| (e) | Credit-derivative instruments |
As a minimum, a bank that adopted the foundation IRB approach for the recognition of risk mitigation relating to credit protection obtained in the form of a credit-derivative instrument—
| (A) | shall comply with the relevant requirements specified in subregulation (9)(d); |
| (B) | shall, except in the case of retail exposures and purchased retail receivables, use the LGD ratios in respect of its various exposures as specified in writing by the Registrar; |
| (C) | shall not in the calculation of the bank's risk-weighted exposure reflect the effect of double default otherwise than in accordance with the relevant requirements specified in paragraph (g) below, that is, the adjusted risk weight relating to a particular exposure shall not be less than a comparable direct exposure to the relevant protection provider unless the bank calculates the said adjusted risk weight in accordance with the relevant requirements specified in paragraph (g) below, |
provided that whenever credit protection obtained in respect of an exposure results in a higher capital requirement for the reporting bank than before the recognition of such credit protection, the reporting bank may ignore the effect of the said credit protection.
| (ii) | Eligible protection providers |
In addition to the eligible protection providers specified in the standardised approach in subregulation (9)(d)(iii), a bank that adopted the foundation IRB approach for the recognition of risk mitigation relating to credit-derivative instruments obtained in respect of corporate institutions, sovereigns or banks may also recognise the effect of protection obtained from a protection provider that is internally rated, provided that the said protection shall comply with the relevant minimum requirements specified in subregulation (9)(d)(xi) above.
(iii) Risk weighting
When a bank that adopted the foundation IRB approach for the measurement of the bank's risk-weighted credit exposure obtains—
| (A) | protection from an eligible protection provider in respect of the bank's credit exposure to a corporate institution, sovereign or bank, the bank— |
| (i) | shall divide the relevant exposure into a protected portion and an unprotected portion; |
| (ii) | shall in respect of the protected portion, apply— |
| (aa) | the risk-weight function relating to the relevant protection provider; and |
| (bb) | the PD ratio relating to the relevant protection provider, or a higher PD ratio relating to a risk grade between the underlying obligor and the relevant protection provider when the bank deems a complete substitution approach inappropriate, |
provided that, based on its seniority or any collateralisation of a protected exposure, the bank may replace the LGD ratio of the underlying transaction with the relevant LGD ratio relating to the said protected position;
| (iii) | shall in respect of the unprotected portion, apply the risk weight relating to the underlying obligor; |
| (iv) | shall in the case of— |
| (aa) | proportional protection comply with the relevant requirements specified in subregulation (9)(d)(x) above; |
| (bb) | a currency mismatch between the underlying obligation and the protection obtained comply with the relevant requirements specified in subregulation (9)(d)(xi) above; |
| (B) | protection in respect of a retail exposure or pool of retail exposures, the bank may reflect the risk reducing effect of the protection through an adjustment to the relevant PD ratio or LGD ratio, provided that the bank— |
| (i) | shall comply with the relevant minimum requirements specified in subregulation (14)(d)(i) below; |
| (ii) | shall apply the relevant adjustment to the PD ratio or LGD ratio in a consistent manner in respect of a given type of credit-derivative instrument, and over time. |
| (C) | protection against dilution risk in respect of purchased receivables, the bank may apply the double default approach specified in paragraph (g) below in order to calculate the required risk-weighted asset amount for dilution risk, provided that— |
| (i) | the bank shall at all times comply with the relevant requirements specified in paragraph (g); |
| (ii) | PD0 shall be equal to the estimated EL amount; |
| (iii) | LGDg shall be equal to 100 percent; |
| (iv) | the effective maturity of the relevant exposure shall be determined in accordance with the relevant requirements specified in subregulation (11)(d)(vi)(A)(ii). |
