CA-9.2.8

Unrated securities may be included in the "qualifying" category when they are (subject to CBB's 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 applying the standardised approach. For banks applying the IRB approach for a portfolio, unrated securities can be included in the "qualifying" category if both of the following conditions are met:

CA-9.2.9

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 chapter CA-4.

CA-9.2.10

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, CBB will have the discretion, on a case by case basis:

CA-9.2.11

In that respect, securitisation exposures that would be subject to a deduction treatment under the securitisation framework set forth in chapter CA-6 (e.g. equity tranches that absorb first loss), as well as securitisation exposures that are unrated liquidity lines or letters of credit must be subject to a capital charge that is no less than the charge set forth in the securitisation framework.

CA-9.2.11A

The specific risk of securitisation positions as defined in Paragraphs CA-6.1.1 to CA-6.1.6 which are held in the trading book is to be calculated according to the method used for such positions in the banking book unless specified otherwise below. To that effect, the risk weight has to be calculated as specified below and applied to the net positions in securitisation instruments in the trading book. The total specific risk capital charge for the correlation trading portfolio is to be computed according to Paragraph CA-9.2.17, and the total specific risk capital charge for securitisation exposures is to be computed according to Paragraph CA-9.1.4.

CA-9.2.11B

The specific risk capital charges for positions covered under the standardised approach for securitisation exposures are defined in the table below. These charges must be applied by banks using the standardised approach for credit risk. For positions with long-term ratings of B+ and below and short-term ratings other than A-1/P-1, A-2/P-2, A-3/P-3, deduction from capital as defined in Paragraph CA-6.4.2 is required. Deduction is also required for unrated positions with the exception of the circumstances described in Paragraphs CA-6.4.12 to CA-6.4.16. The operational requirements for the recognition of external credit assessments outlined in Paragraph CA-6.4.6 apply.

Specific Risk Capital Charges under the Standardised Approach Based on External Credit Ratings

CA-9.2.11C

The specific risk capital charges for rated positions covered under the internal ratings-based approach for securitisation exposures are defined in the table below. For positions with long-term ratings of B+ and below and short-term ratings other than A-1/P-1, A-2/P-2, A-3/P-3, deduction from capital as defined in Paragraph CA-6.4.2 is required. The operational requirements for the recognition of external credit assessments outlined in Paragraph CA-6.4.6 apply:

CA-9.2.11D

The specific risk capital charges for unrated positions under the securitisation framework as defined in Paragraphs CA-6.1.1 to CA-6.1.6 will be calculated as set out below, subject to CBB approval:

The resulting specific risk capital charge must not be lower than any specific risk capital charge applicable to a rated more senior tranche. If a bank is unable to determine the specific risk capital charge as described above or prefers not to apply the treatment described above to a position, it must deduct that position from capital.

CA-9.2.11E

A position subject to deduction according to Paragraphs CA-9.2.11B to CA-9.2.11D may be excluded from the calculation of the capital charge for general market risk whether the bank applies the standardised measurement method or the internal models method for the calculation of its general market risk capital charge.

CA-9.2.12

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:

⁶⁵ 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.

⁶⁶ The maturity of the swap itself may be different from that of the underlying exposure.

CA-9.2.13

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 to 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.

CA-9.2.14

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:

⁶⁷ Currency mismatches should feed into the normal reporting of foreign exchange risk.

CA-9.2.15

In each of these cases in Paragraphs CA-9.2.12 to CA-9.2.14, 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.

CA-9.2.16

In cases not captured in Paragraphs CA-9.2.12 to CA-9.2.14, a specific risk capital charge will be assessed against both sides of the position.

CA-9.2.17

An n-th-to-default credit derivative is a contract where the payoff is based on the n-th asset to default in a basket of underlying reference instruments. Once the n-th default occurs the transaction terminates and is settled: