Document ID: chunk:federal_register_of_legislation:F2024L01073:reg:4:p17
Version: federal_register_of_legislation:F2024L01073
Segment Type: reg
Provision Reference: reg 4 (pt 17/21)
Character Range: 121770–124716

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 = value of the amount of credit protection adjusted for maturity mismatch
              P = the amount of credit protection adjusted for any haircuts (in which case, P = Ga as determined in paragraph 16 of this Attachment)
              t = min (T, residual maturity of the credit derivative) expressed in years
              T = min (5, residual maturity of the underlying exposure) expressed in years.

Sold credit protection
 1.          An ADI that sells credit protection that is not detailed in paragraphs 29 and 30 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 notify APRA prior to execution and provide its written assessment to APRA upon request. The ADI must apply the treatment set out in its written assessment unless APRA determines an alternative methodology for calculating the Regulatory Capital treatment.
     1.          Where an ADI uses total-rate-of-return swaps to hedge a banking book credit exposure in accordance with the requirements set out in this Attachment, those transactions must be included in the ADI's banking book. All other total-rate-of-return swaps must be included in an ADI's trading book.
     2.          Any instruments that would give rise to a net short credit or equity position in the banking book must be included in an ADI's trading book.[34]
     3.          An ADI that has sold credit protection using a credit derivative must, for capital adequacy purposes, assume that 100 per cent of the credit risk is purchased irrespective of the range of specified credit events.
     4.          An ADI that sells credit protection using a credit derivative containing an embedded option to extend the term of the credit derivative must assume the longest possible effective maturity of the credit derivative. This is regardless of any contractual arrangements that may give either the protection buyer or the protection seller the incentive to reduce the contract term.
     1.          When determining the amount of credit protection sold, an ADI must assume that any materiality thresholds included in the credit derivative contract do not reduce the acquired credit risk.

Credit-default swaps
     1.          Where credit protection is sold via a credit-default swap referenced to a single reference entity, the ADI acquires an exposure to the credit risk of that entity. The risk weight that must be applied to the exposure is the risk weight that would otherwise apply to the reference entity. The amount of the exposure is the maximum possible amount payable