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    EBA Consults on Standards to Calculate Risk Weights of CIUs Under CRR

    December 16, 2020

    EBA launched a consultation on the regulatory technical standards for calculation of risk-weighted exposure amounts of collective investment undertakings (CIUs) in line with the Capital Requirements Regulation (CRR). The proposed technical standards will contribute to the calculation of own funds requirements for the exposures in the form of units or shares in collective investment undertakings under the standardized approach for credit risk. The standards clarify the regulatory treatment for missing inputs when the underlying risk of derivatives is unknown and for the computation of the exposure value for counterparty credit risk. The comment period for this consultation ends on March 16, 2021.

    This draft of the technical standards first clarifies the steps to be taken for computing the exposure value of a collective investment undertaking’s derivatives exposures where the underlying is unknown. Then, it provides for cases where the calculation of the exposure amount to counterparty credit risk of a netting set of collective investment undertaking’s derivative exposures is needed. The proposed technical standards also clarify how the exposure amounts of collective investment undertakings, under the mandate-based approach, should be calculated, when one or more of the inputs required for such calculation are not available. Moreover, the draft of technical standards explains what is considered as insufficient information versus missing inputs and clarifies whether market measures provide sufficient information for the application of the mandate-based approach for exposures to collective investment undertakings. The proposed provisions closely follow the Basel framework for equity exposures into funds as well as the CRR2 framework for counterparty credit risk. This consultation paper explains the policy choices of regulatory requirements for the draft technical standards and outlines their legislative basis. EBA believes that the proposed regulatory requirements ensure a proportionate and technically consistent treatment of exposures to funds.

    CRR2 contains a mandate for EBA to develop the draft regulatory technical standards to specify how institutions shall calculate the risk‐weighted exposure amount. EBA believes that this mandate for the technical standards in CRR2 is intended to clarify the way forward when the information for applying the mandate-based approach is considered insufficient due to cases of missing inputs for the calculation of exposure values under the mandate-based approach. Moreover, in case of funds where the total leverage of the fund is limited through market risk measures, which do not limit the actual exposure amounts by specifying limits for the notional amount of derivatives and for the counterparty credit risk exposure incurred by the collective investment undertaking, the mandate-based approach cannot apply and thus the approach to be used is the fallback approach. Consequently, the mandate can only be understood as referring to missing inputs for the exposure value calculation despite having both pieces of information (that is, the maximum extent permitted for investing into exposures and the maximum allowed extent of leverage, if applicable). 


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    Comment Due Date: March 16, 2021

    Keywords: Europe, EU, Banking, CRR, Basel, Collective Investment Undertaking, Credit Risk, Standardized Approach, Derivatives, Regulatory Technical Standards, Regulatory Capital, EBA

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