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  • — Treatment of Guarantees and Credit Derivatives

    • CA-5.3.29

      CRM in the form of guarantees and credit derivatives must not reflect the effect of double default (see paragraph CA-5.8.93). As such, to the extent that the CRM is recognised by the bank, the adjusted risk weight will not be less than that of a comparable direct exposure to the protection provider. Consistent with the standardised approach, banks may choose not to recognise credit protection if doing so would result in a higher capital requirement.

      Apr 08

    • CA-5.3.30

      The approach to guarantees and credit derivatives closely follows the treatment under the standardised approach as specified in paragraphs CA-4.5.1 to CA-4.5.13. The range of eligible guarantors is the same as under the standardised approach except that companies that are internally rated and associated with a PD equivalent to A- or better may also be recognised. To receive recognition, the requirements outlined in paragraphs CA-4.5.1 to CA-4.5.6 must be met.

      Apr 08

    • CA-5.3.31

      Eligible guarantees from eligible guarantors will be recognised as follows:

      (a) For the covered portion of the exposure, a risk weight is derived by taking:
      •   the risk-weight function appropriate to the type of guarantor, and
      •   the PD appropriate to the guarantor's borrower grade, or some grade between the underlying obligor and the guarantor's borrower grade if the bank deems a full substitution treatment not to be warranted.
      (b) The bank may replace the LGD of the underlying transaction with the LGD applicable to the guarantee taking into account seniority and any collateralisation of a guaranteed commitment.
      Apr 08

    • CA-5.3.32

      The uncovered portion of the exposure is assigned the risk weight associated with the underlying obligor.

      Apr 08

    • CA-5.3.33

      Where partial coverage exists, or where there is a currency mismatch between the underlying obligation and the credit protection, it is necessary to split the exposure into a covered and an uncovered amount. The treatment in this approach follows that outlined in the standardised approach in paragraphs CA-4.5.10 to CA-4.5.12, and depends upon whether the cover is proportional or tranched.

      Apr 08

    • CA-5.3.34

      A bank using an IRB approach has the option of using the substitution approach in determining the appropriate capital requirement for an exposure. However, for exposures hedged by one of the following instruments the double default framework according to paragraphs CA-5.3.12 to CA-5.3.16 may be applied subject to the additional operational requirements set out in paragraph CA-5.3.39. A bank may decide separately for each eligible exposure to apply either the double default framework or the substitution approach:

      (a) Single-name, unfunded credit derivatives (e.g. credit default swaps) or single-name guarantees;
      (b) First-to-default basket products — the double default treatment will be applied to the asset within the basket with the lowest risk-weighted amount; and
      (c) nth-to-default basket products — the protection obtained is only eligible for consideration under the double default framework if eligible (n-1)th default protection has also been obtained or where (n-1) of the assets within the basket have already defaulted.
      Amended: April 2011
      Apr 08