MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4611.12.31E. Credit derivatives in the trading book32. The following describes thepositions to be reported for credit derivativetransactions for purposes of calculatingspecific risk and general market risk chargesunder the standardized approach.33. A CDS creates a notional positionin the specific risk of the referenceobligation. A TRS creates notional positionson the specific and general market risks ofthe reference obligation, and an oppositenotional position on a zero coupongovernment security representing the fixedpayments or premium under the TRS. A CLNcreates a notional position in the specificrisk of the reference obligation, a positionon the specific risk associated with theissuer, and a position on the general marketrisk of the note.Specific risk34. The specific risk position/s on thereference obligation/s created by creditderivatives are reported as short positionsby protection buyers and long positions byprotection sellers. In addition, holders ofCLNs should report a long position on thespecific risk of the note issuer.35. The protection buyer in a first-todefaulttransaction should report a shortposition in the reference obligation with thelowest specific risk charge. A protectionbuyer in an n th (other than the first)-to-defaulttransaction shall only be allowed to reporta short position in a reference obligationonly if n-1 obligations in the reference baskethas/have already defaulted.36. When a credit derivative isreferenced to multiple entities and thecontract terminates and pays out on the firstobligation to default in the basket, thetransaction should be reported by theprotection seller as long positions in eachof the reference obligations in the basket. ACLN should likewise be reported as a longposition on the note issuer. The total capitalcharge is capped at the notional amount ofthe derivative or, in the case of a CLN, thecarrying amount of the note.37. When the contract terminates andpays out on the n th (other than the first) entityto default in the basket, the treatment aboveshall apply except that the protection sellermay exclude the long position/s on n-1reference obligations with the lowest riskweightedexposures in its report. A CLNshould likewise be reported as a longposition on the note issuer. The total capitalcharge is capped at the notional amount ofthe derivative or, in the case of a CLN, thecarrying amount of the note.38. When an n th -to-default creditderivative has an external credit ratingacceptable to the BSP, the specific riskweights in Part VI.B will be applied.39. When the contract is referenced tomultiple obligations under a proportionatestructure, positions in the referenceobligations should be reported according totheir respective proportions in the contract.General market risk40. A protection buyer/seller in a TRSshould report a short/long notional positionon the reference obligation and a long/shortnotional position on a zero coupongovernment security representing the fixedpayment under the contract.41. A protection buyer/seller in a CLNshould report a short/long position on thenote.Counterparty credit risk42. CDS and TRS transactions in thetrading book attract counterparty credit riskcharges. A five percent (5%) add-on factorfor the computation of the potential futurecredit exposure shall be used by bothprotection buyers and protection sellers ifthe reference obligation has an externalManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 25