calculation of the notional value.

(6) In calculating the size of the risk position for collateral received under derivative transac-tions, credit institutions must treat collateral received from a counterparty as an claim on the counterparty under a derivative transaction which falls due on the same day. Collateral posted to the counterparty is to be treated as an obligation to the counterparty which falls due on the same day.

Hedging Set

Article 240. (1) In each netting set, credit institutions must assign each risk position to a hedging set and calculate the absolute amount of the difference between the sum of the risk positions arising from transactions and the sum of the risk positions arising from collateral for each hedging set (net risk position). Collateral received from a counterparty is indicated with a plus sign, while collateral posted to a counterparty is indicated with a minus sign.

(2) Interest rate risk positions from money deposits which are received from the counter-party as collateral, from payment legs and from underlying debt instruments for which Arti-cle 207 calls for a minimum capital requirement of 1.60% or less are to be assigned to one of the six hedging sets indicated in the table below. These hedging sets must be created sepa-rately for each currency. Assignments to hedging sets must be based on the combination of maturity and reference interest rates.


Government reference

interest rates Non-government reference

interest rates Maturity ≤ 1 year ≤ 1 year Maturity > 1 year ≤ 5 years > 1 year ≤ 5 years Maturity > 5 years > 5 years

Where the interest rate of the underlying debt instrument or payment leg is linked to a reference interest rate which represents a general market interest level, the remaining maturity is the length of time until the next re-adjustment of the interest rate. In all other cases, the remaining maturity of the underlying debt instrument or payment leg is the remaining term of the transac-tion.

(3) Credit institutions must maintain a separate hedging set for each issuer of a reference debt instrument underlying a credit default swap.

(4) For interest rate risk positions 1. from money deposits posted to the counterparty as collateral in cases where the coun-

terparty has no outstanding obligations from debt instruments for which Article 207 calls for a minimum capital requirement of 1.60% or less; and

2. from underlying debt instruments for which Article 207 calls for a minimum capital re-quirement of more than 1.60%,

credit institutions must maintain a separate hedging set for each issuer. In cases where a pay-ment leg emulates such a debt instrument, the credit institution must maintain a separate hedg-ing set for each issuer of the reference debt instrument. Risk positions which arise from multiple debt instruments of a certain issuer or from reference debt instruments of the same issuer which are emulated by payment legs or which underlie a credit default swap may be assigned to the same hedging set.

(5) Credit institutions must assign underlying financial instruments (other than debt instru-ments) to the same respective hedging sets if they are identical or similar instruments. Similar underlying financial instruments are as follows: 1. Equities of the same issuer; an equity index is to be treated as a separate issuer; 2. Instruments in the same precious metal; a precious metal index is to be treated as a

separate precious metal; 3. Instruments in the same commodity; a commodity index is to be treated as a separate

commodity; and 4. For electric power, those delivery rights and obligations which refer to the same peak or

off-peak load time interval within any 24-hour interval. In all other cases, credit institutions must assign underlying financial instruments to separate hedging sets.


Counterparty Credit Risk Multiplier (CCRM)

Article 241. Credit institutions must apply the following multipliers for counterparty credit risk to the different hedging set categories:

Hedging set category Counterparty credit risk multiplier (CCRM) Interest rates 0.2% Interest rates for risk positions from a reference debt instrument which underlies a credit default swap and to which a minimum capital requirement of 1.60% or less applies according to Article 207

0.3%

Interest rates for risk positions from a debt instrument or reference debt instrument to which a minimum capital requirement of more than 1.60% applies according to Article 207

0.6%

Exchange rates 2.5% Electric power 4.0% Gold 5.0% Equities 7.0% Precious metals (excluding gold) 8.5% Commodities (excluding precious metals and electric power)

10.0%

Underlying instruments of OTC derivatives not covered by any of the categories above; in this context, a separate hedging set is to be maintained for each category of underlying instruments

10.0%

Exposure Value

Article 242. (1) Credit institutions which use the Standardised Method must calculate the exposure value for each netting set under nos. 1 to 3 below: 1. In the first step, a) the net risk position pursuant to Article 240 is to be calculated for each hedging set; b) the relevant multiplier pursuant to Article 241 is to be applied to the resulting net risk

positions; and c) The sum of the resulting products is to be calculated; 2. In the second step, the difference between the sum of the current market values of the

transactions included in the netting set and the sum of the current market values of the collateral assigned to the netting set is to be calculated;

3. The exposure value is then calculated by multiplying the larger of the values calculated under nos. 1 and 2 by a scaling factor of 1.4.


(2) For the purpose of calculating the exposure value pursuant to para. 1, credit institutions may only use collateral pursuant to Article 90 and Article 216 para. 5.

