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
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