Document ID: chunk:federal_register_of_legislation:F2024L01073:reg:4:p12
Version: federal_register_of_legislation:F2024L01073
Segment Type: reg
Provision Reference: reg 4 (pt 12/21)
Character Range: 108028–110969

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 a guarantee is denominated in a different currency from that in which the 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 guarantee
Hfx  =  haircut appropriate for the currency mismatch between the guarantee 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 guarantee is less than the maturity of the exposure covered by the guarantee.
 2.          Where there is a maturity mismatch, a guarantee may only be recognised as eligible CRM where the original maturity of the guarantee 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 guarantor 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 purposes 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 guarantee, an ADI must take into account any clause or incentive within the documentation supporting the transaction 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 guarantee adjusted for maturity mismatch
           P = guarantee amount adjusted for any haircuts (in which case,
                     P = Ga as determined in paragraph 9 of this Attachment)
           t = min (T, residual maturity of the guarantee) expressed in years
    T = min (5, residual maturity of the exposure) expressed in years.

Attachment J – Credit derivatives

Purchased credit protection
 1.              Where an ADI purchases credit protection through an eligible credit derivative, it may 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