| (b) | Irrespective of the method adopted by the reporting bank for the measurement of— |
| (i) | the bank’s exposure to counterparty credit risk, when the bank purchases credit derivative protection against a banking book exposure or against an exposure to counterparty credit risk, the bank shall in respect of the hedged exposure calculate its required amount of capital and reserve funds in accordance with the relevant requirements relating to credit derivative instruments specified in subregulations (9)(d), (12)(e), (12)(g), (14)(d) and (14)(f), that is, in accordance with the relevant substitution or double default requirements; |
| (ii) | the bank’s exposure to counterparty credit risk arising from OTC derivative instruments or securities financing transactions, the bank may adopt either of the methods envisaged in paragraph (a) above for the measurement of the bank’s exposure or EAD arising from long settlement transactions, provided that— |
| (A) | the bank shall continuously comply with the relevant requirements specified in these Regulations and such further requirements specified in writing by the Authority in respect of the selected method; |
| (B) | notwithstanding the materiality of a long settlement transaction or position, in order to calculate the bank’s required amount of capital and reserve funds relating to the said long settlement transaction or position, a bank that obtained the approval of the Authority to adopt the IRB approach for the measurement of the bank’s exposure to credit risk may apply the risk weights specified in the standardised approach, in subregulation (8); |
| (iii) | the bank’s exposure to counterparty credit risk, the exposure amount or EAD relating to a particular counterparty shall be equal to the sum of the relevant exposure amounts or EADs calculated in respect of each relevant netting set relating to the said counterparty, provided that— |
| (A) | for purposes of calculating the relevant amount of required capital and reserve funds for default risk in terms of the relevant requirements specified in this subregulation (15) read with the relevant requirements specified in subregulations (16) to (19), the relevant outstanding exposure or EAD amount shall be net of any incurred credit valuation adjustment (CVA) losses; |
| (B) | unless specifically otherwise provided in this subregulation (15) read with the relevant requirements specified in subregulations (16) to (19), the relevant outstanding exposure or EAD amount for a given OTC derivative counterparty shall be the higher of— |
| (ii) | the difference between the sum of all relevant exposure amounts or EADs across all relevant netting sets with the counterparty and the credit valuation adjustment (CVA) for that counterparty which has already been recognised by the bank as an incurred write-down or incurred CVA loss, which CVA loss shall be calculated without taking into account any offsetting debit valuation adjustments related to changes in the fair value of liabilities that are due to a change in the bank’s own credit risk which have been deducted from capital, that is— |
| (aa) | the incurred CVA loss deduced from the exposure to determine the outstanding exposure or EAD shall be the CVA loss gross of all relevant debit value adjustments related to changes in the fair value of liabilities that are due to a change in the bank’s own credit risk which have been separately deducted from capital; |
| (bb) | to the extent that the aforesaid debit value adjustments have not been separately deducted from the bank’s capital, the incurred CVA loss used to determine the outstanding exposure or EAD shall be net of such debit value adjustments; |
| (C) | the aforesaid reduction of exposure or EAD by incurred CVA losses shall not apply in the calculation of the relevant amount of required capital and reserve funds for CVA risk; |
| (iv) | the bank’s exposure to counterparty credit risk, a bank shall, in addition to any capital requirement for default risk related to counterparty credit risk, determine the relevant amount of required capital and reserve funds to cover risk related to mark-to-market losses on the bank’s expected exposure to counterparty risk, which losses shall for purposes of these Regulations be referred to as CVA risk or CVA losses in respect of OTC derivatives, provided that— |
| (A) | a bank, other than a bank that obtained the approval of the Authority for the use of the internal model method for the measurement of the bank’s exposure to counterparty credit risk and the internal models approach for the measurement of specific risk as part of a bank’s exposure to market risk, shall calculate— |
| (i) | the relevant required amount of capital for default risk in accordance with the relevant requirements and formulae specified in this subregulation (15) read with the relevant requirements specified in subregulations (16) to (18); |
| (ii) | the relevant additional required amount of capital for CVA risk in accordance with the relevant requirements and formula specified in paragraph (c) below; |
