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  • C. Pillar 2 Requirements

    • Pillar 2: Add Requirements to Improve the Operational Performance of the Collateral Department

      A summary is as follows: 
       
       •Applicable to IMM banks
       
       •BCBS strengthened the standards for collateral management (Pillar 2)
       
       •Requirement added to improve the operational performance of the collateral department for IMM banks
       
       •BCBS supports the creation of a ‘’Collateral Management Unit’’ (CMU)
       
      Enhancements 
       
      106.To implement the requirements designed to improve the collateral department operations, two new paragraphs, 51(i) and 51(ii), will be incorporated into Annex 41 and paragraph 777(x), Part 3: The Second Pillar – Supervisory Review Process, will be revised as follows:
       
      51(i).Banks applying the internal model method must have a collateral management unit that is responsible for calculating and making margin calls, managing margin call disputes and reporting levels of independent amounts, initial margins and variation margins accurately on a daily basis. This unit must control the integrity of the data used to make margin calls, and ensure that it is consistent and reconciled regularly with all relevant sources of data within the bank. This unit must also track the extent of reuse of collateral (both cash and non-cash) and the rights that the bank gives away to its respective counterparties for the collateral that it posts. These internal reports must indicate the categories of collateral assets that are reused, and the terms of such reuse including instrument, credit quality and maturity. The unit must also track concentration to individual collateral asset classes accepted by the banks. Senior management must allocate sufficient resources to this unit for its systems to have an appropriate level of operational performance, as measured by the timeliness and accuracy of outgoing calls and response time to incoming calls. Senior management must ensure that this unit is adequately staffed to process calls and disputes in a timely manner even under severe market crisis, and to enable the bank to limit its number of large disputes caused by trade volumes.
       
      51(ii).The bank’s collateral management unit must produce and maintain appropriate collateral management information that is reported on a regular basis to senior management. Such internal reporting should include information on the type of collateral (both cash and non-cash) received and posted, as well as the size, aging and cause for margin call disputes. This internal reporting should also reflect trends in these figures.
       
      SAMA's circular concerning the implementation of Pillar 2 under Basel II.5 will continue to apply and represent SAMA's Pillar 2 capital requirement under Basel III. 
       
      The additional requirement under Basel III are not applicable to SAMA as currently they refer to IMM approach only. Consequently, SAMA will inform the banks where relevant. 
       
      777(x).The bank must conduct an independent review of the CCR management system regularly through its own internal auditing process. This review must include both the activities of the business credit and trading units and of the independent CCR control unit. A review of the overall CCR management process must take place at regular intervals (ideally not less than once a year) and must specifically address, at a minimum:
       
       •the adequacy of the documentation of the CCR management system and process;
       
       •the organization of the collateral management unit;
       
       •the organization of the CCR control unit;
       
       •the integration of CCR measures into daily risk management;
       
       •the approval process for risk pricing models and valuation systems used by front and back-office personnel;
       
       •the validation of any significant change in the CCR measurement process;
       
       •the scope of counterparty credit risks captured by the risk measurement model;
       
       •the integrity of the management information system;
       
       •the accuracy and completeness of CCR data;
       
       •the accurate reflection of legal terms in collateral and netting agreements into exposure measurements;
       
       •the verification of the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources;
       
       •the accuracy and appropriateness of volatility and correlation assumptions;
       
       •the accuracy of valuation and risk transformation calculations; and
       
       •the verification of the model’s accuracy through frequent backtesting.
       

      1 Annex 5 of this document.