40.The supervisory factor for credit derivatives depends on the credit rating of the underlying reference asset. The Basel framework does not provide a specific treatment of unrated reference assets. The Central Bank believes that credit derivatives on unrated reference entities are likely to be rare. However, for the sake of completeness, the Standards requires that any such credit derivatives be treated in a manner that is broadly consistent with the treatment of unrated entities in other aspects of the risk-based capital framework, through use of a Supervisory Factor corresponding to BBB or BB ratings as described in the Standards.

41.For an entity for which a credit rating is not available, a bank should use the Supervisory Factor corresponding to BBB. However, where the exposure is associated with an elevated risk of default, the bank should use the Supervisory Factor for BB. In this context, “elevated risk of default” should also be understood to include instances in which it is difficult or impossible to assess adequately whether the exposure has high risk of loss due to default by the obligor. A bank trading credit derivatives referencing unrated entities should conduct their own analysis to examine this risk.