| (d) | Credit-derivative instruments |
As a minimum, a bank that adopted the advanced 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 minimum requirements specified in subregulation (9)(d)(xi) above; |
| (B) | shall in the case of single-name credit-derivative instruments assign to all relevant obligors and eligible protection providers a borrower rating and calculate its own estimates of LGD in respect of its various exposures, provided that the bank shall have in place duly specified criteria— |
| (i) | to adjust its borrower grades; |
| (ii) | to adjust its LGD estimates; |
| (iii) | to allocate exposures to relevant retail or receivable pools, which criteria— |
| (aa) | shall comply with the relevant minimum requirements for assigning borrower or facility ratings specified in subregulation (11)(b) above; |
| (bb) | shall be plausible and intuitive; |
| (cc) | shall take into account all relevant information; |
| (dd) | shall comprehensively address matters relating to payment, including the impact that payments may have on the level and timing of recoveries; |
| (ee) | shall duly state that the reference asset shall not differ from the underlying asset unless— |
| (i) | the reference asset and the underlying exposure relate to the same obligor, that is, the same legal entity; |
| (ii) | the reference asset ranks pari passu with or more junior than the underlying asset in the event of bankruptcy; |
| (iii) | legally effective cross-default clauses, for example, cross-default or cross-acceleration clauses apply; |
provided that the terms and conditions of the credit-derivative contract shall at no time contravene the terms and conditions of the underlying asset or reference asset;
(ff) shall incorporate—
| (i) | the protection provider's ability and willingness to honour its commitments in terms of the protection provided; |
| (ii) | any correlation between the protection provider's ability to honour its commitments in terms of the protection provided and the obligor's ability to repay any amounts due; |
| (iii) | the effects of any residual risk, such as a currency mismatch between the protection and the underlying exposure; |
| (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 (f) 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 (f) 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
A bank that adopted the advanced IRB approach for the recognition of risk mitigation relating to credit-derivative instruments may recognise the effect of protection obtained from any protection provider, provided that—
| (A) | the credit-derivative instrument shall comply with the relevant minimum requirements specified in subregulation (9)(d)(xi) above; |
| (B) | the bank shall have in place a comprehensive policy and criteria in respect of the types of protection providers acceptable to the bank for risk mitigation purposes. |
(iii) Risk weighting
When a bank that adopted the advanced IRB approach for the measurement of the bank's risk-weighted credit exposure obtains—
| (A) | protection from a protection provider in respect of the bank's credit exposure to a corporate institution, sovereign or bank, the bank— |
| (i) | shall reflect the risk mitigation effect of the protection by way of an adjustment either to the PD ratio or LGD ratio of the relevant exposure provided that the bank shall apply the adjustments to the PD ratio or LGD ratio of the exposure in a consistent manner; or |
| (ii) | may reflect the risk mitigation effect of the protection in accordance with the relevant requirements relating to the recognition of credit-derivative instruments in terms of the foundation IRB approach prescribed in subregulation (12)(e) 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 shall apply the relevant adjustment to the PD ratio or LGD ratio in a consistent manner in respect of a given type of guarantee, and over time; |
| (C) | protection against dilution risk in respect of purchased receivables, the bank may apply the double default approach specified in paragraph (f) below in order to calculate the required risk-weighted asset amount for dilution risk provided that the bank shall comply with the relevant requirements specified in subregulation (12)(e)(iii)(C). |
