Additional treatment for written credit Additional treatment for written credit derivatives

Additional treatment for written credit derivatives

1. For written credit derivatives, an ADI must apply the additional treatment set out in paragraphs 30 to 36 of this Attachment. For the purposes of this Attachment, written credit derivative refers to a broad range of credit derivatives through which an ADI effectively provides credit protection and is not limited solely to credit default swaps and total return swaps.
2. To capture the credit exposure to the underlying reference entity, the effective notional amount[22] referenced by a written credit derivative must be included in the exposure measure unless:
   1. the written credit derivative is included in a transaction cleared on behalf of a client of the ADI acting as a CM; and
   2. the transaction meets the requirements of paragraph 26 of this Attachment for the exclusion of trade exposures to the QCCP.
3. The effective notional amount of a written credit derivative may be reduced in one or both of the following ways:
   1. by any negative change in the fair value amount that has been incorporated into the calculation of Tier 1 Capital with respect to the written credit derivatives; and
   2. by the effective notional amount of an offsetting purchased credit derivative on the same reference name[23] provided the conditions set out in paragraph 33 of this Attachment are satisfied.
4. An ADI may reduce the effective notional amount through the application of offsetting purchased credit derivatives if the following conditions are satisfied:
   1. the credit protection purchased through credit derivatives is otherwise subject to the same, or more conservative, material terms as those in the corresponding written credit derivative.[24] This ensures that if an ADI provides written credit protection via a credit derivative, it may only recognise offsetting from another purchased credit derivative if the purchased protection is certain to deliver a payment to the ADI in all circumstances;
   2. the remaining maturity of the credit protection purchased through credit derivatives is equal to or greater than the remaining maturity of the written credit derivatives;
   3. the credit protection purchased through credit derivatives is not purchased from a counterparty whose credit quality is highly correlated with the value of the reference obligation(i.e. wrong-way risk);
   4. in the event that the effective notional amount of a written credit derivative is reduced by any negative change in fair value reflected in the ADI’s Tier 1 Capital, the effective notional amount of offsetting credit protection purchased through credit derivatives must also be reduced by any resulting positive change in fair value reflected in Tier 1 Capital; and