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Basel ii Accord Sections 202 to 210

6. Maturity mismatches
202. For the purposes of calculating risk-weighted assets, a maturity mismatch occurs
when the residual maturity of a hedge is less than that of the underlying exposure.
 
(i) Definition of maturity
 
203. The maturity of the underlying exposure and the maturity of the hedge should both
be defined conservatively. The effective maturity of the underlying should be gauged as the
longest possible remaining time before the counterparty is scheduled to fulfil its obligation,
taking into account any applicable grace period.
 
For the hedge, embedded options which may reduce the term of the hedge should be taken into account so that the shortest possible effective maturity is used. Where a call is at the discretion of the protection seller, the maturity will always be at the first call date. If the call is at the discretion of the protection buying bank but the terms of the arrangement at origination of the hedge contain a positive incentive for the bank to call the transaction before contractual maturity, the remaining time to the first call date will be deemed to be the effective maturity.
 
For example, where there is a step-up in cost in conjunction with a call feature or where the effective cost of cover increases over time even if credit quality remains the same or increases, the effective maturity will be the remaining time to the first call.
 
(ii) Risk weights for maturity mismatches
 
204. As outlined in paragraph 143, hedges with maturity mismatches are only recognised
when their original maturities are greater than or equal to one year. As a result, the maturity
of hedges for exposures with original maturities of less than one year must be matched to be
recognised. In all cases, hedges with maturity mismatches will no longer be recognised when they have a residual maturity of three months or less.
 
205. When there is a maturity mismatch with recognised credit risk mitigants (collateral,
on-balance sheet netting, guarantees and credit derivatives) the following adjustment will be
applied.
 
Pa = P x (t – 0.25) / (T – 0.25)
 
where:
 
Pa = value of the credit protection adjusted for maturity mismatch
 
P = credit protection (e.g. collateral amount, guarantee amount) adjusted for
any haircuts
 
t = min (T, residual maturity of the credit protection arrangement) expressed in
years
 
T = min (5, residual maturity of the exposure) expressed in years
 
7. Other items related to the treatment of CRM techniques
 
(i) Treatment of pools of CRM techniques
 
206. In the case where a bank has multiple CRM techniques covering a single exposure
(e.g. a bank has both collateral and guarantee partially covering an exposure), the bank will
be required to subdivide the exposure into portions covered by each type of CRM technique
(e.g. portion covered by collateral, portion covered by guarantee) and the risk-weighted
assets of each portion must be calculated separately.
 
When credit protection provided by a single protection provider has differing maturities, they must be subdivided into separate protection as well.
 
(ii) First-to-default credit derivatives
 
207. There are cases where a bank obtains credit protection for a basket of reference
names and where the first default among the reference names triggers the credit protection
and the credit event also terminates the contract. In this case, the bank may recognise
regulatory capital relief for the asset within the basket with the lowest risk-weighted amount,
but only if the notional amount is less than or equal to the notional amount of the credit
derivative.
 
208. With regard to the bank providing credit protection through such an instrument, if the
product has an external credit assessment from an eligible credit assessment institution, the
risk weight in paragraph 567 applied to securitisation tranches will be applied.
 
If the product is not rated by an eligible external credit assessment institution, the risk weights of the assets included in the basket will be aggregated up to a maximum of 1250% and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk-weighted asset amount.
 
(iii) Second-to-default credit derivatives
 
209. In the case where the second default among the assets within the basket triggers
the credit protection, the bank obtaining credit protection through such a product will only be able to recognise any capital relief if first-default-protection has also be obtained or when one of the assets within the basket has already defaulted.
 
210. For banks providing credit protection through such a product, the capital treatment is
the same as in paragraph 208 above with one exception. The exception is that, in
aggregating the risk weights, the asset with the lowest risk weighted amount can be excluded from the calculation.
  
 

 

 

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