Document ID: chunk:federal_register_of_legislation:F2024L01073:reg:4:p13
Version: federal_register_of_legislation:F2024L01073
Segment Type: reg
Provision Reference: reg 4 (pt 13/21)
Character Range: 110718–113775

substitute the risk weight of the counterparty with the risk weight of the credit protection seller for the covered portion of the exposure.[32] The uncovered portion of the exposure must be risk-weighted according to the risk weight applicable to the original counterparty.
 2.              For the purposes of CRM, eligible credit derivatives are limited to:
         1.           single-name credit-default swaps; and
         2.           certain total-rate-of-return swaps.
    Where an ADI purchases credit protection through a total-rate-of-return swap and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the asset that is protected (either through reductions in fair value or by an addition to reserves), the credit protection must not be recognised.
 1.              Cash-funded credit linked notes issued by an ADI against exposures in the banking book that satisfy the minimum requirements for credit derivatives as detailed in this Attachment (with the exception of eligible credit protection providers set out in paragraph 12 of this Attachment) may be treated as cash-collateralised transactions under Attachment G to this Prudential Standard.
     1.              Where an ADI buys credit protection through a credit derivative that forms part of a synthetic securitisation, the requirements detailed in APS 120 apply.

Minimum requirements
 1.              To be recognised as eligible CRM, a credit derivative must:
         1.           represent a direct claim on the protection seller;
         2.           be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible;
         3.           be irrevocable, except in the case of non-payment by a protection purchaser of money due in respect of the credit protection contract. The credit derivative contract must not include any clause that would allow the protection seller to unilaterally cancel the protection of the credit derivative, or that would increase the effective cost of cover as a result of deteriorating credit quality in the hedged exposure;[33]
         4.           be unconditional. The credit derivative contract must not include any clauses that are outside the direct control of the ADI, and the credit events specified in the contract must not prevent the protection seller from being obliged to pay out in a timely manner in the event that the borrower of the underlying exposure fails to make the due payment(s);
         1.           at a minimum, specify the following as credit events under the terms of the credit derivative contract:
                 1.             the failure to pay an amount due under the terms of the underlying exposure that is in effect at the time of such failure;
                 2.          the bankruptcy, insolvency or inability of the borrower of the underlying exposure to pay its debts, or its failure or admission in writing of its inability generally to pay its debts