How should credit-linked notes be treated, for example which is their product category for the purposes of the MRM calculation?

The Delegated Regulation does not in general address the treatment of specific product types, and for credit-linked notes the contractual arrangements for each product would need to be assessed on a case-by-case basis, to identify the applicable category and the methodology for this category would then be applied. However, some guidance can be given in relation to how the Delegated Regulation can be applied to instruments that pay a periodic coupon to the investor until either maturity or the default of a reference entity. First, in accordance with Annex II, Part 1, point 4(c), where there is not sufficient historical data the product shall be considered a Category 1 product, and hence the MRM is 6. For example, if a product depends, on the default of multiple entities, there may not be observable correlations for a joint default. Where there is market data, for example CDS prices that give a market based estimate of the probability of default for a particular reference entity, these products may be Category 3 and the corresponding methodology for the risk and performance calculations would apply. Credit events are not considered to be “factors not observed in the market” (see also Q&A no. 12, Section MRM, 1. Product Categories), and therefore Category 4 is not considered to be applicable.