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    EBA Publishes Standards to Calculate Risk-Weights of CIUs Under CRR

    November 24, 2021

    The European Banking Authority (EBA) published the final report on draft regulatory technical standards for the calculation of risk-weighted exposure amounts of collective investment undertakings or CIUs, in line with the Capital Requirements Regulation (CRR). The final regulatory 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. These standards provide clarification on the regulatory treatment for missing inputs when the underlying risk of derivatives is unknown as well as on the computation of the exposure value for counterparty credit risk.

    The report on the draft regulatory standards first clarifies steps to be taken for computing the exposure value of collective investment undertakings’ derivatives exposures where the underlying is unknown. Then, it provides for cases where the calculation of exposure amount to counterparty credit risk of a netting set of collective investment undertakings’ derivative exposures is needed. The draft regulatory standards explain what is considered as insufficient information versus missing inputs and clarify whether market measures provide sufficient information for application of the mandate-based approach for exposures to collective investment undertakings. The draft provisions closely follow both the Basel framework for equity exposures into funds as well as the CRR2 framework for counterparty credit risk. The final report explains the policy choices of regulatory requirements for the draft regulatory 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 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 the 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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    Keywords: Europe, EU, Banking, CRR, Basel, Collective Investment Undertaking, Credit Risk, Standardized Approach, Derivatives, Regulatory Technical Standards, Regulatory Capital, Mandate-Based Approach, Counterparty Credit Risk, EBA

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