2.5. Requirements to qualify for the treatment set out in Annex VII, Part 1, point 4

To be eligible for the treatment set out in Annex VII, Part 1, point 4, credit protection deriving from a guarantee or credit derivative shall meet the following conditions: the underlying obligation shall be to: a corporate exposure as defined in Article 86, excluding insurance and reinsurance undertakings; an exposure to a regional government, local authority or Public Sector Entity which is not treated as an exposure to a central government or a central bank according to Article 86; or an exposure to a small or medium sized entity, classified as a retail exposure according to Article 86(4); the underlying obligors shall not be members of the same group as the protection provider; the exposure shall be hedged by one of the following instruments: single-name unfunded credit derivatives or single-name guarantees, first-to-default basket products — the treatment shall be applied to the asset within the basket with the lowest risk‐weighted exposure amount, or n^(th)-to-default basket products — the protection obtained is only eligible for consideration under this framework if eligible (n-1)th default protection has also be obtained or where (n-1) of the assets within the basket has/have already defaulted. Where this is the case the treatment shall be applied to the asset within the basket with the lowest risk‐weighted exposure amount; the credit protection meets the requirements set out in points 14, 15, 18, 20 and 21; the risk weight that is associated with the exposure prior to the application of the treatment in Annex VII, Part 1, point 4, does not already factor in any aspect of the credit protection; a credit institution shall have the right and expectation to receive payment from the protection provider without having to take legal action in order to pursue the counterparty for payment. To the extent possible, a credit institution shall take steps to satisfy itself that the protection provider is willing to pay promptly should a credit event occur; the purchased credit protection shall absorb all credit losses incurred on the hedged portion of an exposure that arise due to the occurrence of credit events outlined in the contract; if the payout structure provides for physical settlement, then there shall be legal certainty with respect to the deliverability of a loan, bond, or contingent liability. If a credit institution intends to deliver an obligation other than the underlying exposure, it shall ensure that the deliverable obligation is sufficiently liquid so that the credit institution would have the ability to purchase it for delivery in accordance with the contract; the terms and conditions of credit protection arrangements shall be legally confirmed in writing by both the protection provider and the credit institution; credit institutions shall have a process in place to detect excessive correlation between the creditworthiness of a protection provider and the obligor of the underlying exposure due to their performance being dependent on common factors beyond the systematic risk factor; and in the case of protection against dilution risk, the seller of purchased receivables shall not be a member of the same group as the protection provider.

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Source: EUR-Lex (Cellar) · retrieved 2026-10-09 · Text as adopted (Official Journal); later amendments are not incorporated in this text.