B. Illustration 2
C 52/2017 STA Effective from 1/4/2021Consider a netting set with three credit derivatives: one long single-name CDS written on Firm A (rated AA), one short single-name CDS written on Firm B (rated BBB), and one long CDS index (investment grade). All notional amounts and market values are denominated in USD. This netting set is not subject to a margin agreement and there is no exchange of collateral (independent amount/initial margin) at inception. The table below summarizes the relevant contractual terms of the three derivatives.
| Trade # | Nature | Reference entity / index name | Rating reference entity | Residual maturity | Base currency | Notional (thousands) | Position | Market value (thousands) |
| 1 | Single-name CDS | Firm A | AA | 3 years | USD | 10,000 | Protection buyer | 20 |
| 2 | Single-name CDS | Firm B | BBB | 6 years | EUR | 10,000 | Protection seller | -40 |
| 3 | CDS index | CD X.IG | Investment grade | 5 years | USD | 10,000 | Protection buyer | 0 |
According to the Standards, the EAD for un-margined netting sets is given by:
EAD = 1.4 * (RC + PFE)