For the purposes of this Prudential Standard, aggregate risk exposures arise from exposures to individual counterparties, a group of related individual counterparties, a group of counterparties with similar characteristics (e.g. in specific geographical locations or industry sectors) or to particular asset classes (e.g. property holdings or other investments) where the exposures have the potential to result in material losses for the Level 3 group or an individual prudentially regulated institution in the group. Aggregate risk exposures include both on- and off-balance sheet exposures. Unlimited exposures to any individual counterparty (e.g. a general guarantee of the obligations of a counterparty) are not permitted unless agreed with APRA.

For the purposes of this Prudential Standard, when determining aggregate risk exposures the Level 3 Head must ensure that exposures to the wider conglomerate group to which the Level 3 group belongs are taken into account.

For the purposes of this Prudential Standard, aggregate risk exposures exclude any exposures held, in accordance with written legal agreements, by the Level 3 group on behalf of entities external to the Level 3 group (e.g. custodian arrangements), even if the assets are held in the name of a Level 3 institution in the group.

A Level 3 Head must have an ‘aggregate risk exposures policy’ that addresses all material risk exposures associated with the operations undertaken by Level 3 institutions in the Level 3 group. The policy must include systems and procedures to identify, measure, monitor, evaluate, report and control or mitigate all material risks arising from aggregate risk exposures.

A Level 3 Head must conduct forward-looking scenario analysis and stress testing of the Level 3 group’s material aggregate risk exposures. The analysis must assess the impact of changes in market conditions and key risk factors on these aggregate risk exposures, and how these changes impact on the group’s risk profile, capital strength and earnings.

The management of aggregate risk exposures must be a part of the Level 3 group’s risk management framework.[1]

The Board of a Level 3 Head must:

approve the aggregate risk exposures policy for the Level 3 group;

ensure that adequate systems and controls are in place to identify, measure, aggregate, manage, monitor and report on material risk exposures in the Level 3 group in a timely manner and that those systems and controls are documented;

engage in oversight, which may be via a board committee, of the approach to the identification, measurement, management and monitoring of aggregate risk exposures and compliance with the aggregate risk exposures policy, which includes receiving regular reviews of material aggregate risk exposures of the Level 3 group; and

review the aggregate risk exposures policy at least annually to ensure that this policy remains adequate and appropriate for identifying, measuring, aggregating, managing and monitoring the Level 3 group’s risk exposures.

The aggregate risk exposures policy for a Level 3 group must:

be conceptually sound, consistently implemented, transparent and be subject to independent review;

capture all material aggregate risk exposures;

include limits on acceptable levels of aggregate risk exposures for the Level 3 group;

include a description of the procedures for identifying, aggregating, reviewing, controlling and reporting material risk exposures within the Level 3 group. This must include:

a clear statement of the respective responsibilities and compliance obligations of the Board of the Level 3 Head, its board committees and senior management of the Level 3 group in relation to the monitoring and management of aggregate risk exposures;

escalation procedures for aggregate risk exposures that facilitate responses to identified policy breaches between formal reporting cycles;

the circumstances in which aggregate risk exposure limits may be exceeded and the authority required for approving such excesses;

thresholds and procedures for reporting material changes to the Board of the Level 3 Head, in both formal reporting cycles and outside formal reporting cycles;

consideration of the impact of material changes in macroeconomic conditions, including foreign exchange rates, interest rates and inflation; and

a timetable for a regular review of the reports by the Board of the Level 3 Head.

The aggregate risk exposure limits identified under paragraph 13(c) must take into account, where appropriate, matters such as:

on- and off-balance sheet exposures to:

various types of counterparties;

an individual counterparty or group of related counterparties;

individual industry sectors;

geographical locations;

financial products, including risk transfer products;

specific funding sources;

various asset classes such as equities, property holdings and other investments;

various market risks such as interest rate, foreign exchange and commodities; and

any other material risks,

that cover asset and liability exposures and that are commensurate with the Level 3 group’s risk appetite, risk profile and capital strength, and the size, business mix and complexity of the group; and

operational risk exposures to:

service providers;

outsourcing;

business continuity management; and

any other operational risks.

A Level 3 Head’s management information systems must incorporate reporting systems in relation to aggregate risk exposures across the Level 3 group.[2]

Reports on material aggregate risk exposures must be provided to APRA on request.

Where, in APRA’s view, the Level 3 group is exposed to a significant level of aggregate risk exposure in specific risks, APRA may require a Level 3 Head to limit or reduce the Level 3 group’s level of aggregate risk exposure. APRA may also determine how a Level 3 Head must calculate an aggregate risk exposure. In determining any requirement to limit or reduce the Level 3 group’s level of aggregate risk exposure, or how a Level 3 Head must calculate an aggregate risk exposure, APRA may take account of the following factors:

whether the Level 3 group has been acting in a manner that is consistent with the aggregate risk exposures policy;

the characteristics of aggregate risk exposures, including their number, size and nature;

the characteristics of the Level 3 group, including the nature of its business and the experience of its management; and

other relevant factors to be considered on a case-by-case basis.

A Level 3 Head must notify APRA as soon as practicable, and no more than 10 business days, after it becomes aware:

of a breach of the limits in the aggregate risk exposures policy;

of any significant breach of, or material deviation from, the aggregate risk exposures policy; or

that the aggregate risk exposures policy did not adequately address a material risk,

and advise of remedial actions taken, or planned to be taken, to deal with the issue.

A Level 3 Head must submit to APRA a copy of its aggregate risk exposures policy as soon as practicable, and no more than 10 business days, after Board approval.

APRA may adjust or exclude a specific requirement in this Prudential Standard in relation to the Level 3 Head.[3]