Prudential standard

3PS 222 Intra-group Transaction and Exposures

  • Cross-industry
  • Current
    1 July 2017
Prudential framework pillars
Risk Management
Credit Risk
Supporting

About this standard

This standard requires a level 3 head to monitor and control risks from internal group transactions and exposures. Level 3 heads must have policies and systems to manage these risks. They must also meet minimum requirements set by APRA.

This standard supports CPS 220 Risk Management, which is a core standard in the Risk Management Pillar. It applies to each level 3 head.

Objectives and key requirements of this Prudential Standard

This Prudential Standard requires a Level 3 Head to ensure that associations and dealings within the Level 3 group do not expose prudentially regulated institutions within the group to excessive risk.
The ultimate responsibility for the intra-group transactions and exposures policy of a Level 3 group rests with the Board of its Level 3 Head.
The key requirements of this Prudential Standard are that a Level 3 Head must:
  • have a policy for the Level 3 group that deals with the measurement, management and monitoring of, and reporting on, intra-group transactions and exposures between members of the group;
  • develop and implement effective systems and processes to manage, monitor and report on intra-group transactions and exposures; and
  • meet minimum requirements with respect to dealings between institutions in the Level 3 group and certain related matters.
The requirements in this Prudential Standard are in addition to the obligations imposed on prudentially regulated institutions under other Prudential Standards.
Preamble

Banking, Insurance and Life Insurance (prudential standard) determination No. 3 of 2016

Prudential Standard 3PS 222 Intra-group Transactions and Exposures
Banking Act 1959
Insurance Act 1973
Life Insurance Act 1995
I, Wayne Byres, delegate of :
under subsection 11AF(1) of the Banking Act 1959 DETERMINE Prudential Standard 3PS 222 Intra-group Transactions and Exposures in the form set out in the Schedule, to the extent that it applies to all ADIs and authorised banking NOHCs;
under subsection 32(1) of the Insurance Act 1973 DETERMINE Prudential Standard 3PS 222 Intra-group Transactions and Exposures in the form set out in the Schedule, to the extent that it applies to all general insurers, authorised insurance NOHCs, and subsidiaries of general insurers and authorised insurance NOHCs; and
under subsection 230A(1) of the Life Insurance Act 1995 DETERMINE Prudential Standard 3PS 222 Intra-group Transactions and Exposures in the form set out in the Schedule, to the extent that it applies to all life companies, friendly societies, registered life NOHCs, and subsidiaries of life companies and registered life NOHCs.
This instrument commences on 1 July 2017.
Dated: 8 September 2016
[Signed]
Wayne Byres
Chairman

Interpretation

In this Determination:
ADI has the meaning given in section 5 of the Banking Act 1959.
APRA means the Australian Prudential Regulation Authority.
authorised banking NOHC has the meaning given to the expression authorised NOHC in section 5 of the Banking Act 1959.
authorised insurance NOHC has the meaning given to the expression authorised NOHC in subsection 3(1) of the Insurance Act 1973.
friendly society has the meaning given in section 16C of the Life Insurance Act 1995.
general insurer has the meaning given in section 11 of the Insurance Act 1973.
life company has the meaning given in the Schedule to the Life Insurance Act 1995.
registered life NOHC has the meaning given to the expression registered NOHC in the Schedule to the Life Insurance Act 1995.

Schedule

Prudential Standard 3PS 222 Intra-group Transactions and Exposures comprises the 5 pages commencing on the following page.

Prudential Standard 3PS 222

Intra-Group Transactions and Exposures

Authority

This Prudential Standard is made under:
section 11AF of the Banking Act 1959 (Banking Act);
section 32 of the Insurance Act 1973 (Insurance Act); and
section 230A of the Life Insurance Act 1995 (Life Insurance Act).

Application

This Prudential Standard applies to each Level 3 Head.
This Prudential Standard commences on 1 July 2017.

Interpretation

Terms that are defined in Prudential Standard 3PS 001 Definitions appear in bold the first time they are used in this Prudential Standard.
Where this Prudential Standard provides for APRA to exercise a power or discretion, this power or discretion is to be exercised in writing.
APRA
APRA means the Australian Prudential Regulation Authority.

Intra-group transactions and exposures

For the purposes of this Prudential Standard, an intra-group transaction and exposure (ITE) is the total exposure, including on- and off-balance sheet exposures, of a Level 3 institution to another Level 3 institution within the same Level 3 group.
A Level 3 Head must have an ‘ITE policy’ that addresses all material risks arising in relation to ITEs associated with 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 ITEs between Level 3 institutions in the group.
A Level 3 Head must conduct forward-looking scenario analysis and stress testing of the Level 3 group’s material ITEs. The analysis must assess the impact of changes in market conditions and key risk factors on these ITEs, and how these changes impact the group’s risk profile, capital strength and earnings.
The management of ITEs must be a part of a Level 3 group’s risk management framework.

