![]() ![]() They also apply regardless of whether the cash positions or reference obligations of the credit derivative are single-name or securitisation exposures.įor example, when a long cash position is hedged using a CDS, the 80% offset treatment of MAR20.16 (the partial allowance treatment of MAR20.17) generally applies when the reference obligation of the CDS is the cash instrument being hedged and the currencies and remaining maturities of the two positions are (are not) identical. MAR20.15 to MAR20.17 are applicable not only when the underlying position being hedged is a cash position, but also when the position being hedged is a credit default swap (CDS) or other credit derivative. Supervisors should recognise that, in the case of multiple instruments comprising one side of the position, necessary conditions (ie value of two legs moving in opposite directions, key contractual features of the credit derivative, identical reference obligations and currency/maturity mismatches) will be extremely difficult to meet, in practice.Īccording to MAR20.15 to MAR20.17, the offsetting treatment is applied to a cash position that is hedged by a credit derivative or a credit derivative that is hedged by another credit derivative, assuming there is an exact match in terms of the reference obligations. Although this treatment applies generally in a one-for-one fashion, it is possible that multiple instruments could combine to create a hedge that would be eligible for consideration for partial offsetting. The other set of circumstances described in MAR20.15 to MAR20.17 pertains to offsetting between a credit derivative (whether total return swap or credit default swap) and the underlying exposure (ie cash position). One set of circumstances is described in MAR20.20 and concerns n-th-to-default basked products. In addition, partial offsetting is allowed in two other sets of circumstances. ![]() Even if the issuer is the same, no offsetting will be permitted between different issues since differences in coupon rates, liquidity, call features, etc means that prices may diverge in the short run.” Netting is only allowed under limited circumstances for interest rate specific risk as explained in MAR20.4: “offsetting will be restricted to matched positions in the identical issue (including positions in derivatives). What could be the conditions under which trading book positions that are subject to interest rate specific risk could be netted in order to derive either the net long position or the net short position? Are the rules considering a perfect hedge only? Is it allowed to net cash and synthetic securitisations for the purpose of the capital calculation for structured products under the standardised approach for correlation trading? ![]()
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