In accordance with article 235 institution shall calculate the risk-weighted exposure amounts for exposures with unfunded credit protection to which those institutions apply the standardized approach in accordance with the formula:

Max{0, E-Ga}*r + Ga*g

Where E, in case of off-balance-sheet exposures, shall be 100% of its exposure value rather than the exposure value indicated in article 112(2).

In order to calculate risk-weighted exposure amounts for off-balance-sheet exposures with unfunded credit protection, before applying the factor r to the unsecured part of exposure and before applying the factor g to the secured part of exposure, shall we apply the specific credit conversion factor for the off-balance-sheet exposure as listed in Annex 1 of Reg UE 575/2013? Or does the article require the institution to always apply a credit conversion factor of 100%, not only to calculate E and Ga but also to calculate the post-CCF exposure to which r and g should be applied to calculate the RWA amount?

Example:

off-balance-sheet exposure: 100

unfunded credit protection: 80

specific credit conversion factor for the off-balance-sheet exposure as listed in Annex 1: 20%

r=75% (the risk weight of exposures to the obligor)

g=20% (the risk weight applicable to a direct exposure to the protection provider)

Case1: 

RWA: Max{0, E-Ga}*r + Ga*g= Max(0, 100-80)*75%+80*20%=15+16=31

Case2:

RWA: Max{0, E-Ga}*CCF*r + Ga*CCF*g= Max(0, 100-80)*20%*75%+80*20%*20%=3+3,2=6,2

Which is the most correct application for the specific credit conversion factor for off-balance-sheet exposure?

In case of application of Case1 risk weighted asset calculated for the off-balance-sheet exposure witht an unfunded credit protection could be higher of risk weighted asset calculated for the same off-balance-sheet exposure without an unfunded credit protection. In fact, in this situation:

RWA= E*CCF*r=100*20%*75%=15