707.
The counterparty credit risk charge for single
name credit derivative transactions
in
the
trading book will be calculated using the
following potential future exposure
add-on
factors:
There
will be no difference depending on residual
maturity.
The
definition of “qualifying” is the same as for
the “qualifying” category for the treatment
of
specific
risk under the standardised measurement method
in the Market Risk Amendment.
**
The protection seller of a credit default swap
shall only be subject to the add-on factor where
it is subject to closeout upon the insolvency of
the protection buyer while the underlying is
still solvent. Add-on should then be capped to
the amount of unpaid premiums.
708.
Where the credit derivative is a first to
default transaction, the add-on will
be
determined
by the lowest credit quality underlying in the
basket, i.e. if there are any nonqualifying
items in the basket, the non-qualifying
reference obligation add-on should be used.
For
second and subsequent to default transactions,
underlying assets should continue to be
allocated according to the credit quality, i.e.
the second lowest credit quality will
determine
the
add-on for a second to default transaction
etc.
D. Trading book
capital treatment for specific risk under the
standardised
methodology
709.
The following sections describe the changes to
the specific risk capital
treatments
under the
standardised methodology within the trading
book.
(112) These
changes are
consistent
with the changes in the banking book capital
requirements under the standardised
approach.
(112) The specific risk capital
charges for qualifying debt paper and equities
as set out in the Market Risk Amendment remain
unchanged.
1. Specific risk
capital charges for issuer
risk
710.
The new capital charges for “government” and
“other” categories will be as
follows.
711.
When the government paper is denominated in the
domestic currency and funded
by
the bank in the same currency, at national
discretion a lower specific risk charge may
be
applied.
2. Specific risk
rules for unrated debt
securities
712.
Under the Market Risk Amendment unrated
securities may be included in
the
“qualifying”
category when they are subject to supervisory
approval, unrated, but deemed
to
be
of comparable investment quality by the
reporting bank, and the issuer has
securities
listed
on a recognised stock exchange.
This
will remain unchanged for banks using the
standardised approach. For banks using the IRB
approach for a portfolio, unrated securities can
be included in the “qualifying” category if both
of the following conditions are
met:
•
the securities are rated
equivalent (113)
to
investment grade under the reporting
bank’s
internal
rating system, which the national supervisor has
confirmed complies with
the
requirements for an IRB approach;
and
•
the issuer has securities listed on a
recognised stock
exchange.
(113) Equivalent means the debt
security has a one-year PD equal to or less than
the one year PD implied by the long-run average
one-year PD of a security rated investment grade
or better by a qualifying rating
agency.
3. Specific risk
rules for non-qualifying
issuers
712
(i). Instruments issued by a non-qualifying
issuer will receive the same specific
risk
charge
as a non-investment grade corporate borrower
under the standardised approach
for
credit
risk under this Framework. However, since this
may in certain cases
considerably
underestimate
the specific risk for debt instruments which
have a high yield to redemption
relative
to government debt securities, each national
supervisor will have the
discretion:
•
To
apply a higher specific risk charge to such
instruments; and/or
•
To
disallow offsetting for the purposes of defining
the extent of general market
risk
between
such instruments and any other debt
instruments.
In
that respect, securitisation exposures that
would be subject to a deduction treatment under
the securitisation framework set forth in this
Framework (e.g. equity tranches that absorb
first loss), as well as securitisation exposures
that are unrated liquidity lines or letters of
credit should be subject to a capital charge
that is no less than the charge set forth in
the
securitisation
framework.
4. Specific risk
capital charges for positions hedged by credit
derivatives
713.
Full allowance will be recognised when the
values of two legs (i.e. long and
short)
always
move in the opposite direction and broadly to
the same extent. This would be
the
case
in the following situations:
(a)
the two legs consist of completely identical
instruments, or
(b)
a long cash position is hedged by a total rate
of return swap (or vice versa)
and
there
is an exact match between the reference
obligation and the underlying
exposure (i.e. the
cash position). (114)
In
these cases, no specific risk capital
requirement applies to both sides of the
position.
(114)
The maturity of the swap itself may be different
from that of the underlying
exposure.
714.
An 80% offset will be recognised when the value
of two legs (i.e. long and
short)
always
moves in the opposite direction but not broadly
to the same extent. This would be
the
case
when a long cash position is hedged by a credit
default swap or a credit linked note
(or
vice
versa) and there is an exact match in terms of
the reference obligation, the maturity
of
both
the reference obligation and the credit
derivative, and the currency of the
underlying
exposure.
In
addition, key features of the credit derivative
contract (e.g. credit event definitions,
settlement mechanisms) should not cause the
price movement of the credit derivative to
materially deviate from the price movements of
the cash position. To the
extent
that
the transaction transfers risk (i.e. taking
account of restrictive payout provisions such
as
fixed
payouts and materiality thresholds), an 80%
specific risk offset will be applied to
the
side
of the transaction with the higher capital
charge, while the specific risk requirement
on
the
other side will be zero.
715.
Partial allowance will be recognised when the
value of the two legs (i.e. long
and
short)
usually moves in the opposite direction. This
would be the case in the
following
situations:
(a)
the position is captured in paragraph 713 under
(b), but there is an asset
mismatch
between
the reference obligation and the underlying
exposure. Nonetheless, the
position
meets the requirements in paragraph 191
(g).
(b)
The position is captured in paragraph 713 under
(a) or 714 but there is a currency
or
maturity
mismatch
(115) between the credit
protection and the underlying
asset.
(c)
The position is captured in paragraph 714 but
there is an asset mismatch
between
the
cash position and the credit derivative.
However, the underlying asset
is
included
in the (deliverable) obligations in the credit
derivative documentation.
(115)
Currency mismatches should feed into the normal
reporting of foreign exchange
risk.
716.
In each of these cases in paragraphs 713 to 715,
the following rule applies.
Rather
than
adding the specific risk capital requirements
for each side of the transaction (i.e.
the
credit
protection and the underlying asset) only the
higher of the two capital requirements will
apply.
717.
In cases not captured in paragraphs 713 to 715,
a specific risk capital charge will
be
assessed
against both sides of the
position.
718.
With regard to banks’ first-to-default and
second-to-default products in the
trading
book,
the basic concepts developed for the banking
book will also apply. Banks holding
long
positions
in these products (e.g. buyers of basket credit
linked notes) would be treated as
if
they
were protection sellers and would be required to
add the specific risk charges or use
the
external
rating if available. Issuers of these notes
would be treated as if they were
protection
buyers
and are therefore allowed to off-set specific
risk for one of the underlyings, i.e.
the
asset
with the lowest specific risk
charge.
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