1. To be eligible for the treatment set out in Article 153(3), credit protection deriving from a guarantee or credit derivative shall meet the following conditions:
(a) the underlying obligation is to one of the following exposures:
(i) a corporate exposure as referred to in Article 147, excluding insurance and reinsurance undertakings;
(ii) 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 in accordance with Article 147;
(iii) an exposure to an SME, classified as a retail exposure in accordance with Article 147(5);
(b) the underlying obligors are not members of the same group as the protection provider;
(c) the exposure is hedged by one of the following instruments:
(i) single-name unfunded credit derivatives or single-name guarantees;
(ii) first-to-default basket products;
(iii) nth-to-default basket products;
(d) the credit protection meets the requirements set out in Articles 213, 215 and 216, as applicable;
(e) the risk weight that is associated with the exposure prior to the application of the treatment set out in Article 153(3), does not already factor in any aspect of the credit protection;
(f) an institution has 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, the institution shall take steps to satisfy itself that the protection provider is willing to pay promptly should a credit event occur;
(g) the purchased credit protection absorbs all credit losses incurred on the hedged portion of an exposure that arise due to the occurrence of credit events outlined in the contract;
(h) where the payout structure of the credit protection provides for physical settlement, there is legal certainty with respect to the deliverability of a loan, bond, or contingent liability;
(i) where an institution intends to deliver an obligation other than the underlying exposure, it shall ensure that the deliverable obligation is sufficiently liquid so that the institution would have the ability to purchase it for delivery in accordance with the contract;
(j) the terms and conditions of credit protection arrangements are legally confirmed in writing by both the protection provider and the institution;
(k) institutions have in place a process 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;
(l) in the case of protection against dilution risk, the seller of purchased receivables is not a member of the same group as the protection provider.
2. For the purpose of point (c)(ii) of paragraph 1, institutions shall apply the treatment set out in Article 153(3) to the asset within the basket with the lowest risk-weighted exposure amount.
3. For the purpose of point (c)(iii) of paragraph 1, the protection obtained is only eligible for consideration under this framework where eligible (n-1)th default protection has also been obtained or where (n-1) of the assets within the basket has or have already defaulted. Where this is the case, institutions shall apply the treatment set out in Article 153(3) to the asset within the basket with the lowest risk-weighted exposure amount.