Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p48
Version: federal_register_of_legislation:F2024L01519
Segment Type: other
Provision Reference: 
Character Range: 132870–135873

results in 10 or more exceptions (the red zone), the ADI must submit to APRA analysis which identifies the causes for each of the exceptions, and must also add a plus factor of one to the multiplication factor, unless otherwise directed by APRA.
 4.          APRA, in writing, may also require the ADI to take appropriate action in addition to the plus factor, depending on the nature of the exceptions. Where the exceptions arise from:
        1.           issues with the basic integrity of the model, APRA may require the ADI to make appropriate corrections to the model or, if there are severe problems relating to the basic integrity of the model, APRA may revoke the ADI's model approval under paragraph 20 of this Prudential Standard;

        2.           the need for improvement in the accuracy of the model, APRA may require the ADI to improve its risk measurement techniques; and

        3.           unanticipated market movements, APRA may require the ADI to recalculate its VaR using volatilities and correlations based on a shorter historical observation period if the shifts in volatilities and/or correlations are deemed to be permanent.

Attachment D

Treatment of credit derivatives in the trading book

     1.              An ADI must determine the capital to be held against credit derivative instruments in the trading book in accordance with this Attachment.

     2.              An ADI must include in its trading book total-rate-of-return swaps, except those that have been transacted to hedge a banking book credit exposure in accordance with the requirements in Attachment J to APS 112. An ADI must include open short positions in credit derivatives in its trading book. APRA may, in writing, exempt the ADI from this requirement on a one-off approval basis. When determining whether other credit derivative transactions should be allocated to the banking or trading book, the ADI must consider the trading book requirements outlined in Attachment A to this Prudential Standard. Before including other credit derivative transactions (i.e. transactions other than total-rate-of-return swaps and open short positions) in its trading book, the ADI must undertake a written assessment setting out its reasons for doing so. The ADI must provide its written assessment to APRA upon request. APRA may make a determination requiring the ADI to allocate the transaction to the banking book where APRA considers that this is more appropriate given the nature of the transaction.

Application
     1.              This Attachment applies to single name credit-default swaps, certain total-rate-of-return swaps, cash-funded credit-linked notes and first- and second-to-default baskets. An ADI that 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