Article 386 - Eligible hedges
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Hedges shall be ‘eligible hedges’ for the purposes of the calculation of own funds requirements for CVA risk in accordance with Articles 383 and 384 only where they are used for the purpose of mitigating CVA risk and managed as such, and are one of the following:
single-name credit default swaps or other equivalent hedging instruments referencing the counterparty directly;
The requirement in point (b) that the basis between any individual counterparty spread and the spreads of index credit default swap hedges is reflected in the value-at-risk and the stressed value-at-risk shall also apply to cases where a proxy is used for the spread of a counterparty.
If the basis between any individual counterparty spread and the spreads of index credit default swap hedges is not reflected to the satisfaction of the competent authority, then an institution shall reflect only 50 % of the notional amount of index hedges in the value-at-risk and the stressed value-at-risk.
Over-hedging of the exposures with single name credit default swaps under the method laid out in Article 383 is not allowed.