Financial Sector (Collection of Data) (reporting standard) determination No. 6 of 2009 LRS 210.0 Derivatives, Commitments and Off-Balance Sheet Items (Cth)
Financial Sector (Collection of Data) (reporting standard) determination No. 6 of 2009
Reporting standard LRS 210.0 Derivatives, Commitments and Off-Balance Sheet Items
Financial Sector (Collection of Data) Act 2001
I, John Roy Trowbridge, a delegate of APRA, under paragraph 13(1)(a) of the Financial Sector (Collection of Data) Act 2001 (the Act) and subsection 33(3) of the Acts Interpretation Act 1901:
REVOKE Reporting Standard LRS 210.0 Derivatives, Commitments and Off-Balance Sheet Items made by Financial Sector (Collection of Data) (reporting standard) determination No. 21 of 2007 (the old standard); and
DETERMINE Reporting Standard LRS 210.0 Derivatives, Commitments and Off-Balance Sheet Items in the form set out in the Schedule (the new standard), which applies to the financial sector entities to the extent provided in paragraph 2 of the reporting standard.
Under section 15 of the Act, I DECLARE that the new standard shall begin to apply to those financial sector entities, and the old standard shall cease to apply, on the later of 1 October 2009 and the date of registration of this instrument on the Federal Register of Legislative Instruments.
Dated 17 July 2009
[Signed]
John Trowbridge
Member
Interpretation
In this Determination
APRA means the Australian Prudential Regulation Authority.
Federal Register of Legislative Instruments means the register established under section 20 of the Legislative Instruments Act 2003.
Schedule
Reporting Standard LRS 210.0 Derivatives, Commitments and Off-Balance Sheet Items comprises 18 pages commencing on the following page.
Reporting Standard LRS 210.0
Derivatives, Commitments and Off-Balance Sheet Items
Objective of this reporting standard
This reporting standard is made under section 13 of the Financial Sector (Collection of Data) Act 2001. It requires all registered life insurance companies to report to APRA, in general, on a quarterly and an annual basis in relation to derivatives, commitments and off-balance sheet items.
This reporting standard outlines the overall requirements for the provision of relevant information to APRA. It should be read in conjunction with Form LRF 210.0 Derivatives, Commitments and Off-Balance Sheet Items, and the associated instructions (both of which are attached and form part of this reporting standard).
Purpose
Information collected in Form LRF 210.0 Derivatives, Commitments and Off-Balance Sheet Items (LRF 210.0) is used by APRA for the purpose of prudential supervision, including assessing compliance with prudential standards where appropriate. It may also be used by the Reserve Bank of Australia, the Australian Bureau of Statistics and the Australian Securities and Investments Commission.
Application and commencement
This reporting standard applies to all life insurance companies including friendly societies (together referred to as life companies) registered under the Life Insurance Act 1995 (Life Insurance Act) for reporting periods commencing on or after 1 October 2009.
Information required
A life company must provide APRA with the information required by Form LRF 210.0 for each reporting period.
Note: The instructions for Form LRF 210.0 explain in more detail the information that is required.
The information required to be provided to APRA under this reporting standard is not intended to form part of the financial statements or the annual returns, within the meaning of section 124 of the Life Insurance Act, given by the life company to APRA.
Method of submission
The information required by this reporting standard must be given to APRA either:
(a) in electronic form using the ‘Direct to APRA’ application, applying one of the electronic submission mechanisms under that application; or
(b) by completing Form LRF 210.0 on paper and mailing the completed form to APRA
Note: The ‘Direct to APRA’ application software and paper forms may be obtained from APRA.
Reporting periods and due dates
Subject to paragraph 7, a life company must provide the information required by this reporting standard:
(a) in unaudited form - in respect of each quarter based on the financial year
of the life company; and
(b) in audited form - in respect of each financial year of the life company.
Note 1: This means that this form will be submitted five times for a full financial year.
Note 2: The annual audited form must be submitted in conjunction with the annual auditor’s report, as required under Prudential Standard LPS 310 Audit and Actuarial Requirements.
