Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p49
Version: federal_register_of_legislation:F2024L01519
Segment Type: other
Provision Reference: 
Character Range: 135595–138525

transacts more complex credit derivatives that fall outside the scope of this Attachment must, prior to execution of the relevant credit derivative contract, undertake a written assessment of the appropriate regulatory capital treatment for the transaction. The ADI must provide its written assessment to APRA upon request. The ADI must apply the treatment set out in its written assessment unless APRA determines, in writing, an alternative methodology for calculating the regulatory capital treatment.

     2.              Where APRA considers that an ADI is undertaking significant credit derivative activity, as either a purchaser or seller of protection, such that large exposures and concentrations are a potential concern, APRA may, in writing, require the ADI to adopt an alternative capital treatment to that described in this Attachment.

     3.              An ADI may use either the standard method or, with APRA's approval, either an internal model or other method to measure the general market risk and specific risk charges on credit derivative positions in the trading book. This Attachment outlines the calculation of the capital charge for credit derivatives under the standard method. An ADI that wishes to use an internal risk measurement model to generate the capital requirement must obtain APRA's written approval.

General principles - General market risk
     1.              An ADI that uses the standard method must treat credit derivatives based on a single reference entity in the same way as interest-rate-related derivatives (refer to Attachment B) for the purposes of calculating a general market risk capital charge. Each credit derivative instrument must be broken down into a notional debt instrument, to reflect the interest rate or fee-paying leg (if regular fees are paid under the terms of the contract) and, where applicable, a position in the reference obligation.

     2.              An ADI must include these positions in the maturity ladder applicable to the currency of the cash flows and report at their market values.

General principles - Specific risk
     1.              Where the credit-event payment is defined as the par value of the reference obligation less its recovery value (i.e. the credit derivative is cash settled), an ADI must report for specific risk purposes the par value of the reference obligation. Where the credit-event payment is defined as a fixed amount, the ADI must report the fixed amount. Where there is payment of the par value of an obligation in exchange for its physical delivery, the ADI must report the par value of the obligation. In the latter two cases, the amount reported must reflect a position in the reference entity with maturity equal to the term to maturity of the credit derivative.

Credit-default swaps
     1.              If an ADI is a protection buyer in a credit-default swap, it must enter into the maturity ladder a