CHAPTER V

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

Proportionality
Article 19
1
In determining whether the size of the sovereign credit default swap position is proportionate to the size of the exposures hedged, where a perfect hedge is not possible, an exact match is not required and limited over-provision shall be permitted in accordance with paragraph 2. The relevant party shall justify upon request to the FCA why an exact match was not possible.
2
Where justified by the nature of the assets and liabilities being hedged and their relationship to the value of the obligations of the sovereign which are within the scope of the credit default swap, a greater value of sovereign credit default swap shall be held to hedge a given value of exposures. However, this shall only be permitted where it is demonstrated that a larger value of sovereign credit default swap is necessary to match a relevant measure of risk associated with the reference portfolio, taking into account as the following factors:
a
the size of the nominal position;
b
the sensitivity ratio of the exposures to the obligations of the sovereign which are within the scope of the credit default swap;
c
whether the hedging strategy involved is dynamic or static.
3
It is the responsibility of the position holder to ensure that its sovereign credit default swap position remains proportionate at all times and that the duration of the sovereign credit default swap position is aligned as closely as practicable given prevailing market conventions and liquidity with the duration of the exposures being hedged or the period during which the person intends to hold the exposure. If the exposures being hedged by the credit default swap position are liquidated or redeemed, they must either be replaced by equivalent exposures or the credit default swap position must be reduced or otherwise disposed of.
4
Provided that a sovereign credit default swap position was covered at the time it was entered into, it shall not be treated as becoming uncovered where the sole reason for the position becoming uncovered is a fluctuation in the market value of the hedged exposures or the value of the sovereign credit default swap.
5
In all circumstances, where parties accept a sovereign credit default swap position as a consequence of their obligations as members of a central counterparty which clears sovereign credit default swap transactions and as a result of the operation of the rules of that central counterparty, such a position shall be treated as involuntary and not as a position that the party has entered into and so shall not be considered uncovered pursuant to Article 4(1) of Regulation (EU) No 236/2012.
Words in Art. 19 substituted (31.12.2020) by The Short Selling (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1321), regs. 1(2), 15(10) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)