An Authorised Person may recognise the effects of CRM for an Exposure where there is a Maturity Mismatch only if the Credit Risk mitigant has an Original Maturity of at least one year and a residual maturity of more than three months. For the purposes of calculating Credit RWA, a Maturity Mismatch occurs when the residual maturity of the Credit Risk mitigant is less than that of the underlying Exposure.
PRU 4.13.15(1) An Authorised Person must determine the maturity of the underlying Exposure and the maturity of the Credit Risk mitigant conservatively. The residual maturity of the underlying Exposure must be gauged as the longest possible remaining time before the Counterparty is scheduled to fulfil its obligation, taking into account any applicable grace period.(2) In the case of Credit Risk the mitigant, embedded Options which may reduce the term of the credit protection must be taken into account so that the shortest possible residual maturity is used. Where a call is at the discretion of the protection seller, the residual maturity will be at the first call date. If the call is at the discretion of the Authorised Person but the terms of the arrangement at origination of the Credit Derivative contain a positive incentive for the Authorised Person to call the transaction before contractual maturity, the remaining time to the first call date will be deemed to be the residual maturity.
PRU 4.13.16 PRU 4.13.16(1) An Authorised Person must calculate the value of the CRM adjusted for any Maturity Mismatch (referred to as "PA"), using the following formula:
PA = P(t-0.25)/(T-0.25)where -(a) P = value of the credit protection (e.g. Collateral amount, guarantee amount) adjusted for any haircuts;(b) t = min (T, residual maturity of the Credit Risk mitigant) expressed in years; and(c) T = min (5, residual maturity of the Exposure) expressed in years.(2) For residual maturity of the Exposure in the case of a basket of Exposures with different maturities, an Authorised Person must use the longest maturity of any of the Exposures as the maturity of all the Exposures being hedged.
The positive incentive for an Authorised Person to call the transaction before contractual maturity as referred in Rule 4.13.15 would be, for example, a situation wherein there is a step-up in cost in conjunction with a call feature or where the effective cost of cover remains the same even if credit quality remains the same or increases.