BANK 3.4.15 Treatment of written credit derivatives

(1) The effective notional amount for a written credit derivative that is leveraged or otherwise enhanced by the structure of the contract is obtained by adjusting the notional amount of the contract in accordance with this rule, to reflect the true exposure that results from the leverage or enhancement.
(2) The effective notional amount may be reduced in either or both of the following ways:
(a) by the negative change in fair value amount that has been incorporated into the calculation of tier 1 capital in relation to the derivative;
(b) by the effective notional amount of an offsetting purchased credit derivative on the same reference entity, if the conditions set out in subrule (3) are satisfied.
(3) The conditions for paragraph (2) (b) are the following:
(a) the written and the offsetting derivatives refer to the same legal entity;
(b) the remaining maturity of the offsetting derivatives is equal to or greater than the remaining maturity of the written derivatives;
(c) for single-name credit derivatives:
(i) the credit protection purchased is on a reference obligation that ranks equally with, or is junior to, the reference obligation of the written derivatives; and
(ii) a credit event on the senior reference asset would result in a credit event on the subordinated reference asset;
(d) for tranched products, the purchased protection is on a reference obligation with the same level of seniority;
(e) if the firm purchases protection on a pool of reference names, the protection is economically equivalent to buying protection separately on each individual name in the pool, and the pool of reference entities and the level of subordination in both contracts are identical.
(4) When the effective notional amount is included in the exposure as described in subrule (2), and a deduction of offsetting purchased credit derivatives is made (see subrule (2) (b)), the effective notional amount of the offsetting credit protection must also be reduced by any resulting positive change in the firm's tier 1 capital.
(5) When the effective notional amount is included in the exposure as described in subrule (2), but no deduction of offsetting purchased credit derivatives is made (see subrule (2) (b)):
(a) if an eligible bilateral netting agreement applies, the firm may deduct the individual PFCE add-on amount from PFCEgross; or
(b) if no such netting agreement applies, the firm may set PFCE for rule 3.4.13 to 0.
(6) However, no adjustments may be made to NGR.
Inserted by QFCRA RM/2019-6 (as from 1st January 2020).