Directive 2006/48/EC of the European Parliament and of the council (repealed)Show full title

2. UNFUNDED CREDIT PROTECTION

2.1. Valuation

83. The value of unfunded credit protection (G) shall be the amount that the protection provider has undertaken to pay in the event of the default or non-payment of the borrower or on the occurrence of other specified credit events. In the case of credit derivatives which do not include as a credit event restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fees that result in a credit loss event (e.g. value adjustment, the making of a value adjustment or other similar debit to the profit and loss account),

(a)

where the amount that the protection provider has undertaken to pay is not higher than the exposure value, the value of the credit protection calculated under the first sentence of this point shall be reduced by 40 %; or

(b)

where the amount that the protection provider has undertaken to pay is higher than the exposure value, the value of the credit protection shall be no higher than 60 % of the exposure value.

84. Where unfunded credit protection is denominated in a currency different from that in which the exposure is denominated (a currency mismatch) the value of the credit protection shall be reduced by the application of a volatility adjustment H_FX as follows:

G* = G x (1-H_FX)

where:

G is the nominal amount of the credit protection,

G* is G adjusted for any foreign exchange risk, and

H_fx is the volatility adjustment for any currency mismatch between the credit protection and the underlying obligation.

Where there is no currency mismatch

G* = G

85. The volatility adjustments for any currency mismatch may be calculated based on the Supervisory volatility adjustments approach or the Own estimates approach as set out in points 34 to 57.

2.2. Calculating risk‐weighted exposure amounts and expected loss amounts

2.2.1. Partial protection — tranching

86. Where the credit institution transfers a part of the risk of a loan in one or more tranches, the rules set out in Articles 94 to 101 shall apply. Materiality thresholds on payments below which no payment shall be made in the event of loss are considered to be equivalent to retained first loss positions and to give rise to a tranched transfer of risk.

2.2.2. Standardised Approach

(a) Full protection

87. For the purposes of Article 80, g shall be the risk weight to be assigned to an exposure which is fully protected by unfunded protection (G_A), where:

g is the risk weight of exposures to the protection provider as specified under Articles 78 to 83; and

G_A is the value of G* as calculated under point 84 further adjusted for any maturity mismatch as laid down in Part 4.

(b) Partial protection — equal seniority

88. Where the protected amount is less than the exposure value and the protected and unprotected parts are of equal seniority — i.e. the credit institution and the protection provider share losses on a pro-rata basis, proportional regulatory capital relief shall be afforded. For the purposes of Article 80, risk‐weighted exposure amounts shall be calculated in accordance with the following formula:

(E-G_A) x r + G_A x g

where:

E is the exposure value;

G_A is the value of G* as calculated under point 84 further adjusted for any maturity mismatch as laid down in Part 4;

r is the risk weight of exposures to the obligor as specified under Articles 78 to 83; and

g is the risk weight of exposures to the protection provider as specified under Articles 78 to 83.

(c) Sovereign guarantees

89. The competent authorities may extend the treatment provided for in Annex VI, Part 1, points 4 and 5 to exposures or parts of exposures guaranteed by the central government or central bank, where the guarantee is denominated in the domestic currency of the borrower and the exposure is funded in that currency.

2.2.3. IRB Approach

Full protection/Partial protection — equal seniority

90. For the covered portion of the exposure (based on the adjusted value of the credit protection G_A), the PD for the purposes of Annex VII, Part 2 may be the PD of the protection provider, or a PD between that of the borrower and that of the guarantor if a full substitution is deemed not to be warranted. In the case of subordinated exposures and non‐subordinated unfunded protection, the LGD to be applied for the purposes of Annex VII, Part 2 may be that associated with senior claims.

91. For any uncovered portion of the exposure the PD shall be that of the borrower and the LGD shall be that of the underlying exposure.

92. G_A is the value of G* as calculated under point 84 further adjusted for any maturity mismatch as laid down in Part 4.