Prudential Regulation Authority Rulebook

1.

A firm must calculate the capital requirement SCR_cd for spread risk on credit derivatives other than those referred to in 3D23.4 as equal to the higher of the following capital requirements:

1. (1) the loss in its basic own funds that would result from an instantaneous increase in absolute terms of the credit spread of the instruments underlying the credit derivatives; and
2. (2) the loss in its basic own funds that would result from an instantaneous relative decrease of the credit spread of the instruments underlying the credit derivatives by 75%.

2.

For the purposes of 3D23.1(1), a firm must calculate the instantaneous increase of the credit spread of the instruments underlying the credit derivatives for which a credit assessment by a nominated external credit assessment institution is available according to the following table:

3.

For the purposes of 3D23.1(1), a firm must calculate the instantaneous increase of the credit spread of the instruments underlying the credit derivatives for which a credit assessment by a nominated external credit assessment institution is not available as 5 percentage points.

4.

A firm must not subject credit derivatives which are part of the firm’s risk mitigation policy to a capital requirement for spread risk, provided that the firm holds either the instruments underlying the credit derivative or another exposure with respect to which the basis risk between that exposure and the instruments underlying the credit derivative is not material in any circumstances.

5.

Where the higher of the capital requirements referred to in 3D23.1(1) and (2) and the higher of the corresponding capital requirements calculated in accordance with 6.3(2) are not based on the same scenario, the capital requirement for spread risk on credit derivatives must be the capital requirement referred to in 3D23.1 for which the underlying scenario results in the highest corresponding capital requirement calculated in accordance with 6.3(2).