in force 2023-06-28 INSERTED+1,243 −0§
Amended by Regulation (EU) 2019/876 32019R0876
applies from: unknown (an inserted provision states its own application date only in prose)
This is a wholly new article setting out which equity derivatives count as eligible credit protection, limiting their use to internal hedges and specifying when protection bought via a total return swap does not qualify.
It also states that an internal hedge using an equity derivative only qualifies as eligible credit protection if the credit risk transferred to the trading book is passed out to one or more third parties, and that in that case institutions apply the rules in Sections 4 to 6 of the Chapter for calculating risk-weighted exposure amounts and expected loss amounts when acquiring unfunded credit protection.
Cited: Art. 204a, v2
text before / after
inserted text (02013R0575-20230628)
Article 204a Eligible types of equity derivatives 1. Institutions may use equity derivatives which are total return swaps or economically effectively similar, as eligible credit protection only for the purpose of conducting internal hedges. Where an institution buys credit protection through a total return swap and records the net payments received on the swap as net income, but does not record the offsetting deterioration in the value of the asset that is protected either through reductions in fair value or by an addition to reserves, that credit protection shall not qualify as eligible credit protection. 2. Where an institution conducts an internal hedge using an equity derivative, in order for the internal hedge to qualify as eligible credit protection for the purposes of this Chapter, the credit risk transferred to the trading book shall be transferred out to a third party or parties. Where an internal hedge has been conducted in accordance with the first subparagraph and the requirements in this Chapter have been met, institutions shall apply the rules set out in Sections 4 to 6 of this Chapter for the calculation of risk-weighted exposure amounts and expected loss amounts where they acquire unfunded credit protection.