MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4611.12.31purchased out of the proceeds of the noteissuance.B. Operational requirements for creditderivatives8. A credit derivative must represent adirect claim on the protection seller andmust be explicitly referenced to specificexposures or a pool of exposures, so thatthe extent of the cover is clearly defined andincontrovertible. Other than non-paymentby a protection buyer of money due inrespect of the credit derivative contract, itmust be irrevocable; there must be no clausein the contract that would allow theprotection seller unilaterally to cancel thecredit cover or that would increase theeffective cost of cover as a result ofdeteriorating credit quality in the hedgedexposure. It must also be unconditional;there should be no clause in the creditderivative contract outside the directcontrol of the protection buyer that couldprevent the protection seller from beingobliged to pay out in a timely manner inthe event of a defined credit event.9. The credit events specified by thecontracting parties must at a minimumcover:a) failure to pay the amounts dueunder terms of the underlying obligationthat are in effect at the time of such failure(with a grace period that is closely in linewith the grace period in the underlyingobligation);b) bankruptcy, insolvency or inabilityof the obligor to pay its debts, or its failureor admission in writing of its inabilitygenerally to pay its debts as they becomedue, and analogous events; andc) restructuring of the underlyingobligation involving forgiveness orpostponement of principal, interest or feesthat results in a credit loss event (i.e.,charge-off, specific provision or othersimilar debit to the profit and lossaccount).10. The credit derivative shall notterminate prior to expiration of any graceperiod required for a default on theunderlying obligation to occur as a result ofa failure to pay, subject to the provisions ofparagraph 52 of Part III.B.11. Credit derivatives allowing forcash settlement are recognized for capitalpurposes insofar as a robust valuationprocess is in place in order to estimateloss reliably. There must be a clearlyspecified period for obtaining post-creditevent valuations of the underlyingobligation.12. If the protection buyer’s right orability to transfer the underlying obligationto the protection seller is required forsettlement, the terms of the underlyingobligation must provide that any requiredconsent to such transfer may not beunreasonably withheld.13.The identity of the partiesresponsible for determining whether acredit event has occurred must be clearlydefined. This determination must not bethe sole responsibility of the protectionseller. The bank as protection buyer musthave the right/ability to inform theprotection seller of the occurrence of acredit event.14. Asset mismatches (underlyingobligation is different from the obligationused for purposes of determining cashsettlement or the deliverable obligation,or from the obligation used for purposesof determining whether a credit event hasoccurred) are permissible if:a) the obligation used for purposesof determining cash settlement or thedeliverable obligation, or the obligationused for purposes of determining whethera credit event has occurred ranks paripassu with or is junior to the underlyingQ RegulationsAppendix Q-46 - Page 22Manual of Regulations for Non-Bank Financial Institutions