APRA may, by notice in writing, change the reporting periods, or specified reporting periods, for a particular life company, to require it to provide the information required by this reporting standard more frequently, or less frequently, having regard to:
(a)the particular circumstances of the life company;
(b)the extent to which the information is required for the purposes of the prudential supervision of the life company; and
(c)the requirements of the Reserve Bank of Australia or the Australian Bureau of Statistics or the Australian Securities and Investments Commission.
The quarterly information required by this reporting standard in unaudited form must be provided to APRA within 20 business days after the end of the reporting period to which the information relates. The annual information required by this reporting standard in audited form must be provided to APRA within four months after the end of the reporting period to which the information relates.
APRA may grant a life company an extension of a due date in writing, in which case the new due date for the provision of the information will be the date on the notice of extension.
Quality control
The information provided by a life company under this reporting standard must be the product of processes and controls that have been reviewed and tested by the auditor of the life company.
All information provided by a life company under this reporting standard must be subject to processes and controls developed by the life company for the internal review and authorisation of that information. It is the responsibility of the board and senior management of the life company to ensure that an appropriate set of policies and procedures for the authorisation of data submitted to APRA is in place.
Actuarial valuations and calculations included in, or used in the preparation of, the information provided to APRA must be in accordance with the prudential standards in force for the reporting period. However, life companies may use reasonable estimates when preparing information that will not be audited (i.e. for the first four submissions of information for a full financial year). The instructions to Form LRF 210.0 include general principles on the use of estimates.
Authorisation
If the officer of a life company provides the information required by this reporting standard:
(a)using Direct to APRA (D2A), the officer must digitally authorise, submit the data to APRA and receive a D2A receipt number for the information to be considered given to APRA. APRA will issue ‘digital certificates’ to officers of the life company who have authority to transmit the data to APRA; or
(b)on paper, the relevant completed form must be signed on the front page by the principal executive officer or chief financial officer of the life company.
Note: Information in draft returns saved at APRA using D2A will not be considered to be provided to APRA for the purposes of the life company's obligations under this reporting standard.
Transitional
A life company must report in relation to a reporting period ending prior to 1 October 2009 in accordance with the reporting standard that this reporting standard replaces rather than under this reporting standard.
Interpretation
In this reporting standard:
business days means ordinary business days, exclusive of Saturdays, Sundays or public holidays;
principal executive officer means the principal executive officer of the life company for the time being, by whatever name called, and whether or not he or she is a member of the governing board of the entity;
reporting period means a reporting period under paragraph 6 or, if applicable, paragraph 7.
A reference to a prudential standard means the prudential standard made under section 230A of the Life Insurance Act mentioned in the reference, as amended from time to time. If the prudential standard has been revoked and replaced, the reference shall be taken to be to the prudential standard that has replaced it.
Reporting Form LRF 210.0
Derivatives, Commitments and Off-Balance Sheet Items
Instruction Guide
Introduction
Form LRF 210.0 Derivatives, Commitments and Off-Balance Sheet Items (LRF 210.0) provides APRA with the necessary information on the potential effects and values of derivative activity, charges or commitments, and non-market related off-balance sheet transactions on the assets of a statutory fund.
This Instruction Guide is designed to assist reporting entities in the completion of LRF 210.0. The Instruction Guide provides:
·general directions and notes regarding preparation and lodgement; and
·instructions relating to specific items.
General directions and notes
Reporting levels
LRF 210.0 must be completed by all life insurance companies, including friendly societies.
The form is to be completed separately for each statutory fund (approved benefit fund), except for a fund solely devoted to investment linked business, in which case the form is not required to be completed.
LRF 210.0 contains three sections:
·Section A: Statement of Derivative Activity;
·Section B: Non-Market Related Off-Balance Sheet Items; and
·Section C: Other Off-Balance Transactions, including Charges and Encumbrances.
Within each section, reporting items are to be completed at total fund level, under the various categories of data required.
Unit of measurement
LRF 210.0 is to be prepared in thousands of Australian dollars (AUD). Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates.
Definitions
Definitions for data reporting items required by this form have been provided where appropriate in the instructions under the section headed ‘Instructions for specific items’.