(3) In the calculation of the exposure value pursuant to para. 1, collateral received from a counterparty is to be indicated with a plus sign, while collateral posted to a counterparty is to be indicated with a minus sign.

(4) For transactions with a non-linear risk profile and for payment legs and transactions in underlying debt instruments for which the price sensitivity pursuant to Article 239 para. 4 or the interest rate sensitivity pursuant to Article 239 para. 2 cannot be determined using a model which is approved for the calculation of minimum capital requirements pursuant to Article 22p Banking Act, credit institutions must calculate the exposure value using the Mark-to-Market Method pursuant to Article 234. Netting is not permitted.

Internal Procedures

Article 243. (1) Credit institutions which use the Standardised Method to calculate expo-sure values must have in place adequate internal procedures to verify the legal enforceability of the netting agreement pursuant to Articles 256 to 261 before including a transaction in a hedg-ing set.

(2) Credit institutions which use collateral for the purpose of mitigating their counterparty credit risk under the Standardised Method must have in place adequate internal procedures to verify that the collateral meets the legal certainty requirements pursuant to Articles 100 to 118 before recognising the effect of collateral in the calculation of exposure values.

Chapter 5

Internal Model Method Article 244. Credit institutions which use an internal model pursuant to Article 21f Banking

Act must fulfil the requirements set forth in Articles 245 to 255.

Exposure Value

Article 245. (1) Within the model, credit institutions must calculate exposure values for each netting set as a whole. Credit institutions may account for fluctuations in the value of col-lateral in the case of margined counterparties.

(2) In calculating the exposure value for a netting set, credit institutions may use collateral pursuant to Article 90 and Article 216 para. 5 provided that the quantitative, qualitative and data requirements for the internal model are fulfilled with regard to the collateral.

(3) The exposure value is to be calculated as follows: 1. In the first step, the distribution of the market value of the netting set given changes in

market variables which may have an impact on the market value is to be calculated for a series of future dates;


2. In the second step, the respective average market value of the netting set is to be calcu-

lated for each of those future dates, with negative market values set to zero; 3. In the next step, the maximum average market value is to be calculated for each of the

future dates as the maximum of the average market values determined pursuant to no. 2 up to that date;

4. The exposure value is then calculated by multiplying the average of the maximum aver-age market values pursuant to no. 3 by a scaling factor of 1.4. This average is to be cal-culated over the duration of the contract with the longest maturity in the netting set, but no more than one year; in cases where the dates are irregularly distributed, the average is to be weighted according to the length of the time intervals.

(4) In the calculation pursuant to para. 3 no. 2 and of high percentiles of the distribution of the market value of the netting set, potential deviations from the assumptions made regarding the underlying modelling of changes in market variables must be taken into account. This also applies to cases where negative market values are set to zero.

(5) In performing the calculation pursuant to para. 3 no. 4, credit institutions may use a more conservative value for each counterparty instead of the average of maximum average market values pursuant to para. 3 no. 3 when applying the scaling factor pursuant to para. 3 no. 4.

Own Estimates of the Scaling Factor

Article 246. (1) In calculating the exposure value, credit institutions may use their own es-timate of the scaling factor instead of the scaling factor specified in Article 245 para. 3 no. 4. In this context, the scaling factor must equal the ratio of the internal capital calculated on the basis of internal assumptions to cover market and credit risk (numerator) and the internal capital cal-culated on the basis of internal assumptions given a constant counterparty exposure volume which is equal to the average of average market values pursuant to Article 245 para. 3 no. 2 (denominator). This factor is subject to a floor of 1.2. This average of average market values is to be calculated over the duration of the contract with the longest maturity in the netting set, but no more than one year; in cases where the dates are irregularly distributed, the average is to be weighted according to the length of the time intervals.

(2) The credit institution's own estimates of the scaling factor pursuant to para. 1 must: 1. capture in the numerator material sources of stochastic dependency of the distribution of

market value of transactions or of portfolios of transactions across counterparties; and 2. sufficiently account for the granularity of the portfolio.

(3) Credit institutions which use their own estimates of the scaling factor must: 1. ensure that the numerator and denominator of the scaling factor are calculated in a con-

sistent manner with regard to modelling methodology, parameter specifications and portfolio composition;

2. ensure that the approach used is based on the credit institution's internal approach pur-suant to Article 39a Banking Act;

3. appropriately document the approach used;


4. subject the approach used to independent validation; 5. review their estimates at least on a quarterly basis, and more frequently in cases where

the composition of the portfolio varies over time; and 6. assess the model risk.

Correlation of Market and Credit Risk Factors

Article 247. Where appropriate, in calculating the internal capital required to cover market and credit risk pursuant to Article 246 para. 1, credit institutions must ensure that volatilities and correlations of market risk factors are conditioned on credit risk factors in order to reflect poten-tial increases in volatility and correlation in the case of an economic downturn.