| (B) | a bank that obtained the approval of the Authority for the use of the internal model method for the measurement of the bank’s exposure to counterparty credit risk and the internal models approach for the measurement of specific risk as part of a bank’s exposure to market risk, shall calculate the relevant additional required amount of capital for CVA risk in accordance with the relevant requirements and formula specified in subregulation (19)(h)(i) below, which approach shall be regarded as the advanced approach for the calculation of the relevant required amount of capital and reserve funds for CVA risk, capturing both general and specific credit spread risk, including stressed value-at-risk (VaR) but not incremental risk, and which formula shall form the basis of all relevant inputs into the bank’s approved VaR model for bonds, that is, when the bank’s approved VaR model is based on full repricing, the bank shall use the formula specified in subregulation (19)(h)(i) for its relevant calculations, provided that— |
| (i) | all relevant VaR amounts shall be calculated in accordance with the relevant quantitative requirements specified in regulation 28(8) of these Regulations and shall be the sum of the non-stressed VaR component and the stressed VaR component, provided that when calculating— |
| (aa) | the non-stressed VaR component, the bank shall use current parameter calibrations for expected exposure; |
| (bb) | the stressed VaR component, the bank shall use future counterparty expected exposure (EE) profiles in accordance with the stressed exposure parameter calibrations specified in these Regulations, including the relevant requirements specified in regulation 39(12) of these Regulations, provided that the period of stress for the credit spread parameters shall be the most severe one-year stress period contained within the three-year stress period used for the bank’s exposure parameters, |
Provided that the three-times multiplier inherent in the calculation of VaR and stressed VaR shall also apply in respect of the aforesaid calculations;
| (ii) | when the bank’s approved VaR model is based on credit spread sensitivities for specific tenors, the bank shall base each relevant credit spread sensitivity on the formula specified in subregulation (19)(h)(ii)(A); |
| (iii) | when the bank’s approved VaR model uses credit spread sensitivities to parallel shifts in credit spreads, which shall for purposes of these Regulations be referred to as regulatory CS01, the bank shall use the formula specified in subregulation (19)(h)(ii)(B); |
| (iv) | when the bank’s approved VaR model uses second-order sensitivities to shifts in credit spreads, that is, spread gamma, the gammas shall be calculated based on the formula specified in subregulation (19)(h)(i); |
| (v) | a bank that obtained the approval of the Authority for the use of the internal model method for the majority of its business, but the bank uses the Standardised Approach for counterparty credit risk for certain smaller portfolios, and the bank also obtained the approval of the Authority for the use of the internal models approach for the measurement of specific risk as part of a bank’s exposure to market risk, shall include these non-internal-model-method netting sets into the CVA risk capital requirements in accordance with the relevant requirements specified in subregulation (19)(h)(i), provided that— |
| (aa) | the Authority may instruct the bank in writing to use the method envisaged in paragraph (c) below for the relevant portfolios specified in writing by the Authority; |
| (bb) | any relevant non-internal-model-method netting set shall be included into the advanced CVA risk capital requirement assuming a constant EE profile, where EE shall be set equal to the EAD as calculated in terms of the Standardised Approach for counterparty credit risk for a maturity equal to the maximum of— |
| (i) | half of the longest maturity occurring in the netting set; and |
| (ii) | the notional weighted average maturity of all relevant transactions in the netting set, |
| (cc) | when a bank’s internal model does not produce an expected exposure profile, the bank shall in the calculation of the relevant required amount apply the same approach as set out in sub-item (bb) above; |
| (vi) | when the bank’s approved market risk VaR model does not appropriately reflect the risk of credit spread changes, because the bank's VaR model, for example, does not appropriately reflect the specific risk of debt instruments issued by a particular counterparty, the bank shall not use the advanced approach for CVA envisaged in subregulation (19)(h)(i) for those relevant exposures, and instead the bank shall determine the required amount of capital for CVA risk through the application of the standardised method specified in paragraph (c) below, that is, the bank shall include in its advanced approach calculations only those exposures to counterparties for which the bank obtained the approval of the Authority to apply its internal model in respect of specific risk for the relevant exposures arising from debt instruments; |
| (vii) | the additional required amount of capital for CVA risk shall be a standalone market risk requirement, calculated on the set of CVAs envisaged in this item (B) read with the relevant requirements specified in subregulation (19)(h)(i), for all the relevant collateralised and uncollateralised OTC derivative counterparties, together with eligible CVA hedges, provided that, unless expressly otherwise provided in these Regulations, within the standalone required amount of capital for CVA risk, the bank shall not apply any offset against any other instrument on the bank’s balance sheet; |
