(a) Eligibility and operational criteria for double default treatment. An FDIC-supervised institution may recognize the credit risk mitigation benefits of a guarantee or credit derivative covering an exposure described in Sec. 324.134(a)(1) by applying the double default treatment in this section if all the following criteria are satisfied:
(1) The hedged exposure is fully covered or covered on a pro rata basis by:
(i) An eligible guarantee issued by an eligible double default guarantor; or
(ii) An eligible credit derivative that meets the requirements of Sec. 324.134(b)(2) and that is issued by an eligible double default guarantor.
(2) The guarantee or credit derivative is:
(i) An uncollateralized guarantee or uncollateralized credit derivative (for example, a credit default swap) that provides protection with respect to a single reference obligor; or
(ii) An nth-to-default credit derivative (subject to the requirements of Sec. 324.142(m)).
(3) The hedged exposure is a wholesale exposure (other than a sovereign exposure).
(4) The obligor of the hedged exposure is not:
(i) An eligible double default guarantor or an affiliate of an eligible double default guarantor; or
(ii) An affiliate of the guarantor.
(5) The FDIC-supervised institution does not recognize any credit risk mitigation benefits of the guarantee or credit derivative for the hedged exposure other than through application of the double default treatment as provided in this section.
(6) The FDIC-supervised institution has implemented a process (which has received the prior, written approval of the FDIC) to detect excessive correlation between the creditworthiness of the obligor of the hedged exposure and the protection provider. If excessive correlation is present, the FDIC-supervised institution may not use the double default treatment for the hedged exposure.
(b) Full coverage. If a transaction meets the criteria in paragraph (a) of this section and the protection amount (P) of the guarantee or credit derivative is at least equal to the EAD of the hedged exposure, the FDIC-supervised institution may determine its risk-weighted asset amount for the hedged exposure under paragraph (e) of this section.
(c) Partial coverage. If a transaction meets the criteria in paragraph (a) of this section and the protection amount (P) of the guarantee or credit derivative is less than the EAD of the hedged exposure, the FDIC-supervised institution must treat the hedged exposure as two separate exposures (protected and unprotected) in order to recognize double default treatment on the protected portion of the exposure:
(1) For the protected exposure, the FDIC-supervised institution must set EAD equal to P and calculate its risk-weighted asset amount as provided in paragraph (e) of this section; and
(2) For the unprotected exposure, the FDIC-supervised institution must set EAD equal to the EAD of the original exposure minus P and then calculate its risk-weighted asset amount as provided in Sec. 324.131.
(d) Mismatches. For any hedged exposure to which an FDIC-supervised institution applies double default treatment under this part, the FDIC-supervised institution must make applicable adjustments to the protection amount as required in Sec. Sec. 324.134(d), (e), and (f).
(e) The double default dollar risk-based capital requirement. The dollar risk-based capital requirement for a hedged exposure to which an FDIC-supervised institution has applied double default treatment is KDD multiplied by the EAD of the exposure. KDD is calculated according to the following formula: KDD = Ko x (0.15 + 160 x PDg), where:(1)[GRAPHIC] [TIFF OMITTED] TR10SE13.039 (2) PDg equals PD of the protection provider.(3) PDo equals PD of the obligor of the hedged exposure.(4) LGDg equals:(i) The lower of the LGD of the hedged exposure (not adjusted to reflect
the guarantee or credit derivative) and the LGD of the
guarantee or credit derivative, if the guarantee or credit
derivative provides the FDIC-supervised institution with the
option to receive immediate payout on triggering the
protection; or(ii) The LGD of the guarantee or credit derivative, if the guarantee or
credit derivative does not provide the FDIC-supervised
institution with the option to receive immediate payout on
triggering the protection; and(5) [rho]os (asset value correlation of the obligor) is
calculated according to the appropriate formula for (R)
provided in Table 1 in Sec. 324.131, with PD equal to
PDo.(6) b (maturity adjustment coefficient) is calculated according to the
formula for b provided in Table 1 in Sec. 324.131, with PD
equal to the lesser of PDo and PDg; and(7) M (maturity) is the effective maturity of the guarantee or credit
derivative, which may not be less than one year or greater
than five years.