Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p26
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 70335–73248

the same PD, LGD and EAD estimates for calculating EL as it uses for calculating RWA for UL; and
        3.           where the risk-mitigating effect of guarantees or credit derivatives is recognised through PD, the ADI must use the risk-weight function appropriate to the guarantor or credit protection provider.
 5.          The uncovered portion of the exposure must be assigned a risk weight that is calculated in the same manner as a direct exposure to the underlying borrower.
 6.          Where proportional or tranched coverage exists, or where there is a currency or maturity mismatch between the underlying exposure and the guarantee or credit derivative, the approach set out in paragraphs 7 to 15 of Attachment I and paragraphs 14 to 22 of Attachment J to APS 112 must be applied.

Recognition under the FIRB substitution approach
 1.          Under the FIRB substitution approach, an ADI must determine the risk weight of the covered portion of the exposure by using the PD appropriate to the guarantor or credit protection provider's borrower grade. The ADI may also replace the LGD of the underlying exposure with the LGD applicable to the guarantee or credit derivative taking into account its seniority and any eligible collateral calculated in accordance with this Attachment.

Recognition under the AIRB or retail IRB substitution approach
 1.          Under the AIRB or retail IRB substitution approach, an ADI may recognise the risk-mitigating effect of guarantees and credit derivatives by adjusting either PD or LGD estimates; however, in all cases, only one risk component may be adjusted. Whether adjustments are made through PD or LGD, they must be made in a consistent manner over time and for a given type of guarantee or credit derivative.

Maturity mismatch
 1.          Where a maturity mismatch exists between:
        1.           the residual maturity of the term of lodgement of collateral and the maturity of the exposure covered by the collateral, the ADI must apply the adjustment detailed in paragraph 27 of Attachment G to APS 112;
        2.           the residual maturity of a guarantee and the maturity of the exposure covered by the guarantee, the ADI must apply the adjustment detailed in paragraph 15 of Attachment I to APS 112; or
        3.           the residual maturity of a purchased credit derivative and the maturity of the exposure covered by the derivatives, the ADI must apply the adjustment detailed in paragraph 22 of Attachment J to APS 112.

Treatment of securities financing transactions
 1.          For the purpose of calculating RWA and EL amounts for SFTs, including securities lending transactions, an ADI must calculate:
        1.           the LGD of the counterparty in accordance with this Attachment;
        2.           EAD in accordance with Attachment G to APS 112; and
        3.           the capital requirement for the credit risk