Netting Sets with Margin Agreements

Article 248. In the case of netting sets subject to margin agreements, credit institutions are to calculate the exposure value pursuant to Article 245 using one of the methods indicated un-der nos. 1 to 3 below. A margin agreement refers to a contractual agreement or provisions of an agreement under which one counterparty is required to supply collateral to a second counter-party when an exposure of that second counterparty to the first counterparty exceeds a speci-fied level. 1. Calculation of the exposure value pursuant to Article 245 without accounting for margin

agreements; 2. Calculation of the value pursuant to Article 245 para. 2 no. 2 as the threshold, if positive,

under the margin agreement plus an appropriate add-on which reflects the potential in-crease in exposure over the margin period of risk, where:

a) The margin period of risk refers to the time period between the last exchange of col-lateral covering a netting set of transactions with a defaulting counterparty and the time at which that counterparty is closed out and the resulting market risk is re-hedged;

b) The threshold refers to the largest amount of an exposure which can remain out-standing until one party has the right to call for collateral; and

c) The add-on is calculated as the expected increase in the netting set's exposure be-ginning from a current exposure of zero over the margin period of risk; the margin pe-riod of risk used for this purpose must be subject to a floor of five business days for netting sets consisting only of repurchase transactions or securities or commodities lending or borrowing transactions subject to daily remargining and daily marking-to-market, and ten business days for all other netting sets;

3. In cases where the internal model captures the effects of margining in the estimation of values pursuant to Article 245 para. 2 no. 2, this estimate may be used directly in the calculation pursuant to Article 245 para. 2 no. 3.


Organisational Unit for Counterparty Credit Risk Management

Article 249. (1) For the purpose of counterparty credit risk control, the credit institution must establish a separate organisational unit which is independent of the front office and for which sufficient resources are provided. The work of this organisational unit must be part of the credit institution's day-to-day risk management process. Its output must be integrated into the process of planning, monitoring and controlling the credit institution's credit and overall risk pro-file.

(2) The duties of this organisational unit are as follows: 1. Performing the initial and ongoing validation of the model; 2. Reviewing the integrity of input data; 3. Analysing reports on the model's output, including an evaluation of the relationships

between the model's output and credit and trading limits; and 4. regular reporting to the senior management.

Counterparty Credit Risk Management

Article 250. (1) In the management of counterparty credit risk, credit institutions must fulfil the following requirements: 1. The credit institution must have in place conceptually sound processes, policies and

systems for the management of counterparty credit risk, which must specifically include the identification, management, approval and internal reporting of counterparty credit risk;

2. The credit institution's risk management policies must account for market and liquidity risks as well as legal and operational risks associated with counterparty credit risk.

3. The credit institution must assess a counterparty's creditworthiness before undertaking business with that counterparty and take sufficient account of settlement credit risk; these risks must be managed as comprehensively as practicable at the counterparty level and at the credit institution level;

4. The directors and senior management of the credit institution must be actively involved in the management and control of counterparty credit risk; the directors are responsible for ensuring that the appropriate resources are provided; senior management must be aware of the limitations and underlying assumptions of the model as well as their poten-tial impact on the reliability of the model's output; senior management must ensure that the uncertainties of the market environment and operational issues are taken into ac-count and be able to assess how these impact the model;

5. The daily reports must be reviewed on a daily basis by employees who have sufficient authority to enforce reductions of positions taken by employees responsible for lending decisions or by traders as well as reductions in the credit institution's counterparty credit risk exposure;


6. The counterparty credit risk management system must be used in conjunction with in-

ternal credit and trading limits; internal credit and trading volume limits must be related to the credit institution's risk measurement model in a manner which is consistent over time and which is well understood by employees responsible for lending decisions, trad-ers and senior management;

7. The measurement of counterparty credit risk must include the daily and intra-day usage of credit lines as well as of the allocation of internal capital as determined in accordance with Article 39a para. 1 Banking Act; this measurement must be performed both gross and net of collateral;

8. At the counterparty and portfolio level, credit institutions must calculate and monitor peak exposure and potential future exposure at the confidence interval chosen by the credit institutions, also taking account of concentration risk; and

9. Credit institutions must routinely conduct a comprehensive and systematic stress-testing programme based on the daily output of the risk measurement model. The re-sults of the stress tests must be reviewed periodically by senior management and must be reflected in counterparty credit risk management policies, processes and systems as well as the limit system. Where stress tests reveal anomalies in relation to certain cir-cumstances, the credit institution must take prompt steps to manage those risks appro-priately.

