Authorised Firmmay recognise the effects of Credit Riskmitigation for an Exposurewhere there is a maturity mismatch only if the Credit Riskmitigant has an Original Maturityof at least one year and a residual maturity of more than three months. For the purposes of calculating Credit RWA, a maturity mismatch occurs when the residual maturity of the Credit Riskmitigant is less than that of the underlying Exposure.
PIB 4.13.15(1) An
Authorised Firmmust determine the maturity of the underlying Exposureand the maturity of the Credit Riskmitigant conservatively. The residual maturity of the underlying Exposuremust be gauged as the longest possible remaining time before the Counterpartyis scheduled to fulfil its obligation, taking into account any applicable grace period.(2) In the case of Credit Riskmitigant, embedded options which may reduce the term of the credit protection must be taken into account so that the shortest possible residual maturity is used. Where a call is at the discretion of the protection seller, the residual maturity will be at the first call date. If the call is at the discretion of the Authorised Firmbut the terms of the arrangement at origination of the Credit Derivativecontain a positive incentive for the Authorised Firmto call the transaction before contractual maturity, the remaining time to the first call date will be deemed to be the residual maturity.
PIB 4.13.16 PIB 4.13.16(1) An
Authorised Firmmust calculate the value of the Credit Riskmitigation adjusted for any maturity mismatch (referred to as "PA"), using the following formula:
PA = P(t-0.25)/(T-0.25)where —(a) P = value of the credit protection (e.g.
Collateralamount, guarantee amount) adjusted for any haircuts;(b) t = min (T, residual maturity of the Credit Riskmitigant) expressed in years; and(c) T = min (5, residual maturity of the Exposure) expressed in years.(2) For residual maturity of the Exposurein the case of a basket of Exposureswith different maturities, an Authorised Firmmust use the longest maturity of any of the Exposuresas the maturity of all the Exposuresbeing hedged.
PIB 4.13.16 Guidance
The positive incentive for an
Authorised Firmto call the transaction before contractual maturity as referred in PIB Rule 4.13.15 would be, for example, a situation wherein there is a step-up in cost in conjunction with a call feature or where the effective cost of cover remains the same even if credit quality remains the same or increases.