Article 346 - Allowance for hedges by credit derivatives
Table of content
Allowance for hedges by credit derivatives
Full allowance shall be given when the values of the two legs always move in the opposite direction and broadly to the same extent. This will be the case in the following situations:
the two legs consist of completely identical instruments;
In these situations, a specific risk own funds requirement shall not be applied to either side of the position.
Partial allowance shall be given, absent the situations in paragraphs 3 and 4, in the following situations:
the reference obligation ranks pari passu with or is junior to the underlying obligation;
the underlying obligation and reference obligation share the same obligor and have legally enforceable cross-default or cross-acceleration clauses;
the position falls under paragraph 3(a) or paragraph 4 but there is a currency or maturity mismatch between the credit protection and the underlying asset. Such currency mismatch shall be included in the own funds requirement for foreign exchange risk;
the position falls under paragraph 4 but there is an asset mismatch between the cash position and the credit derivative. However, the underlying asset is included in the (deliverable) obligations in the credit derivative documentation.