Related Counterparties
Contents
Definition
The concept of Related Counterparties applies to all legal entities that may exhibit economically strongly correlated (dependent) behaviour, in particular in the case of a Credit Event due to economic and legal relations. (Also Connected Counterparties or Connected Clients). Related counterparties are typically part of a Counterparty Group.
Related counterparties may be:
- two or more natural persons or legal persons who, unless it is shown otherwise, constitute a single risk because one of them, directly or indirectly, has control over the other
- two or more natural or legal persons between whom there is no relationship of control but who are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, the other or all of the others would be likely to encounter repayment difficulties
Control means the relationship between a parent undertaking and a subsidiary or a similar relationship between any natural or legal person and an undertaking[1]
Identification
Related counterparties stem principally by direct or indirect economic interest via significant (majority) shareholdings. Other mechanisms that establish close economic relation:
- Legal liability stemming from law and/or agreement
- Moral liability based on written or verbal commitments
- Minority interest combined with a management contract/control.
- Substantial degree of support through intercompany loans.
The understanding of groups of connected clients and the classification of country of ultimate borrower are included in an Asset Quality Review[2] as any issues identified have a direct impact of credit file review.
Focus Areas
- Methodology and systems capabilities for producing debtor level view of portfolio for non- retail clients, including links outside of consolidated legal entities
- Approach to considering links created by Cross Default.
- Approach to considering links created by Cross Collateralisation.
- Bank policy for identification of a connection between clients, as per CRR requirements, including consideration of:
- Direct or indirect control by one client over the other
- Material economic dependency between clients
- Methodology for identification of country of ultimate borrower (including consideration of enforceability across the connected group);
Issues and Challenges
- Exposures to a single counterparty, may have been originated by different captive companies.
- Entities of the Counterparty Group may use different IT systems to store assets data
- The incorrect treatment of two connected clients may lead to the double counting of collateral (e.g. in the case of second lien mortgages). Further, the sampling process for credit file reviews relies on identification of debtors connected to those selected in the initial sample.