(2) Credit institutions must have procedures in place to ensure compliance with the re-quirements pursuant to para. 1 and must appropriately document such procedures as well as the empirical techniques used to measure counterparty credit risk.

Stress Tests

Article 251. (1) Credit institutions must have in place sound stress testing processes in ac-cordance with Article 250 para. 1 no. 9 in order to assess their capital adequacy for the cover-age of counterparty credit risk. These measurements must be compared with the exposure val-ues calculated in accordance with Articles 245 to 248 and reviewed in the course of the proce-dures set forth in Article 39a Banking Act. In addition, stress testing must also involve identifying possible events or future changes in economic conditions which could have unfavourable ef-fects on a credit institution's credit exposures as well as assessing the credit institution's ability to withstand such changes.

(2) Credit institutions must stress-test their exposures to counterparty credit risk, including tests which jointly stress market and credit risk factors. These stress tests must account for concentration risk, the correlation between market and credit risk, and the risk that the liquida-tion of a counterparty's position could move the market. Stress tests must also consider the impact of such market movements on the credit institution's own positions and integrate that impact into the assessment of counterparty credit risk.

(3) Where stress test scenarios are prescribed by the FMA, these must be analysed with the stress tests developed by the credit institution. In the course of evaluations, the Oesterreichische Nationalbank may also prescribe such stress test scenarios.


Internal Auditing

Article 252. The internal audit unit must review the management of counterparty credit risk on a regular basis. This review must cover the activities of the credit and trading units as well as those of the organisational unit pursuant to Article 249. The overall counterparty credit risk management process must be reviewed periodically (but at least once per year); in any case, this review must specifically address the following aspects: 1. The adequacy of the documentation pursuant to Article 250 para. 2 and of the counter-

party credit risk management processes; 2. The organisation of the counterparty credit risk management unit pursuant to Arti-

cle 249; 3. The integration of counterparty credit risk measurement results into day-to-day risk

management; 4. The approval process for the risk pricing models and valuation systems used by em-

ployees in the front and back office; 5. The validation of any significant changes in the counterparty credit risk measurement

process; 6. The scope of counterparty credit risk captured by the risk measurement model; 7. The quality of the management information system; 8. The accuracy and completeness of the data used to determine counterparty credit risk; 9. The verification of the consistency, timeliness and reliability of the data sources used in

the model, including the independence of such data sources; 10. The accuracy and appropriateness of assumptions regarding volatility and correlations; 11. The accuracy of valuation and risk transformation calculations; and 12. The verification of the model's accuracy through frequent back-testing.

Integration of the Model into the Risk Management System

Article 253. (1) Credit institutions must closely integrate the distribution of exposure values generated in accordance with Articles 245 to 248 into their day-to-day counterparty credit risk management processes. The output of the internal model must be accounted for appropriately in lending decisions, counterparty credit risk management, the allocation of internal capital de-termined in accordance with Article 39a para. 1 Banking Act, and general risk management pursuant to Article 39 Banking Act.

(2) The credit institution must have a track record in the use of models which generate a distribution of exposures to counterparty credit risk.


(3) The model used to calculate exposure values in accordance with Articles 245 to 248 must be an integral part of the counterparty credit risk management system, which must also include the measurement of the usage of credit lines (aggregating counterparty credit risk expo-sures with other credit exposures) and the allocation of internal capital determined in accor-dance with Article 39a para. 1 Banking Act. In addition to the exposure values pursuant to Arti-cles 245 to 248, the credit institution must also measure and manage current exposures; where appropriate, current exposures are to be measured both gross and net of collateral. The credit institution must also use its internal model to calculate other measures of counterparty credit risk, such as peak exposure or potential future exposure.

(4) Credit institutions must be able to assess the values pursuant to Article 245 para. 3 no. 2 on a daily basis unless their counterparty credit risk exposure warrants less frequent cal-culation. Credit institutions must calculate their estimates over a forecasting horizon which ade-quately reflects the structure of expected cash flows and the maturity of existing transactions as well as the materiality and composition of the exposures.

(5) Credit institutions must assess, monitor and control the exposures over the entire term of all contracts in the netting set and have in place suitable assessment procedures for cases where an exposure to a counterparty rises beyond the one-year horizon. The forecast amount of the exposure must be input into the calculation of internal capital pursuant to Article 39a para. 1 Banking Act.

(6) Credit institutions must give due consideration to exposures associated with significant general wrong-way risk and have procedures in place to identify, monitor and control cases of specific wrong-way risk beginning at the inception of a transaction and continuing throughout the term of the transaction. In this context, general wrong-way risk refers to the possibility that the probability of default of counterparties will be positively correlated with general market risk factors; specific wrong-way risk refers to the possibility that the exposure to a particular coun-terparty will be positively correlated with the probability of default of the counterparty due to the nature of the transactions with the counterparty; credit institutions are exposed to specific wrong-way risk if the future exposure to a specific counterparty is expected to be high when that counterparty's probability of default is also high.

