Featured Product

    EBA Guidelines on Treatment of Structural Foreign Exchange Under CRR

    July 01, 2020

    EBA finalized the guidelines on treatment of structural foreign-exchange (FX) positions under Article 352(2) of the Capital Requirements Regulation (CRR). The guidelines consider changes to the market risk framework introduced in CRR2 and the structural foreign-exchange treatment envisaged in the Fundamental Review of the Trading Book (FRTB) standards. Thus, the guidelines have been designed in such a way that institutions will not be required to ask for a new permission once they switch to the FRTB framework for computing the own funds requirements for market risk. The guidelines will be applicable from January 01, 2022, one year later than originally envisaged to ensure that institutions have time to prepare for the introduction of the requirements.

    The guidelines are deemed to set objective criteria that competent authorities should consider for assessing whether the conditions set out in Article 352(2) of CRR for receiving the permission to exclude a foreign-exchange position from the net open position in the foreign currency are met. To harmonize such practices among EU jurisdictions, several technical details have been included as part of these guidelines, which:

    • Provide some clarifications about the structural foreign exchange provision. It is clarified that institutions computing the own funds requirements for foreign exchange risk both using the standardized approach and using the internal model approach may apply for the waiver. The waiver should be sought only for currencies that are relevant to the institution
    • Discuss the concepts of positions "deliberately taken to hedge the capital ratio" and positions of "a non-trading or structural nature." The guidelines set out that only banking book positions may be subject to the waiver (on meeting other conditions) and that the position for which the exemption is sought should be long on a net basis.
    • Lay down the governance requirements and the requirements related to the risk management strategy of the institution with respect to the structural foreign-exchange positions.
    • Deal with the treatment of items held at historical cost. EBA clarified that such items should be considered part of the foreign-exchange open position.
    • Deal with the calculation of the maximum open position that can be excluded from the net open position. In line with the FRTB standards, EBA clarifies that the exemption should be limited in size by the open position for which the capital ratio is non-sensitive to the exchange rate.
    • Clarify certain aspects of the calculation of the own funds requirements for foreign-exchange risk, where some positions have been excluded from the net open position following the permission of the competent authority.
    • Provide clarifications about the approval process and how competent authorities should react to possible changes in the risk management strategy of structural foreign exchange positions.

    The two annexes to the guidelines further clarify certain technical details discussed in the guidelines and provide examples on application of the structural foreign-exchange provision. These guidelines are based on a consultation paper that EBA had published on October 16, 2019. Twenty-one respondents provided feedback on the consultation paper. However, only six of the responses were non-confidential and were published on the EBA website. A summary of the non-confidential responses, along with EBA analyses of those responses, has been included in the guidelines. EBA considered the feedback provided by all respondents in developing the final guidelines.

     

    Related Links

    Effective Date: January 01, 2022

    Keywords: Europe, EU, Banking, CRR, CRR2, Structural Foreign Exchange, FRTB, Market Risk, Regulatory Capital, Basel, EBA

    Featured Experts
    Related Articles
    News

    OSFI Issues Results of Pilot on Climate Risk Scenario Analysis

    The Office of the Superintendent of Financial Institutions (OSFI) published an update on the discussion paper that intended to engage federally regulated financial institutions and other interested stakeholders in a dialog with OSFI, to proactively enhance and align assurance expectations over key regulatory returns.

    January 20, 2022 WebPage Regulatory News
    News

    EC Issues Regulation on Adjustments to K-Factor Coefficients Under IFR

    The European Commission (EC) published a report summarizing responses to the targeted consultation on the supervisory convergence and the single rulebook in the European Union (EU).

    January 20, 2022 WebPage Regulatory News
    News

    ECB Issues Opinions on Green Bonds Standard and CRR Proposals

    The European Central Bank (ECB) published its opinion on a proposal for a regulation on European green bonds, following a request from the European Parliament.

    January 19, 2022 WebPage Regulatory News
    News

    ESRB Explores Policy Response to Risks Arising from Digitalization

    The Advisory Scientific Committee (ASC) of the European Systemic Risk Board (ESRB) published a report that explores the expected impact of digitalization on provision of financial and banking services, and proposes policy measures to address the risks stemming from digitalization.

    January 18, 2022 WebPage Regulatory News
    News

    HKMA Consults on FIRO Code, Revises Policy on Foreign Exchange Risk

    The Hong Kong Monetary Authority (HKMA) is consulting on the draft Financial Institutions (Resolution) Ordinance (Cap. 628), or FIRO, Code of Practice chapter on liquidity and funding in resolution, until March 14, 2022.

    January 18, 2022 WebPage Regulatory News
    News

    FI Publishes Multiple Regulatory and Reporting Updates

    The Swedish Financial Supervisory Authority (FI) announced that the capital adequacy reporting as at December 31, 2021 must be done by February 11, 2022.

    January 17, 2022 WebPage Regulatory News
    News

    EU Authorities Address COVID-19 Reporting, MCD, and PSD2 Issues

    The European Banking Authority (EBA) announced that the guidelines on the reporting and disclosure of exposures subject to measures COVID-relief measures shall continue to apply until further notice.

    January 17, 2022 WebPage Regulatory News
    News

    BSP Tackles Aspects of Lending and Islamic, Open & Sustainable Finance

    The Central Bank of the Philippines (BSP) issued communications covering developments related to online lending platforms, open finance framework and roadmap, and on the expected regulations in the area sustainable finance.

    January 16, 2022 WebPage Regulatory News
    News

    US Agencies Issue Regulatory Updates, FDIC Launches Tech Sprint

    The Board of Governors of the Federal Reserve System (FED) published the final rule that amends Regulation I to reduce the quarterly reporting burden for member banks by automating the application process for adjusting their subscriptions to the Federal Reserve Bank capital stock, except in the context of mergers.

    January 13, 2022 WebPage Regulatory News
    News

    EBA Issues Guide on Bank Resolvability, Consults on Transferability

    The European Banking Authority (EBA) published its assessment of risks through the quarterly Risk Dashboard and the results of the Autumn edition of the Risk Assessment Questionnaire (RAQ).

    January 13, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 7903