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.[33] 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.

2. Where an ADI buys credit protection through a credit derivative that forms part of a synthetic securitisation, the requirements detailed in APS 120 apply.