Integrity of the Model

Article 254. (1) Credit institutions must employ stable modelling processes and fulfil the fol-lowing requirements: 1. Transaction specifications and terms must be reflected in a timely, complete and suffi-

ciently conservative manner; such terms must include at least contract notional amounts, maturity, reference assets, margining obligations and netting agreements;

2. The terms must be stored in a database which is reviewed at regular intervals (at least once per year);

3. The processes for recognising netting arrangements must be reviewed and approved by a unit which possesses sufficient expertise to assess the legal enforceability of the net-ting agreement;

4. The netting agreement must be input into the database by an independent unit;


5. There must be a process for the reconciliation of data between the internal model and

the source system in order to ensure that the transaction terms are reflected in the ex-posure values pursuant to Articles 245 to 248 correctly or in a sufficiently conservative manner;

6. Current market data must be used in the calculation of exposure values pursuant to Articles 245 to 248; where historical data are used to estimate volatility and correlations, at least three years of historical data must be used, and such data must be updated on a regular (at least quarterly) basis; the data must reflect economic conditions such as the business cycle comprehensively;

7. In cases where the model relies on proxies or new products for which three years of historical data may not be available, the credit institution must have internal policies which identify suitable proxies; the credit institution must demonstrate empirically that the proxy used provides a conservative representation of the underlying risk under ad-verse market conditions;

8. The data must be acquired by an independent unit, fed into the internal model in a timely and complete fashion, stored in a database and reviewed and updated on a regu-lar basis.

9. There must be procedures in place to ensure data integrity and to cleanse the data of erroneous or anomalous observations; in cases where the model relies on proxies for market data for which three years of historical data are not available, the credit institu-tion must have procedures in place to define suitable proxies; in such cases, credit insti-tutions must demonstrate that the proxies provide a conservative representation of the underlying risk under adverse market conditions; in cases where the model accounts for the effect of collateral on changes in the market value of the netting set, the credit insti-tution must have adequate historical data to model the volatility of the collateral; and

10. The price determined by the business unit must be validated by an independent unit.

(2) Credit institutions must subject their models to a validation process. This process must be clearly articulated in the credit institution's internal procedures and policies. The validation process must be documented completely and sufficiently, and the process must specify the kind of testing needed in order to ensure model integrity and to identify conditions under which as-sumptions are violated and may result in an understatement of the exposure value pursuant to Articles 245 to 248. The validation process must also include a review of the comprehensive-ness of the model.

(3) Credit institutions must monitor the risks to which they may be exposed and must have procedures in place to adjust their estimates of exposure values pursuant to Articles 245 to 248 when those risks reach significant levels. In the course of these procedures, the credit institution must: 1. identify and manage its exposures to specific wrong-way risk; 2. in the case of exposures with a rising risk profile after one year, compare the estimates

of exposure values pursuant to Articles 245 to 248 over one year with the estimates of exposure values over the term of those exposures on a regular basis; and


3. in the case of exposures with a residual maturity of less than one year, compare on a

regular basis the replacement cost and the realised exposure profile or the stored data that would allow such a comparison.

(4) Credit institutions shall have in place internal procedures to verify the legal enforceability of netting agreements and the fulfilment of the requirements set forth in Articles 256 to 261 prior to including a transaction in a netting set.

(5) Credit institutions which use collateral for the purpose of mitigating their counterparty credit risk must have in place procedures to verify that the requirements pursuant to Articles 83 to 118 are fulfilled before recognising the effect of collateral in any calculations.

Model Validation

Article 255. In validating the model, the credit institution must fulfil the following require-ments: 1. The validation requirements applicable to market risk models pursuant to Article 21e

Banking Act; 2. Interest rates, foreign exchange rates, equity prices, commodities and other market risk

factors must be forecast over a sufficiently long time horizon in order to measure coun-terparty credit risk exposure; the performance of the forecasting model for the relevant factors must be validated over a sufficiently long time horizon;

3. The pricing models used to calculate the counterparty credit risk exposure for a given scenario of future shocks to market risk factors must be tested in the course of the model validation process; pricing models for options must account for the non-linearity of the option value with regard to market risk factors;

4. The model used to estimate exposure values pursuant to Articles 245 to 248 must cap-ture transaction-specific information in order to aggregate exposures at the level of the netting set; the credit institution must ensure that transactions are assigned to the cor-rect netting set within the model;

5. The model used to estimate exposure values pursuant to Articles 245 to 248 must in-clude transaction-specific information in order to capture the effects of margining; both the current margin amount and the future margin payments of the counterparty must be taken into account; the model must account for unilateral or bilateral margin obligations, the frequency of margin calls, the margin period of risk, the minimum threshold of un-margined exposure the credit institution is willing to accept, and the minimum transfer amount; the model must forecast the change in the market value of the collateral posted, or the requirements pursuant to Articles 83 to 118 must be fulfilled; and

6. In the course of model validation, representative counterparty portfolios must be sub-jected to back-testing; this back-testing must be performed at regular intervals on a number of representative actual or hypothetical counterparty portfolios; the criteria for considering portfolios to be representative are their sensitivity to material risk factors and the existence of correlations which may pose a risk to the credit institution.


