(b)index credit default swaps, provided that the basis between any individual counterparty spread and the spreads of index credit default swap hedges is reflected, to the satisfaction of the competent authority, in the value-at-risk and the stressed value-at-risk.
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.
For all counterparties for which a proxy is used, an institution shall use reasonable basis time series out of a representative group of similar names for which a spread is available.
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.
2.An institution shall not reflect other types of counterparty risk hedges in the calculation of the own funds requirements for CVA risk. In particular, tranched or nth-to-default credit default swaps and credit linked notes are not eligible hedges for the purposes the calculation of the own funds requirements for CVA risk.
1.HedgesPositions in hedging instruments shall be ‘eligiblerecognised hedges’as eligible hedges for the purposes of the calculation of the own funds requirements for CVA risk in accordance with Articles 383 and 384 only where theythose arepositions usedmeet for the purpose of mitigating CVA risk and managed as such, and are oneall of the following: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);
(b)instruments that hedge variability of the exposure component of CVA risk, with the exception of the 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 orand othersingle-name equivalentcontingent-credit hedgingdefault instrumentsswaps, referencing the counterparty directly;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.
4.3. EligiblePositions hedgesin 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 includedsubject in the calculation ofto the own funds requirements for specificmarket risk as set out in Title IV or treated as credit risk mitigation other than for the counterparty credit risk of the same portfolio of transaction.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.