CHAPTER V

COVERED SOVEREIGN CREDIT DEFAULT SWAPS PURSUANT TO ARTICLE 4(2)

Correlation tests
Article 18
1
The correlation test referred to in this Chapter shall be met in either of the following cases:
a
the quantitative correlation test shall be met by showing a Pearson’s correlation coefficient of at least 70 % between the price of the assets or liabilities and the price of the sovereign debt calculated on a historical basis using data for at least a period of 12 months of trading days immediately preceding the date when the sovereign credit default swap position is taken out;
b
the qualitative correlation shall be met by showing meaningful correlation, which means a correlation that is based on appropriate data and is not evidence of a merely temporary dependence. The correlation shall be calculated on a historical basis using data for the 12 months of trading days before the sovereign credit default swap position is taken out, weighted to the most recent time. A different time-frame shall be used if it is demonstrated that the conditions prevailing in that period were similar to those at the time that the sovereign credit default swap position is to be taken out or which would occur in the period of the exposure being hedged. For assets for which there is not a liquid market price or where there is not a sufficiently long price history, an appropriate proxy shall be used.
2
The correlation test in paragraph 1 shall be deemed to have been met if it can be demonstrated that:
a
the exposure being hedged relates to an enterprise which is owned by the sovereign issuer or where the sovereign issuer owns a majority of its voting share capital or whose debts are guaranteed by the sovereign issuer;
b
the exposure being hedged relates to a regional, local or municipal government of the United Kingdom;
c
the exposure being hedged relates to an enterprise whose cash flows are significantly dependent on contracts from a sovereign issuer or a project which is funded or significantly funded or underwritten by a sovereign issuer, such as an infrastructure project.
3
The relevant party shall justify that the correlation test was met at the time that the sovereign credit default swap position was entered into upon request by the FCA.
Words in Art. 18(2)(b) substituted (31.12.2020) by The Short Selling (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1321), regs. 1(2), 15(9)(a) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)
Words in Art. 18(3) substituted (31.12.2020) by The Short Selling (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1321), regs. 1(2), 15(9)(b) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)