Nth-to-default basket credit derivatives

Nth-to-default basket credit derivatives

1. If an ADI is a protection buyer in a first- or second-to‑default basket, it must enter into the maturity ladder a short position in a notional debt instrument, where regular interest or fee cash flows are to be paid, to reflect the general market risk associated with those cash flows.

2. If an ADI is a protection seller in a first- or second-to‑default basket, it must enter into the maturity ladder a long position in a notional debt instrument, where regular interest or fee cash flows are to be received, to reflect the general market risk associated with those cash flows.

3. An ADI must determine the capital charge for specific risk for an nth-to-default credit derivative as follows:

4. The capital charge for specific risk for a first-to-default credit derivative is the lesser of (1) the sum of the specific risk capital charges for the individual reference credit instruments in the basket, and (2) the maximum possible credit event payment under the contract. Where an ADI has a risk position in one of the reference credit instruments underlying a first-to-default credit derivative and this credit derivative hedges the ADI’s risk position, the ADI is allowed to reduce, with respect to the hedged amount, both the capital charge for specific risk for the reference credit instrument and that part of the capital charge for specific risk for the credit derivative that relates to this particular reference credit instrument. Where an ADI has multiple risk positions in reference credit instruments underlying a first-to-default credit derivative this offset is allowed only for that underlying reference credit instrument having the lowest specific risk capital charge.

5. The capital charge for specific risk for an nth-to-default credit derivative with n greater than one is the lesser of (1) the sum of the specific risk capital charges for the individual reference credit instruments in the basket but disregarding the (n-1) obligations with the lowest specific risk capital charges; and (2) the maximum possible credit event payment under the contract. For nth-to-default credit derivatives with n greater than 1 no offset of the capital charge for specific risk with any underlying reference credit instrument is allowed.

6. If an ADI is a protection seller, then where a first- or second-to-default basket product has an external credit assessment[47] from an ECAI, the ADI must calculate the specific risk capital charge using the rating of the derivative and apply the respective securitisation risk weights as specified in paragraphs 12 or 13 of Attachment B, as applicable.

7. The capital charge against each net nth-to-default credit derivative position applies irrespective of whether the ADI has a long or short position (i.e. obtains or provides protection).