Article 4 Short run default rates of a rating category where a sufficient number of credit ratings is available

Where a sufficient number of credit ratings is available according to Article 3(1), the short run default rates referred to in Article 1 shall be calculated in the manner described in paragraphs 2 to 5.

The short run default rates of a rating category shall be calculated over a 3-year time horizon as a ratio where:

1. (a)

   the denominator represents the number of items assigned the same rating category present at the beginning of the time horizon;

2. (b)

   the numerator represents the number of items referred to in point (a) that have defaulted prior to the end of the time horizon.

Items withdrawn prior to the end of the time horizon and not defaulted shall only contribute to the denominator of the short run default rates referred to in point (a) of paragraph 2 with a weight equal to 50 %. Any item for which there is evidence that it has been withdrawn prior to the occurrence of a default shall be considered to be a defaulted item.

Items shall be considered to be defaulted items to be included in the numerator specified in point (b) of paragraph 2 where any of the following types of event has occurred:

1. (a)

   a bankruptcy filing or legal receivership that will likely cause a miss or delay in future contractually required debt service payments;

2. (b)

   a missed or delayed disbursement of a contractually required interest or principal payment, unless payments are made within a contractually allowed grace period;

3. (c)

   a distressed exchange if the offer implies the investor will receive less value than the promise of the original securities;

4. (d)

   the rated entity is under a significant form of regulatory supervision owing to its financial condition.

The short run default rates shall be calculated for each available pool of items assigned the same rating category on semi-annual periods, which are based on 1 January and 1 July of each year.