Chapter 6

Contractual Netting Article 256. (1) For the purpose of using contractual netting agreements pursuant to Arti-

cles 257 to 260, a counterparty is taken to mean any entity (including natural persons) which has the power to conclude a contractual netting agreement, and a contractual cross-product netting agreement refers to a written bilateral agreement between a credit institution and a counterparty which creates a single legal obligation covering all included bilateral master agreements and transactions belonging to different product categories. Contractual cross-product netting agreements can only be concluded on a bilateral basis.

(2) For the purposes of cross-product netting, the following product categories are to be dis-tinguished: 1. Repurchase transactions and reverse repurchase transactions as well as securities and

commodities lending and borrowing transactions; 2. Margin lending transactions; and 3. The contracts listed in Annex 2 to Article 22 Banking Act;

Types of Netting Agreements and Conditions for Application

Article 257. (1) Credit institutions may use the following forms of contractual netting agreements to mitigate counterparty credit risk: 1. Bilateral contracts for novation under which mutual claims and obligations are automati-

cally amalgamated in such a way that this novation fixes a single net amount each time novation applies and thus creates a single, new and legally binding contract which ex-tinguishes former contracts;

2. Other bilateral agreements between the credit institution and a counterparty; and 3. Contractual cross-product netting agreements concluded by credit institutions which

have received approval to use a model pursuant to Article 21f Banking Act for transac-tions falling under the scope of that method; Netting between credit institutions within a group of credit institutions is not recognised as risk-reducing.

(2) Netting agreements may be recognised in the calculation of counterparty credit risk if the following conditions are fulfilled: 1. The counterparty is authorised to conclude a netting agreement, which must be in writ-

ten form; 2. The netting agreement creates a single legal obligation between the credit institution

and its counterparty covering all included transactions, such that, in the event of a coun-terparty's failure to perform owing to default, bankruptcy, liquidation or any other similar circumstances, the credit institution has a claim to receive or an obligation to pay only the net sum of the positive and negative market values of the individual transactions in-cluded;


3. The credit institution has a written legal opinion from an independent expert which states

that, in the event of a legal dispute, applicable law dictates or the relevant courts and administrative authorities would find that the credit institution's claims and obligations would be limited to the difference amount indicated in no. 2; where master agreements are used, the legal opinions may be drawn up by type of contractual netting agreement; these legal opinions, which must be submitted to the FMA and the Oesterreichische Na-tionalbank upon request, must account for the following jurisdictions:

a) The law of the jurisdiction in which the counterparty is established; in cases where a foreign branch of the credit institution or of the counterparty is involved, also under the law of the jurisdiction in which the branch is located;

b) The law governing the individual transactions included; c) The law governing any contract or agreement necessary to effect the contractual

netting; 4. The credit institution must have procedures in place to ensure that the legal validity of

netting agreements is reviewed at least once per year in light of possible changes in the applicable laws;

5. The contracts must not contain any provisions which permit a non-defaulting counter-party to make limited payments only, or no payments at all, to the estate of the defaulter, even if the defaulter is a net creditor ("walk-away" clause).

6. The credit institution is not aware of any indications that the competent authority abroad might doubt the legal effectiveness of the netting agreement under the applicable laws;

7. A notification from the FMA pursuant to Article 22 para. 8 Banking Act has not been issued;

8. The credit institution maintains all required documentation in its files; 9. The credit institution factors the effects of cross-product netting into the measurement of

each counterparty's aggregate risk exposure and manages its counterparty credit risk on this basis; and

10. The credit risk exposure to each counterparty is aggregated to arrive at a single legal exposure across products; this aggregate exposure is to be used in the credit institu-tion's limit systems and in the procedures pursuant to Article 39a Banking Act.

