Treatment of credit derivatives in the tTreatment of credit derivatives in the trading book

Treatment of credit derivatives in the trading book

1. An ADI must determine the capital to be held against credit derivative instruments in the trading book in accordance with this Attachment.
2. An ADI must include in its trading book total-rate-of-return swaps, except those that have been transacted to hedge a banking book credit exposure in accordance with the requirements in Attachment J to APS 112. An ADI must include open short positions in credit derivatives in its trading book. APRA may, in writing, exempt the ADI from this requirement on a one-off approval basis. When determining whether other credit derivative transactions should be allocated to the banking or trading book, the ADI must consider the trading book requirements outlined in Attachment A to this Prudential Standard. Before including other credit derivative transactions (i.e. transactions other than total-rate-of-return swaps and open short positions) in its trading book, the ADI must undertake a written assessment setting out its reasons for doing so. The ADI must provide its written assessment to APRA upon request. APRA may make a determination requiring the ADI to allocate the transaction to the banking book where APRA considers that this is more appropriate given the nature of the transaction.