| (C) | only hedges used by the bank to mitigate its exposure to CVA risk, and managed as such by the bank, shall be eligible for inclusion in the calculation of the bank’s relevant required amount of capital and reserve funds for CVA risk, irrespective of whether the relevant required amount is calculated in terms of the standardised or VaR approach, provided that— |
| (i) | the only hedges eligible for inclusion in the calculation of the bank’s required amount of capital and reserve funds for CVA risk in terms of the standardised or VaR approach shall be single-name credit default swaps (CDSs), single-name contingent CDSs, other equivalent hedging instruments referencing the counterparty directly, and index CDSs, that is, counterparty risk hedges other than the instruments specified above shall be excluded from the calculation of the bank’s relevant required amount of capital and reserve funds for CVA risk; |
| (ii) | in the case of index CDSs— |
| (aa) | the basis between any individual counterparty spread and the spreads of index CDS hedges shall in all relevant cases be reflected in the bank’s VaR amount, even when a proxy is used for the spread of a counterparty, since idiosyncratic basis still needs to be reflected in such situations, provided that for all counterparties with no available spread, the bank shall use reasonable basis time series out of a representative bucket of similar names for which a spread is available; |
| (bb) | when the envisaged basis is not reflected to the satisfaction of the Authority, the bank shall include in its relevant VaR amount only 50 per cent of the notional amount of the index hedge; |
| (iii) | no tranched or nth-to-default CDS shall constitute an eligible CVA hedge; |
| (iv) | any eligible hedge included in the relevant required amount of capital and reserve funds for CVA risk shall be removed from the bank’s relevant calculation of required capital and reserve funds for market risk; |
| (v) | when a CDS referencing an issuer is in the bank’s inventory, and that issuer also happens to be an OTC counterparty but the CDS is not managed by the bank as a hedge of CVA risk, that CDS shall not be eligible to offset the CVA within the bank’s relevant standalone VaR calculation of the required amount of capital and reserve funds for CVA risk; |
| (D) | the bank shall exclude from the aforesaid additional required amount of capital and reserve funds for CVA risk— |
| (i) | all relevant transactions with intragroup banks or other formally regulated intragroup financial entities that are subject to capital requirements similar or equivalent to these Regulations, which banks or entities are included in the consolidated amounts calculated in accordance with the relevant requirements specified in these Regulations in respect of consolidated supervision, provided that the Authority may in writing instruct a bank to include in its relevant calculations for CVA risk all such transactions with intragroup banks or other formally regulated intragroup financial entities as may be specified in writing by the Authority; |
| (ii) | transactions with a central counterparty (CCP); and |
| (iii) | securities financing transactions (SFT), provided that when SFT exposures are deemed by the Authority to be material, the Authority may in writing instruct a bank to include in its relevant calculations CVA loss exposures arising from SFT transactions; |
| (E) | the bank shall calculate the relevant aggregate amount of required capital and reserve funds for counterparty credit risk and credit valuation adjustments in accordance with the relevant requirements specified in paragraph (d) below; |
| (v) | the bank’s exposure to counterparty credit risk arising from OTC derivative instruments or securities financing transactions, the bank shall calculate its relevant required amount of capital and reserve funds relating to any delivery-versus-payment transaction and any non-delivery-versus-payment or free-delivery transaction in accordance with the relevant requirements specified in subregulation (20) below; |
| (vi) | the bank’s exposure to counterparty credit risk, unless specifically otherwise provided in these Regulations, the bank may in respect of its exposure to counterparty credit risk apply an exposure value or EAD equal to zero— |
| (A) | when the said exposure to counterparty credit risk relates to protection provided by the reporting bank in the form of a credit-default swap contract held in the bank’s banking book, provided that the said contract— |
| (i) | shall be treated in a manner similar to a guarantee provided by the reporting bank and in accordance with the relevant requirements specified in subregulations (9)(d), (12)(e) or (14)(d), as the case may be; |
| (ii) | shall be subject to required capital and reserve funds in respect of the contract’s full notional amount; |
| (B) | when the said exposure to counterparty credit risk relates to purchased credit derivative protection and the reporting bank calculates its required amount of capital and reserve funds in respect of the hedged exposure in accordance with the relevant requirements specified in subparagraph (i) above; |
| (vii) | the bank’s exposure to counterparty credit risk, the bank shall comply with the relevant requirements specified in subregulation (17) below related to margin requirements for noncentrally cleared derivative instruments. |
[Regulation 23(15)(b) substituted by section 3(i) of Notice No. 1427, GG44048, dated 31 December 2020 - effective 1 January 2021]
