Document ID: chunk:federal_register_of_legislation:F2024L01073:reg:4:p15
Version: federal_register_of_legislation:F2024L01073
Segment Type: reg
Provision Reference: reg 4 (pt 15/21)
Character Range: 116184–119284

of the lesser of the amount of the credit protection purchased and the amount of the underlying exposure.
     2.          Where there is a mismatch between the underlying obligation and the reference obligation under the credit derivative, including the obligation used for the purposes of determining the cash settlement value or the deliverable obligation, an ADI may only recognise the credit derivative as eligible CRM if the following conditions are satisfied:
             1.           the reference obligation ranks pari passu with, or is junior to the underlying obligation; and
             2.           the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.
 1.          Where there is a mismatch between the underlying obligation and the obligation used for the purposes of determining whether a credit event has occurred, an ADI may only recognise the credit derivative as eligible CRM if the following conditions are satisfied:
         1.           the obligation used to determine whether a credit event has occurred ranks pari passu with, or is junior to, the underlying obligation; and
         2.           the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.

Eligible credit protection providers
 1.          An ADI must only recognise credit protection provided by the following entities:
         1.           sovereigns;
         2.           banks;
         3.           other entities that are externally rated, where credit protection is provided to a non-securitisation exposure. This includes credit protection provided by parent, subsidiary and affiliate companies where they have a lower risk weight than the borrower; and
         4.           where credit protection is provided to a securitisation exposure, other entities with a credit rating grade of three or better and that were externally rated two or better at the time the credit protection was provided. This also includes credit protection provided by parent, subsidiary and affiliated companies where they have a lower risk weight than the borrower.

Materiality thresholds
     1.          Where a credit derivative provides for a materiality threshold on payments below which no payment will be made in the event of loss, it is equivalent to a retained first loss position and must be deducted from Common Equity Tier 1 Capital in accordance with APS 111. This deduction will be capped at the amount of capital the ADI would be required to hold against the full value of the underlying exposure.

Proportional and tranched cover
     1.          Where there is partial coverage of an underlying exposure by a credit derivative and the protected and unprotected portions are of equal seniority (i.e. the ADI buying credit protection and the protection seller share losses on a pro rata basis), capital relief will be afforded on a proportional