(3) Cross-product netting agreements must fulfil the following requirements in addition to those indicated in para. 2: 1. The net sum pursuant to para. 2 no. 2 is the net sum of the positive and negative close-

out values of any included individual bilateral master agreements and of the positive and negative mark-to-market values of the individual transactions (cross-product net amount);

2. The opinion pursuant to para. 2 no. 3 must address the validity and enforceability of the entire cross-product netting agreement and an assessment of the impact of the cross-product netting agreement on the material provisions of any bilateral master agreement included;


3. The procedures pursuant to para. 2 no. 4 must also serve to ensure that an opinion

pursuant to para. 2 no. 3 is prepared for new transactions to be included in a netting set; and

4. The credit institution must continue to comply with the requirements for the recognition of bilateral netting and, where applicable, the requirements of Articles 83 to 155 for the recognition of credit risk mitigation, with respect to each individual bilateral master agreement and transaction included.

Recognition of Netting Agreements

Article 258. Articles 234 and 235 apply to the recognition of a netting agreement as fol-lows: 1. Bilateral contracts for novation and the Mark-to-Market Method: the market values and

notional values are to be calculated with due attention to the contract for novation; 2. Bilateral contracts for novation and the Original Exposure Method: the notional values

are to be calculated with due attention to the contract for novation; 3. Other bilateral netting agreements and the Mark-to-Market Method: a) For contracts included in the offsetting agreement, the market value pursuant to Arti-

cle 234 is equal to that amount which results from the netting agreement; in cases where netting results in a net obligation, the market value is to be set to zero;

b) The following are to be included in the calculation of the potential future credit expo-sure:

aa) In the case of forward foreign exchange transactions and other comparable con-tracts, the offset notional value is to be applied without the application of Arti-cle 259 if this value is equivalent to cash flows and the claims and liabilities are denominated in the same currency and fall due on the same value date;

bb) In all other cases, the original notional values (weighted at the credit institution's discretion pursuant to Article 259) are to be applied;

4. Other bilateral netting agreements and the Original Exposure Method: a) In the case of forward foreign exchange transactions and other comparable contracts

in which the offset notional value is equivalent to cash flows and the claims and liabili-ties are denominated in the same currency and fall due on the same value date, the offset notional value is to be applied; the table under Article 235 is also applicable;

b) For all other contracts included in a netting agreement, the notional value of each contract is to be multiplied by the following percentages:


Original maturity Interest-rate contracts Foreign-exchange

contracts and contracts concerning gold

One year or less 0.35% 1.50% Over one year, not

exceeding two years 0.75% 3.75%

Additional allowance for each additional year

0.75% 2.25%

Netting Agreements: Potential Future Credit Exposure

Article 259. Credit institutions may, in application of Article 258 no. 3, reduce the potential future credit exposure using to the following formula:

,6.04.0 PCEgrossNGRPCEgrossPCEred ××+×=

where: PCEred: the reduced figure for potential future credit exposure for all contracts with a

given counterparty included in a bilateral netting agreement; PCEgross: the sum of the figures for potential future credit exposure for all contracts with a

given counterparty which are included in a bilateral netting agreement and are calculated by multiplying their notional values by the percentages indicated in the table under Article 234; and

NGR: The "net-to-gross ratio" pursuant to Article 260.

Netting Agreements: Net-to-Gross Ratio

Article 260. Credit institutions may determine the net-to-gross ratio either using the sepa-rate or aggregate calculation method; once chosen, however, the method must be used consis-tently: 1. In the separate calculation method, the net-to-gross ratio is the ratio of the offset market

value of contracts with a given counterparty under a bilateral netting agreement (nu-merator) and the sum of all market values of the contracts with the same counterparty which are included in the netting agreement before netting (denominator); or

2. In the aggregate calculation method, the net-to-gross ratio is the ratio of the sum of the offset market values calculated on a bilateral basis for all counterparties, taking into ac-count all contracts under bilateral netting agreements (numerator) and the sum of the market values of all contracts included in a netting agreement before netting (denomina-tor).

Netting Agreements under the Standardised Method and Internal Models

Article 261. For credit institutions which use the Standardised Method pursuant to Arti-cles 234 to 241 or an internal model pursuant to Article 21f Banking Act, Articles 258 to 260 apply to the recognition of netting agreements as if the Mark-to-Market Method were used.


Part 6: Transitional and Final Provisions

Transitional Provisions

Article 262. The following transitional provisions will apply once this regulation enters into effect: 1. In the calculation of risk weighted exposure amounts for the purposes of Article 4

para. 4, until 31 December 2012, the same risk weight may be assigned to exposures to Member States' central governments or central banks denominated and funded in the domestic currency of any Member State as would be applied to such exposures de-nominated and funded in their domestic currency.

2. In the In the calculation of risk weighted exposure amounts for the purposes of Article 15 para. 2, until 31 December 2012, exposures arising from real estate leasing transactions which involve commercial real estate properties located in Austria may be assigned a risk weight of 50% if the requirements set forth in Article 14 para. 1 nos. 1 and 3 are ful-filled. Article 15 paras. 1 and 2 are not applicable in this context.

3. Until 31 December 2010, the figure of 60% indicated in Article 18 para. 1 no. 6 may be replaced with a figure of 70%.

4. Data collected for the purpose of own estimates of the risk parameters PD, LGD, con-version factor and expected loss for the purposes of Article 47 prior to this regulation's entry into effect may be used if they are adjusted appropriately to ensure that broad equivalence with the definitions of default and loss pursuant to Article 22b para. 5 no. 2 Banking Act is achieved.

5. In cases where own estimates of loss given default and conversion factors are used, the relevant observation period for the purposes of Article 48 no. 8 may be shortened to a minimum of two years; the period to be covered must increase by one year each year until the relevant data cover a period of five years.

6. The relevant observation period for the purposes of Article 49 no. 4 may be shortened to a minimum of two years; the period to be covered must increase by one year each year until the relevant data cover a period of five years.

7. The relevant observation period for the purposes of Article 51 may be shortened to a minimum of five years; the period to be covered must increase by one year each year until the relevant data cover a period of seven years.


9. The relevant observation period for the purposes of Article 54 may be shortened to a minimum of five years; the period to be covered must increase by one year each year until the relevant data cover a period of seven years.



11. Until 31 December 2010, in the estimation of LGD for the purposes of Article 69 para. 1

no. 4, an LGD value of 11.25% instead of 12.5% may be applied to covered bonds pur-suant to Article 18 if:

a. all of the assets collateralising the bonds as set forth in Article 18 para. 1 nos. 1 and 2 qualify for credit quality step 2;

b. where the assets indicated in Article 18 nos. 3 to 5 are used as collateral, the respec-tive upper limit set forth in each of those points is 10% of the nominal amount of the outstanding issue;

c. assets pursuant to Article 18 are not used as collateral; or d. The covered bonds are the subject of a credit assessment by an eligible external

credit assessment institution, and the external credit assessment institution places them in the most favourable credit assessment category that the external credit as-sessment institution could assign in respect of covered bonds.

12. Until 31 December 2010, the exposure-weighted average loss given default pursuant to Article 75 para. 3 for all retail exposures secured by residential real estate and not bene-fiting from guarantees from central governments must be higher than 10%.

13. Real estate properties which served as collateral pursuant to Article 22 para. 3 no. 3 lit. a Banking Act as last amended by Federal Law Gazette I No. 48/2006 or pursuant to Article 103 no. 10 lit. f Banking Act as last amended by Federal Law Gazette I No. 48/2006 as of 31 December 2006, or at the time of the changeover pursuant to Arti-cle 103e no. 7 Banking Act (if later) and were used for the purpose of credit risk mitiga-tion must be valued in accordance with Article 104 for the first time by 31 Decem-ber 2009 at the latest.

14. For transactions pursuant to Article 138 which were concluded prior to 1 January 2007, a time lag of five business days may be assumed instead of the requirement stipulated in Article 138 para. 1 no. 3.

15. By way of derogation from Article 140, until 31 December 2012, credit institutions may apply an effective loss given default (LGD*) of 30% for senior exposures in the form of commercial real estate leasing and for senior exposures secured by residential and commercial real estate, and an effective loss given default (LGD*) of 35% for senior ex-posures in the form of equipment leasing.

16. Until 31 December 2012, credit institutions and groups of credit institutions for which the relevant indicator for the trading and sales business line accounts for at least 50% of the total of the relevant indicators determined for all of its business lines in accordance with Articles 184 to 187 may apply a percentage of 15% to the trading and sales business line.

17. Credit institutions which use a market risk model pursuant to Article 22p Banking Act approved prior to 1January 2007, may continue to apply the Regulation of the Minister of Finance implementing the Banking Act with regard to Internal Market Risk Models (Model Regulation; Federal Law Gazette II No. 179/1997) until 31 December 2009.


References

Article 263. (1) Where references to the Banking Act are made in this regulation, the ver-sion last amended by Federal Law Gazette I No. 141/2006 is to be applied unless specified otherwise.

(2) Where references to other FMA regulations are made in this regulation, those regula-tions are to be applied in their respective current versions unless specified otherwise.

Repeals

Article 264. The following will expire as of 31 December 2006: 1. Regulation of the Minister of Finance implementing the Banking Act with regard to Inter-

nal Market Risk Models (Model Regulation; Federal Law Gazette II No. 179/1997); and 2. Regulation of the Minister of Finance implementing the Banking Act with regard to Other

Risks Associated with Options (Option Risks Regulation 2000; Federal Law Gazette II No. 323/1997).

Entry into Effect

Article 265. This regulation will enter into effect on the day following its announcement.

Documents

Regulation of the Financial Market Authority (FMA) on the