Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p52
Version: federal_register_of_legislation:F2024L01519
Segment Type: other
Provision Reference: 
Character Range: 143487–146360

the respective securitisation risk weights as specified in paragraphs 12 or 13 of Attachment B, as applicable.

        4.           The capital charge against each net nth-to-default credit derivative position applies irrespective of whether the ADI has a long or short position (i.e. obtains or provides protection).

Specific risk offsetting
     1.          An ADI may recognise full allowance for offsetting when the values of two legs (i.e. long and short) always move in the opposite direction and broadly to the same extent. This occurs where:

        1.           the two legs consist of completely identical instruments; or

        2.           a long cash position is hedged by a total rate of return swap (or vice versa) and there is an exact match between the reference obligation and the underlying exposure (i.e. the cash position).[48] In these cases, specific risk capital requirements do not apply to either side of the position.

     1.          An ADI may recognise an offset of 80 per cent 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 of the underlying exposure. In addition, key features of the credit derivative contract (e.g. credit-event definitions, settlement mechanisms) must 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 per cent specific risk offset may be applied to the side of the transaction with the higher capital charge, while the specific risk requirement on the other side is zero.

     2.          An ADI may recognise a partial offset when the value of the two legs (i.e. long and short) usually moves in the opposite direction. This occurs where:

        1.           the position is captured in paragraph 18(b) of this Attachment but there is an asset mismatch[49] between the reference obligation and the underlying exposure; nonetheless, the position meets the requirements for an asset mismatch to be allowed for credit risk mitigation purposes as set out in Attachment J to APS 112; or

        2.           the position is captured in paragraphs 18(a) or 19 of this Attachment but there is a currency or maturity mismatch[50] between the credit protection and the underlying asset; or

        3.           the position is captured in paragraph 19 of this Attachment but there is an asset mismatch between the cash