Definitions, unless specified, apply to all life insurance companies, including friendly societies as if each reference to a statutory fund, or shareholders’ fund, were a reference to an approved benefit fund, or management fund, respectively. Likewise, reference to shareholders should be taken to embrace ‘members’ of a mutual association and/or a society. The term ‘life companies’ or ‘life insurance companies’ includes friendly societies unless stated otherwise. This is in line with the usage of terms in the Life Insurance Act 1995.
Reporting period
Life companies are required to report the information in the reporting form on a quarterly and annual basis.
·The quarterly information is to be completed as at the end of each quarter based on the financial year of the life company, not the calendar year.
·The annual information is to be completed as at the end of the financial year of the life company.
·The financial information required in this form is to be reported as at the close of business for the last day of the reporting period.
Basis of preparation
In completing this form, unless specifically stated otherwise, institutions are to follow the basis that is used for the preparation of the annual financial statements in accordance with the Australian accounting standards.
Actuarial valuations and calculations included in, or used in the preparation of, the form must be in accordance with prudential standards.
If additional clarification is required for specific items in this form, reference should be made to the section ‘Instructions for specific items’, which is provided as a guide.
Instructions for specific items
While these instructions apply to all life insurance companies, including friendly societies, not all items may be applicable to both: some items may not be applicable to friendly societies while others may not be applicable to life insurers.
Principal Amount
The principal amount refers to the face value or gross amount of a given off-balance sheet transaction and not the fair value. The principal amount must be reported as a positive value, even for short positions in derivative financial instruments.
Fair value
The fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable and willing parties in an arm’s-length transaction. The fair value should be able to be determined through observation of similar transactions, quoted market prices, independent valuations or if there is no readily observable market, through the ability to liquidate the investment or through assessing the net present value of future cash flows.
Record the aggregate fair (or market) value of the derivative exposure/position by summing the absolute fair value of each exposure, for each of the items listed.
For the purposes of valuing derivative exposures, for this form, fair value should represent an estimate of the amount, which could be expected to be received from the disposal of the derivative instrument in an orderly market, ignoring transaction costs. It is not necessarily related to the nominal value of the derivative.
Market value
Market value is defined for accounting purposes as a subset of fair value and is determined as follows:
(i) the quoted market price in an active and liquid market; or
(ii) when there is infrequent activity in a market, the market is not well established, small volumes are traded relative to the asset or liability to be valued, or a quoted market price is not available – an estimate of a price for the asset or liability in an active and liquid market.
Section A: Statement of Derivative Activity
The Statement of Derivative Activity is for information purposes. Life companies should report all derivative instruments held at the reporting date in the principal (or notional) amount column and the fair value column.
The following sections give examples of the more common derivatives which are traded on exchanges, traded over-the-counter, or not market-traded. This is not intended as an exhaustive list.
Life companies should not generally enter into contracts at off-market prices. This includes historical rate rollovers on foreign exchange contracts. If any contracts are undertaken at off-market prices, life companies should contact APRA to discuss the reasons for such actions. APRA would generally expect that the risk management arrangements for off-market price dealings would be covered in the Risk Management Strategy (RMS) required under Prudential Standard LPS 220 Risk Management.
Breakdown 1: By trade method
The following items form the row headings of the Section A table.
Exchange-Traded Derivatives (traded on recognised exchanges)
Derivatives that are traded on recognised exchanges, as defined in Schedule 7 of the Life Insurance Regulations 1995.
Offsetting positions (e.g. buy a call and write a call with same exercise price and expiry date) can be excluded if both contracts are exchange traded on the same exchange. In all other circumstances, contracts should be reported on a ‘gross’ basis.
Over-The-Counter Derivatives
·2.1 Forwards
·2.2 Swaps
·2.3 Bought option positions
·2.4 Written option positions
·2.5 Credit derivatives - bought protection
·2.6 Credit derivatives - sold protection
·2.7 Other – include all other over-the-counter derivatives not specifically categorised above.
Total Derivatives [derived item]
This item is calculated automatically by the form.
Breakdown 2: By contract type
For each category of derivative contract listed below, report the Principal Amount and the Fair Value. Life companies may refer to APRA where they are unclear as to which category is appropriate for a particular derivative when reporting the principal amount and fair value of that derivative.
The following items form the column headings of the Section A table.
Column 1-2: Interest rate contracts
All instruments that have the objective of managing interest rate risk. Do not include contracts which manage both interest rate risk and foreign exchange risk.
