Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast) (repealed) (c. 49)

ANNEX I U.K. CALCULATING CAPITAL REQUIREMENTS FOR POSITION RISK

SPECIFIC RISK CAPITAL CHARGES FOR TRADING BOOK POSITIONS HEDGED BY CREDIT DERIVATIVES U.K.

45. Partial allowance shall be given when the value of two legs usually move in the opposite direction. This would be the case in the following situations: U.K.

(a)

the position falls under point 43(b) but there is an asset mismatch between the reference obligation and the underlying exposure. However, the positions meet the following requirements:

(i)

the reference obligation ranks pari passu with or is junior to the underlying obligation; and

(ii)

the underlying obligation and reference obligation share the same obligor and have legally enforceable cross‐default or cross‐acceleration clauses;

(b)

the position falls under point 43(a) or point 44 but there is a currency or maturity mismatch between the credit protection and the underlying asset (currency mismatches should be included in the normal reporting foreign exchange risk under Annex III); or

(c)

the position falls under point 44 but there is an asset mismatch between the cash position and the credit derivative. However, the underlying asset is included in the (deliverable) obligations in the credit derivative documentation.

In each of those situations, rather than adding the specific risk capital requirements for each side of the transaction, only the higher of the two capital requirements shall apply.