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Capital Requirements Regulation (CRR)
Article 384

Article 384 — Standardised method

  1. An institution which does not calculate the own funds requirements for CVA risk for its counterparties in accordance with Article 383 shall calculate a portfolio own funds requirements for CVA risk for each counterparty in accordance with the following formula, taking into account CVA hedges that are eligible in accordance with Article 386:
    $${K} = {2.33 \cdot \sqrt{{h}} \cdot \sqrt{{{\left (\sum 0.5 \cdot w _{i} \cdot (M _{i} \cdot \mathrm{EAD} _{i} ^{\mathrm{total}} - M _{i} ^{\mathrm{hedge}} B _{i}) - \sum w _{\mathrm{ind}} \cdot M _{\mathrm{ind}} \cdot B _{\mathrm{ind}}\right ) ^{2}} + \sum 0.75 \cdot w _{i} ^{2} \cdot {(M _{i} \cdot \mathrm{EAD} _{i} ^{\mathrm{total}} - M _{i} ^{\mathrm{hedge}} B _{i}) ^{2}}}}}$$

    where:

    • h = the one-year risk horizon (in units of a year); h = 1;
    • wi =

      the weight applicable to counterparty i.

      Counterparty i shall be mapped to one of the six weights wi based on an external credit assessment by a nominated ECAI, as set out in Table 1. For a counterparty for which a credit assessment by a nominated ECAI is not available:

      1. an institution using the approach in Title II, Chapter 3 shall map the internal rating of the counterparty to one of the external credit assessment;
      2. an institution using the approach in Title II, Chapter 2 shall assign wi=1,0 % to this counterparty. However, if an institution uses Article 128 to risk weight counterparty credit risk exposures to this counterparty, wi=3,0 % shall be assigned;
    • \({\mathrm{EAD} ^{\mathrm{total}} _{i}}\) = the total counterparty credit risk exposure value of counterparty i (summed across its netting sets) including the effect of collateral in accordance with the methods set out in Sections 3 to 6 of Chapter 6 of Title II as applicable to the calculation of the own funds requirements for counterparty credit risk for that counterparty.
    • Bi =

      the notional of purchased single name credit default swap hedges (summed if more than one position) referencing counterparty i and used to hedge CVA risk.

      That notional amount shall be discounted by applying the following factor:

      $${\frac{1 - e ^{- 0.05 \cdot M _{i} ^{\mathrm{hedge}}}}{{0.05 \cdot M _{i} ^{\mathrm{hedge}}}}}$$
    • Bind =

      is the full notional of one or more index credit default swap of purchased protection used to hedge CVA risk.

      That notional amount shall be discounted by applying the following factor:

      $${\frac{1 - e ^{- 0.05 \cdot M _{\mathrm{ind}}}}{{0.05 \cdot M _{\mathrm{ind}}}}}$$
    • wind =

      is the weight applicable to index hedges.

      An institution shall determine wind by calculating a weighted average of wi that are applicable to the individual constituents of the index;

    • Mi =

      the effective maturity of the transactions with counterparty i.

      For an institution using the method set out in Section 6 of Title II, Chapter 6, Mi shall be calculated in accordance with Article 162(2)(g). However, for that purpose, Mi shall not be capped at five years but at the longest contractual remaining maturity in the netting set.

      For an institution not using the method set out in Section 6 of Title II, Chapter 6, Mi is the average notional weighted maturity as referred to in point (b) of Article 162(2). However, for that purpose, Mi shall not be capped at five years but at the longest contractual remaining maturity in the netting set.

    • \({M _{i} ^{\mathrm{hedge}}}\) = the maturity of the hedge instrument with notional Bi (the quantities \({M _{i} ^{\mathrm{hedge}}}\)Bi are to be summed if these are several positions);
    • Mind =

      the maturity of the index hedge.

      In the case of more than one index hedge position, Mind is the notional-weighted maturity.

  2. Where a counterparty is included in an index on which a credit default swap used for hedging counterparty credit risk is based, the institution may subtract the notional amount attributable to that counterparty in accordance with its reference entity weight from the index CDS notional amount and treat it as a single name hedge (Bi) of the individual counterparty with maturity based on the maturity of the index.
    Table 1
    Credit quality stepWeight wi
    10,7 %
    20,8 %
    31,0 %
    42,0 %
    53,0 %
    610,0 %