CHAPTER VCOVERED SOVEREIGN CREDIT DEFAULT SWAPS PURSUANT TO ARTICLE 4(2)
Article 15Cases which are not uncovered sovereign credit default swap positions where the obligor is established or the asset or liability is located in F1the United Kingdom and a third country
1.
Where the obligor of, or counterparty to, an asset or liability is established in F2the United Kingdom and a third country a sovereign credit default swap position shall not be considered an uncovered position in the following cases, in accordance with Article 4(1) of Regulation (EU) No 236/2012, and provided that the correlation test in Article 18 of this Regulation is met in each case:
(a)
where there is a parent company in F3a third country and a subsidiary in F4the United Kingdom and a loan has been made to the subsidiary. Where there is either explicit or implicit credit support to the subsidiary by the parent, it shall be permissible to purchase sovereign credit default swaps F5in the country of the parent rather than the subsidiary;
(b)
where there is a parent holding company which own or controls a subsidiary operating company in a F6third country. If the parent company is the issuer of the bond but the assets and revenues that are hedged are owned by the subsidiary, it shall be permissible to buy sovereign credit default swaps referenced to the F7country of the subsidiary;
(c)
to hedge an exposure to a company F8in the United Kingdom which has invested in the sovereign debt of a F9third country to the extent that that company would be significantly impacted in the event of a significant fall in the value of the sovereign debt of the F9third country, provided that the company is established F10in the United Kingdom and the third country. Where the correlation between this risk and the debt of the F9third country is greater than the correlation between this risk and the F11debt of the United Kingdom it shall be permissible to buy sovereign credit default swaps referenced to the F9third country.
2.
A sovereign credit default swap position shall not be considered an uncovered position in the following cases, in accordance with Article 4(1) of Regulation (EU) No 236/2012, and provided that the correlation test in Article 18 of this Regulation is met in each case:
(a)
where the obligor of, or counterparty to, an asset or liability being hedged is a company which has operations F12in the United Kingdom and in a third country or where the exposure being hedged relates to the Union or the Member States which have the euro as their currency, it shall be permissible to hedge it with an appropriate European or euro area index of sovereign bond credit default swaps;
(b)
where the counterparty to an asset or liability being hedged is a supra-national issuer, it shall be permissible to hedge the counterparty risk with an appropriately chosen basket of sovereign credit default swaps referencing that entity’s guarantors or shareholders.
F13(3.
For the purposes of this Regulation, “sovereign debt” in relation to a third country means a debt instrument issued by—
(a)
a third country, including a government department, an agency or a special purpose vehicle of the third country; or
(b)
in the case of a federal country, a member of the federation.
(4.
For the purposes of this Article, “supra-national issuer” means—
(a)
the Union;
(b)
a special purpose vehicle for several third countries;
(c)
an international financial institution established by two or more countries which has the purpose of mobilising funding and providing financial assistance to the benefit of its members that are experiencing or threatened by severe financing problems; or
(d)
the European Investment Bank.