EBA launched a consultation on the regulatory technical standards that specify how institutions should determine exposures arising from derivative and credit derivative contracts not entered directly into with a client but whose underlying debt or equity instrument was issued by a client. These draft technical standards, which have been issued in line with the revised Capital Requirements Regulation or CRR2, are intended to ensure appropriate levels of consistency through different pieces of the regulatory framework for the calculation of exposures for large exposure purposes. The consultation runs until October 23, 2020.
The draft technical standards propose a methodology for the calculation of exposures under Part four of the CRR for different categories of derivative contracts and credit derivative contracts with a single underlying debt or equity instrument— namely, options on debt and equity instruments, credit derivative contracts, and other derivatives having as underlying a debt or equity instrument. Only derivative and credit derivative contracts where the underlying of those instruments entails a default risk of the underlying reference names should be relevant for the calculation of the indirect exposures set out in these technical standards.
The draft technical standards provide a separate methodology for calculation of exposures stemming from contracts with multiple underlying reference names. In each case, a general methodology as well as a fallback approach is provided. The draft technical standards build on the BCBS framework on large exposures with the intention to be consistent with market risk rules for the calculation of exposures from (credit) derivatives, complemented where needed by specificities or objectives stemming from the large exposures framework. These technical standards are part of the EBA roadmap on the risk-reduction measures package that was published in November 2019. The final regulatory technical standards will be submitted to EC for endorsement before being published in the Official Journal of the European Union.
Keywords: Europe, EU, Banking, CRR2, Large Exposures, Indirect Exposures, Derivatives, Basel, Regulatory Technical Standards, Market Risk, Credit Risk, EBA
Previous ArticleEBA Issues Guidelines on Approach to 2020 SREP in Light of Pandemic
FCA and PRA in the UK, FED in the US, and the authorities in Singapore have fined Goldman Sachs for risk management failures in connection with the 1Malaysia Development Berhad (1MDB).
ISDA launched the IBOR Fallbacks Supplement and the IBOR Fallbacks Protocol, with both becoming effective on January 25, 2021.
BCBS announced that OSFI and the Bank of Canada hosted the 21st International Conference of Banking Supervisors (ICBS) virtually on October 19-22, 2020.
FCA proposed guidance on how firms should continue to seek to help customers who hold insurance and premium finance products and may be in financial difficulty because of COVID-19, after October 31, 2020.
EBA issued an opinion on prudential treatment of the legacy instruments as the grandfathering period nears an end on December 31, 2021.
ESRB published the fifth issue of the EU Non-bank Financial Intermediation Risk Monitor 2020 (NBFI Monitor).
HM Treasury announced that the new Financial Services Bill has been introduced in the Parliament.
APRA announced that it has increased the minimum liquidity requirement of Bendigo and Adelaide Bank for failing to comply with the prudential standard on liquidity.
PRA published the consultation paper CP17/20 to propose changes to certain rules, supervisory statements, and statements of policy to implement elements of the Capital Requirements Directive (CRD5).
US Agencies adopted a final rule that applies to advanced approaches banking organizations and aims to reduce interconnectedness in the financial system as well as to reduce contagion risks associated with the failure of a global systemically important bank (G-SIB).