Introduction to Definition of Default Rules

The Definition of Default Rules (RX) module is introduced in Temenos Transact to enable banks to meet the regulatory rules governing the identification of default of an obligor, which has a bearing in regulatory capital requirement calculations. The existing Obligor Objects (OX) module is a pre-requisite, while the Default Contagion (JX) module is optional.

This functionality is developed based on the European Banking Authority (EBA) guidelines and Regulatory Technical Standards (RTS) on the definition of default. However, the framework developed offers the flexibility to the banks in other jurisdictions as well.

The definition of default of an obligor is based on two criteria:

• Days Past Due (DPD) – An obligor is identified as default, when there is a delay in repayment beyond a certain number of days. According to the EBA guidelines, a consecutive period of 90 days for non-repayment of a material past due amount is considered as default. To determine the materiality of the past due amount, a test involving absolute and relative threshold checks are performed. If the breach of the materiality tests continues for 90 consecutive days, an obligor is considered in default based on the days past due or delay in payment.
• Unlikeliness to Pay (UTP) indicators – Refers to when banks have reasonable doubts with regards to the unlikeliness of repayment of the obligation in a timely manner. For example, non-accrued interest status or distressed restructuring are considered as UTP indicators.

Probation Period

When a defaulted obligor is eligible to move to a non-defaulted status, the probation period is applicable according to the regulatory rules. Probation period refers to the time period that an obligor is monitored for, before the defaulted obligor returns to non-default status. The probation period can vary between obligors subjected to distressed restructuring and those obligors who are not. As defined by the EBA, a period of 365 days is allotted for distressed restructuring cases and a minimum of 90 days for other cases.

The Definition of Default Rules module consists of the following features:

Illustrating Model Parameters

This section covers the following Model parameters.

Parameters	Description
PV.DOD.PARAMETER	This parameter is designed to apply and capture the data values required to define the business logic to cater the Definition of Default (DOD) of an obligor. This parameter has the following fields: The Absolute Threshold CCY field specifies the currency used to define the absolute threshold level. The Obligor Classification field indicates whether the obligor is classified as retail or non-retail. The values of this field are Retail or Non-Retail. The Absolute Threshold Amt field holds the amount to define the absolute threshold level for an obligor. The Relative threshold Percentage field holds the relative threshold percentage as applicable for obligor. The Retail Facility Level DPD field specifies the level of application of default for retail obligors. The values of this field are Facility or Obligor. The Default DPD Count field specifies the number of days to identify the default upon the consecutive breach of Absolute and Relative threshold levels. The Prob Default Monitor field allows the Automatic or Manual values to decide whether the probation default flag removal, on completion of probation period, should be automatic or manual. The Standard Probation Period field defines the number of days for probation for other obligations. The Distressed Probation period field defines the probation period for a restructured obligation. The UTP Indicator field defines the UTP indicator. The UTP Indicator Threshold Percentage field defines the UTP indicator threshold percentage. The Exposure Excl Bal Type field specifies the exposure exclusion balance type. The Past Due Excl Bal Type field specifies the past due exclusion balance type. The Distressed Probation Start Date field indicates the start date of probation for the Distressed Restructuring cases. The options are Probation Default Date or DR Date.
PV.UTP.INDICATORS	This 'Unlikely to Pay Indicators' table stores records of all UTP indicators and related details. This table has the following fields: The Description field displays the UTP (Unlikely to Pay) Indicator description. The UTP Classification field influences the working of the system about UTP setting at obligor level. This field has Manual and Automatic field values. The UTP Regulatory/Additional field displays whether the UTP is specified in the regulation or an additional one at the discretion of the bank. The UTP Type field specifies the UTP type. Selection from the EB Lookup dropdown list. The Pulling Effect Test field allows the bank’s user to define whether the pulling effective test, one of the ‘Unlikeliness Indicators to Pay’ is required or not, in case of retail obligors with application of DOD at facility level. The Distressed Restructuring Utp field allows the bank user to define whether the UTP is a distressed restructuring or not. List of possible UTPs as per the regulatory DOD rules are: Additional Collateral Bankruptcy Breach Covenant Contract Delay Payment Distressed Restructuring External Source Future Cash flow Doubtful Income Sources Concern Increase Obligor Leverage Non-Accrued Status Pulling Effect Purchase Asset Discount Sale Credit Obligation SCRA and Sector Crisis The above list of UTP indicators is explained in the ‘Unlikeliness to Pay Indicator’ (UTP) section in the Definition of Default Rules module.