Document ID: chunk:federal_register_of_legislation:F2024L01073:reg:4:p16
Version: federal_register_of_legislation:F2024L01073
Segment Type: reg
Provision Reference: reg 4 (pt 16/21)
Character Range: 119037–122047

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 basis. This means that the protected portion of the underlying exposure will receive the capital treatment applicable to eligible credit derivatives with the remainder treated as unprotected.
     2.          Where there is partial coverage of an underlying exposure by a credit derivative and there is a difference in seniority between the protected and unprotected portions of the underlying exposure, then the arrangement is considered to be a synthetic securitisation and is subject to the requirements set out in APS 120.

Currency mismatch
     1.          A currency mismatch exists where an ADI has purchased credit protection using a credit derivative and the credit derivative is denominated in a different currency from that in which the underlying exposure is denominated. In this case the amount of the exposure deemed to be protected (Ga) must be reduced by the application of a haircut (Hfx) as follows:
    where:
    G  = nominal amount of the credit derivative
              Hfx  = haircut appropriate for the currency mismatch between the credit derivative and the underlying exposure.
 1.          Where there is a currency mismatch, an ADI must apply a haircut of 8 per cent (based on a 10 business day holding period and daily marking-to-market). The haircut must be adjusted depending on the actual frequency of revaluation of the currency mismatch, in accordance with paragraph 32 of Attachment G to this Prudential Standard.

Maturity mismatch
     1.          A maturity mismatch exists where the residual maturity of a credit derivative is less than the maturity of the underlying exposure.
     2.          Where there is a maturity mismatch, a credit derivative may only be recognised as eligible CRM where the original maturity of the credit derivative is greater than or equal to 12 months and the residual maturity is greater than or equal to 3 months.
     3.          Where credit protection provided by a single protection seller to the same underlying exposure has different maturities, an ADI must divide the exposure into separate covered portions for risk-weighting purposes.
     4.          For the purpose of determining maturity:
             1.           the effective maturity of the underlying exposure must be calculated using the longest possible remaining time before the counterparty is scheduled to fulfil its obligation; and
             2.           for the credit derivative, an ADI that purchases credit protection must take into account any clause or incentive within the credit derivative contract that may reduce its maturity so that the shortest possible effective maturity is used.
     5.          Where there is a maturity mismatch, an ADI must apply the following adjustment:
where:
              Pa