Article 386
Eligible hedges
1.
Positions in hedging instruments shall be recognised as eligible hedges for the calculation of the own funds requirements for CVA risk in accordance with Articles 383 and 384 where those positions meet all of the following requirements:
(a)
they are used for the purpose of mitigating CVA risk and are managed as such;
(b)
they can be entered into with third parties or with the institution’s trading book as an internal hedge, in which case they are to comply with Article 106(7);
(c)
only positions in hedging instruments as referred to in paragraphs 2 and 3 of this Article can be recognised as eligible hedges for the calculation of the own funds requirements for CVA risk in accordance with Articles 383 and 384, respectively.
For the purpose of calculating the own funds requirements for CVA risk in accordance with Article 383, positions in hedging instruments shall be recognised as eligible hedges where, in addition to the conditions set out in points (a) to (c) of this paragraph, such hedging instruments form a single position in an eligible hedge and are not split into more than one position in more than one eligible hedge.
2.
For the calculation of the own funds requirements for CVA risk in accordance with Article 383, only positions in the following hedging instruments shall be recognised as eligible hedges:
(a)
instruments that hedge variability of the counterparty credit spread, with the exception of instruments referred to in Article 325(5);
3.
For the calculation of the own funds requirements for CVA risk in accordance with Article 384, only positions in the following hedging instruments shall be recognised as eligible hedges:
(a)
single-name credit default swaps and single-name contingent-credit default swaps, referencing:
(i)
the counterparty directly;
(ii)
an entity legally related to the counterparty, where legally related refers to cases where the reference name and the counterparty are either a parent undertaking and its subsidiary or two subsidiaries of a common parent;
(iii)
an entity that belongs to the same sector and region as the counterparty;
(b)
index credit default swaps.
4.
Positions in hedging instruments entered into with third parties that are recognised as eligible hedges in accordance with paragraphs 1, 2 and 3 and included in the calculation of the own funds requirements for CVA risk shall not be subject to the own funds requirements for market risk set out in Title IV.
5.
Positions in hedging instruments that are not recognised as eligible hedges in accordance with this Article shall be subject to the own funds requirements for market risk set out in Title IV.