| 24.2 | The LTA requires a bank to risk weight the underlying exposures of a fund as if the exposures were held directly by the bank. This is the most granular and risk-sensitive approach. It must be used when:
|
| | (1) | There is sufficient and frequent information provided to the bank regarding the underlying exposures of the fund; and
|
| | (2) | Such information is verified by an independent third party.
|
| 24.3 | To satisfy condition (1) above, the frequency of financial reporting of the fund must be the same as, or more frequent than, that of the bank’s and the granularity of the financial information must be sufficient to calculate the corresponding risk weights. To satisfy condition (2) above, there must be verification of the underlying exposures by an independent third party, such as the depository or the custodian bank or, where applicable, the management company.115
|
| 24.4 | Under the LTA banks must risk weight all underlying exposures of the fund as if those exposures were directly held. This includes, for example, any underlying exposure arising from the fund’s derivatives activities for situations in which the underlying receives a risk weighting treatment under the calculation of minimum risk based capital requirements and the associated counterparty credit risk (CCR) exposure. Instead of determining a credit valuation adjustment (CVA) charge associated with the fund’s derivatives exposures in accordance with the Minimum Capital Requirements for CVA, banks must multiply the CCR exposure by a factor of 1.5 before applying the risk weight associated with the counterparty.116
|
| 24.5 | Banks may rely on third-party calculations for determining the risk weights associated with their equity investments in funds (i.e. the underlying risk weights of the exposures of the fund) if they do not have adequate data or information to perform the calculations themselves. In such cases, the applicable risk weight shall be 1.2 times higher than the one that would be applicable if the exposure were held directly by the bank.117
|
115 An external audit is not required.
116 A bank is only required to apply the 1.5 factor for transactions that are within the scope of the Minimum Capital Requirements for CVA.
117 For instance, any exposure that is subject to a 20% risk weight under the standardized approach would be weighted at 24% (1.2 * 20%) when the look through is performed by a third party.