Include:
·single currency interest rate swaps;
·basis swaps;
·forward rate agreements;
·interest rate futures; and
·interest rate options purchased.
Column 3-4: Foreign exchange contracts (including contracts involving gold)
All instruments that have the objective of managing foreign exchange risk. Include contracts which manage both interest rate risk and foreign exchange risk.
Include:
·cross currency swaps;
·forward foreign exchange contracts;
·currency futures;
·currency options purchased; and
·hedge contracts.
Outstanding spot transactions should be treated as forward foreign exchange contracts.
Column 5-6: Equity contracts
All derivative contracts based on individual equities or equity indices that have the objective of managing equity price risk
Include:
· swaps;
·forwards;
·futures;
·purchased options/warrants; and
Column 7-8: Other derivative contracts
Include:
·credit derivatives;
·commodity derivatives; and
·any contracts covering other items, that give rise to credit risk.
Section B: Non-market related off-balance sheet transactions
Report the principal amount of all non-market related off-balance sheet transactions that give rise to credit exposures.
The categories of non-market related off-balance sheet transactions are as follows:
4.1. Direct credit substitutes
Any irrevocable off-balance sheet obligations that carry the same credit risk as a direct extension of credit, such as an undertaking to make a payment to a third party in the event that a counterparty fails to meet a financial obligation, or an undertaking to a counterparty to acquire a potential claim on another party in the event of default by that party, constitutes a direct credit substitute (i.e. the risk of loss depends on the creditworthiness of the counterparty or the party on whom a potential claim is acquired).
Include:
·potential credit exposures arising from the issue of guarantees and credit derivatives (credit derivatives where protection is sold);
·confirmation of letters of credit;
·issue of standby letters of credit serving as financial guarantees for loans, securities and any other financial liabilities; and
·bills endorsed under bill endorsement lines (but are not accepted by, or have the prior endorsement of, an ADI).
4.2. Performance-related contingencies
Contingent liabilities that involve an irrevocable obligation to pay a third party in the event that a counterparty fails to fulfil or perform a contractual non-monetary obligation, such as delivery of goods by a specified date, etc (i.e. the risk of loss depends on a future event that is not directly related to the creditworthiness of the counterparty involved).
Include:
·issue of performance bond;
·bid bonds;
·warranties;
·indemnities; and
·standby letters of credit in relation to a non-monetary obligation of a counterparty under a particular transaction.
4.3. Trade-related contingencies
Contingent liabilities arising from trade-related obligations that are secured against an underlying shipment of goods.
Include:
·documentary letters of credit issued;
·acceptances on trade bills;
·shipping guarantees issued; and
·any other trade-related contingencies.
4.4. Sale & repurchase agreements (‘Repos’)
This relates to arrangements whereby a life company sells a loan, security or other asset to another party with a commitment to repurchase the asset at an agreed price on an agreed future date.
4.5. Assets sold with recourse
Include:
·any asset sales (to the extent that such assets are not included in on-balance sheet) by a life company where the holder of the asset is entitled to ‘put’ the asset back to the life company within an agreed period or under certain prescribed circumstances, e.g. deterioration in the value or credit quality of the asset concerned.
4.6. Forward asset purchases
Include:
·commitments to purchase at a future date and on pre-arranged terms; and
·a loan, security or other asset from another party, including written put options on specified assets with the character of a credit enhancement.
Where a life company purchasing the asset has an unequivocal right to substitute cash settlement in place of accepting delivery of the asset, and the price on settlement is calculated with reference to a general market price indicator (and not to the financial condition of any specific entity), the purchase may be treated as a market-related off-balance sheet transaction.
Written put options expressed in terms of market rates for currencies or financial instruments bearing no credit risk are excluded.
4.7. Partly paid shares and securities
Include:
·any amounts owing on the uncalled portion of partly paid shares; and
·securities that represent commitments with certain draw down by the issuer at a future date.
4.8. Placements of forward deposits
This relates to any agreement between a life company and another party whereby the life company will place a deposit at an agreed rate of interest with that party at a predetermined future date.
