Document ID: chunk:federal_register_of_legislation:F2023L00676:reg:7:p2
Version: federal_register_of_legislation:F2023L00676
Segment Type: reg
Provision Reference: reg 7 (pt 2/2)
Character Range: 26811–28520

grade 1 must be treated as grade 1 (government) and assets with counterparty grade 2 must be treated as grade 1 (other).

Illiquidity premium
72.         Liabilities whose value depends on the illiquidity premium must be revalued using a stressed illiquidity premium. The stress adjustment to the illiquidity premium is an increase of 30 basis points to the forward rates for the first 10 years after the reporting date and zero thereafter. The stressed illiquidity premium is subject to a maximum of 150 basis points.
73.         The risk charge component for the credit spreads stress must not be less than an amount calculated by multiplying the value of each asset by the default factor specified in paragraph 62 and adding the results for all assets to which the credit spreads stress applies.

Default stress
74.         This stress applies to reinsurance assets, over-the-counter derivatives, unpaid premiums, and all other credit or counterparty exposures that have not been affected by the credit spreads stress.
75.         This stress includes the risk of counterparty default. A life company must determine risk charges for the default stress for the risk of counterparty default on exposures that include (but are not limited to) reinsurance assets, unpaid premiums, futures and options, swaps, hedges, warrants, forward rate and repurchase agreements.
76.         The default factors are specified in Table 2. These factors apply to all assets affected by this stress, with the exception of certain types of assets specified in later paragraphs in this section.
    Table 2: Default factors by counterparty grade
Counterparty grade  Default factor (%)
1 (government)      0
1 (other)           2