The role of the Board of a Level 3 Head

The Board of a Level 3 Head must:
approve the ITE policy for the Level 3 group;
ensure that adequate systems and controls are in place to identify, measure, manage, monitor and report on material ITEs 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 ITEs and compliance with the ITE policy, which includes receiving regular reviews of which ITEs are deemed to be material to the operations of the Level 3 group; and
review the ITE policy at least annually, to ensure that this policy remains adequate and appropriate for identifying, measuring, managing and monitoring material risks in relation to ITEs.
If a prudentially regulated institution in the Level 3 group proposes to accept terms and conditions, in dealing with Level 3 institutions in the group, that are not consistent with terms and conditions that would be negotiated on an arms-length basis in such a dealing, those terms and conditions must first be approved by the Board of the Level 3 Head with justification fully and clearly documented.

The ITE policy

The ITE policy for a Level 3 group must:
be conceptually sound, consistently implemented, transparent and be subject to independent review;
capture all material ITEs;
include limits on acceptable levels of ITEs for a Level 3 institution in the Level 3 group having regard to:
the Level 3 institution’s Board-approved limits on exposures to unrelated institutions of broadly equivalent credit status; and
the potential impact on the Level 3 group’s capital and liquidity positions, as well as the institution’s ability to continue operating, as a result of a failure of any other institution in the group; and
include a description of the procedures for identifying, reviewing, controlling and reporting material ITEs within the Level 3 group. This must include:
a clear statement of the respective responsibilities and compliance obligations on 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 material ITEs;
escalation procedures for ITEs that facilitate responses to identified policy breaches between formal reporting cycles;
the circumstances in which ITE limits may be exceeded and the authority required for approving such excesses;
procedures for resolving any conflict of interest arising in relation to ITEs;
procedures for the participation of prudentially regulated institutions in Level 3 group-wide operations;
processes to ensure the transparency of dealings with entities external to the Level 3 group that are associated with ITEs;
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; and
a timetable for a regular review of the reports by the Board of the Level 3 Head.

Participation in group-wide operations

A Level 3 Head must establish policies and procedures to address risks posed to the group from the participation of any prudentially regulated institution in Level 3 group-wide operations including, but not limited to, sharing premises with other Level 3 institutions, centralising back-office functions or outsourcing services to other Level 3 institutions.
Where a prudentially regulated institution participates in Level 3 group-wide activities, a Level 3 Head must:
consider the risks posed to that institution on a standalone basis as a result of its participation in such activities;
be satisfied that these ITEs are appropriately addressed by the Level 3 group’s risk management policies;
ensure dealings with other parties arising from participation in group-wide operations are appropriately documented in written service agreements;
[2]
  Outsourcing of material business activities to a related entity must satisfy the prudential requirements set out in Prudential Standard CPS 231 Outsourcing.
facilitate APRA being able to obtain information required for the supervision of either individual prudentially regulated institutions or the Level 3 group as a whole; and
ensure that there is a clear obligation under the written arrangements for any service provider to comply with any direction given by APRA in relation to the operations of any prudentially regulated institution within the Level 3 group.

Internal reporting systems

A Level 3 Head’s management information systems must incorporate reporting systems in relation to ITEs across the Level 3 group.
[3]
  Refer to CPS 220.
Reports on material ITEs must be provided to APRA on request.

Limits and approvals

Where, in APRA’s view, the Level 3 group is exposed to a significant level of ITEs, APRA may require a Level 3 Head to limit or reduce the Level 3 group’s level of ITEs. APRA may also determine how a Level 3 Head must calculate the ITEs. In determining any requirement to limit or reduce the Level 3 group’s level of ITEs, or how a Level 3 Head must calculate an ITE, APRA may take account of the following factors:
whether the Level 3 group has been acting in a manner that is consistent with the ITE policy;
the characteristics of ITEs, 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.

Notification requirements

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 ITE policy;
of any significant breach of, or material deviation from, the ITE policy; or
that the ITE 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 ITE policy as soon as practicable, and no more than 10 business days, after Board approval.

Adjustments and exclusions

APRA may adjust or exclude a specific requirement in this Prudential Standard in relation to the Level 3 Head.
[4]
  Refer to subsection 11AF(2) of the Banking Act, subsection 32(3D) of the Insurance Act and subsection 230A(4) of the Life Insurance Act.
Open official version