4.9. Note issuance and revolving underwriting facilities
This involves arrangements whereby a borrower may draw down funds up to a prescribed limit over a predefined period by making repeated note issues to the market, and where, should the issue prove unable to be placed in the market, the unplaced amount is to be taken up or funds made available by a life company being committed as an underwriter of the facility.
4.10. Other commitments
4.10.1. Loans Approved but Not Yet Advanced
Report the principal amount of loans that are approved but not yet drawn.
4.10.2.Any other irrevocable commitments
The amount of undrawn commitment to be included in calculating life companies’ off-balance sheet non-market related credit exposures is the maximum unused portion of the commitment that could be drawn during the remaining period to maturity. The drawn portion of a commitment forms part of a life company’s on-balance sheet credit exposure.
4.10.3.Commitments that can be unconditionally revoked at any time without notice
4.11. All other non-market related off-balance sheet items
For any non-market related off-balance sheet transactions that give rise to credit risk but are not specifically identified above, a life company should consult APRA on the appropriate counterparty grade to be used for calculating the credit risk component of the resilience reserve for solvency and capital adequacy purposes.
Section C: Other off-balance sheet transactions
Off-balance Sheet Liquidity Support Facilities Contracted for Reporting Entity’s Use
This section captures information on liquidity support facilities contracted by the life company to supplement its liquidity requirements.
Column 1: Approved balance available
Include:
·the total approved balance of the facility at the reporting date.
Column 2: Undrawn balance available
Include:
·the balance of the facility that has not been used or drawn down by the life company at the reporting date.
5.1. Standby facilities
These facilities are approved and committed. These generally require written notice by the life company to trigger draw down (access to the funds).
5.1.1.Facilities with same day draw down
Include:
·those standby facilities that can be drawn down (funds accessed) on the same day that notice is given by the life company of its intention to draw down on the standby facility.
5.1.2. Facilities with 2 - 5 day draw down
Include:
·those standby facilities that can be drawn down (funds accessed) within two-five days after notice is given by the life company of its intention to draw down on the standby facility (i.e. a two-five day waiting period).
5.1.3.Facilities with greater than 5 days draw down
Include:
·those standby facilities that can be drawn down (funds accessed) five days after notice is given by the life company of its intention to draw down on the standby facility (i.e. a five day waiting period).
5.2. Bill acceptance/discount facilities
These are another form of liquidity/funding. The funding is provided to the life company by a facility that discounts bills (e.g. bank accepted bills). Principle and interest (discount) owing on the bill is repaid or ‘rolled over’ by the life company on maturity of the bill.
5.3. Letter of credit facilities
This is an irrevocable and unconditional undertaking covering a life company to repay principle and interest of a loan in the event of default by the life company.
5.4. Overdrafts
These are accounts that may be overdrawn up to limits agreed to with an ADI.
5.5. Other liquidity support facilities
All other off-balance sheet liquidity support facilities contracted for the life company’s use that are not included in the categories above.
5.6. Total off-balance sheet liquidity support facilities [derived item]
Charges and Encumbrances
Column 1: Purpose of Charge/Encumbrance
The purposes are set out in the Life Insurance Act 1995, Sections 38 and 40.
Column 2: Type of Charge/Encumbrance
The following is not an exhaustive list but is provided as an example:
Fixed charge
A fixed charge is generally given in relation to a specific asset or assets and it will generally limit the ability or right of the life company to deal with those assets.
Floating charge
A floating charge may be given over specific assets or all assets of the life company and may generally only crystallise and become a fixed charge on the occurrence of a specific event that is agreed between the parties (i.e. default on payment, or not maintaining specified interest coverage ratios).
Column 3: Principal Value of the charge
This refers to the principal or face value or amount of the charge or encumbrance given over assets of the life company.
Column 4: Outstanding Value of the charge
This refers to the outstanding value of the charge or encumbrance (as at the reporting date) given over assets of the life company.
Column 5: Value of assets subject to the charge
For each separate charge listed, report in this column the value of the assets that are subject to the charge or encumbrance.
Column 6: Extent of Indebtedness Secured By Assets [derived item]
This field is automatically calculated. For each separate charge listed, the form will calculate the dollar value to which the assets are charged. It equals the minimum of the value of the assets subject to the charge (column 5) and the outstanding value of the charge granted (column 4).
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