EBA is consulting on the guidelines on application of the structural foreign exchange, or S-FX, provision under Article 352(2) of the Capital Requirements Regulation (CRR). The guidelines aim to set a regulatory framework on structural foreign exchange to address the observed diversity in its application across EU. The guidelines identify criteria to assist competent authorities in their assessment of the structural nature of a foreign-exchange position and whether such a position has been deliberately taken for hedging the capital ratio. The consultation period ends on January 17, 2020.
This consultation paper sets out objective criteria that competent authorities should consider for assessing whether the conditions set out in article 352(2) of the CRR for receiving the permission to exclude a foreign-exchange position from the net open position in the foreign currency are met. The guidelines introduce, for the first time, a detailed regulatory framework for the structural foreign-exchange provision and several questions have been included as part of the consultation process to gather feedback on the proposed provisions. The consultation paper:
- Provides clarifications on the structural foreign-exchange provision, clarifying, among others, that institutions computing the own funds requirements for foreign-exchange risk with the standardized approach and with the internal model approach may apply for the waiver and the waiver should be sought only for currencies that are material for the institution.
- Discusses the concepts of positions ‘deliberately taken to hedge the capital ratio and positions of "a non-trading or structural nature." EBA proposes that only banking book positions may be subject to the waiver and that the position for which the exemption is sought should be long on a net basis.
- Sets the governance requirements and the requirements related to the risk-management strategy of the institution with respect to its structural foreign-exchange positions.
- Clarifies that items held at historical cost should be considered as part of the foreign-exchange open position.
- Deals with the calculation of the maximum open position that can be excluded from the net open position. In line with the Fundamental Review of the Trading Book (FRTB) standards, the EBA proposes that the exemption should be limited in size by the open position for which the capital ratio is non-sensitive to the exchange rate.
- Clarifies some aspects with respect to 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.
- Provides clarifications on the approval process and how competent authorities should react to possible changes in the risk-management strategy of the structural foreign-exchange positions.
Furthermore, the annexes to the consultation paper further clarify technical details discussed in the paper and provide examples on the application of the structural foreign-exchange provision. The concept and application of the structural foreign-exchange provision, as laid down in the CRR, appears to be subject to several interpretations, across both supervisory authorities and institutions. This is particularly relevant, as over the last few years banks appear to have become increasingly interested in the application of the structural foreign-exchange exclusion. Moreover, the implementation of this provision seems to be quite uneven across jurisdictions and there is a lack of clarity about what constitutes a structural position for the purposes of Article 352(2). Finally, the treatment of the structural foreign-exchange has been modified in the recently published FRTB. Therefore, the application of this provision can have a significant impact on capital requirements. Accordingly, EBA believes that a more harmonized application and enforcement of this provision is necessary and can be achieved with these guidelines.
Comment Due Date: January 17, 2020
Keywords: Europe, EU, Banking, CRR, Guidelines, S-FX, Structural Foreign Exchange, FRTB, Market Risk, Regulatory Capital, Basel III
The Australian Prudential Regulation Authority (APRA) released an update on the timelines for revisions to the market risk prudential standards and the implications for the broader capital framework.
Three global standard-setters launched a joint consultation that reviews the margining practices during the COVID-19 pandemic and identifies potential areas for further policy work.
The Bank of England (BoE) published the Statistical Notice 2021/09 requiring additional information from firms and software vendors to assist in the onboarding and testing phases for migrating statistical reporting to the BEEDS portal.
The European Banking Authority (EBA) published the final draft regulatory technical standards on gross jump-to-default amounts and on residual risk add-on under the Capital Requirements Regulation or CRR.
The Financial Conduct Authority (FCA) published the final rules on the Investment Firms Prudential Regime (IFPR) to streamline and simplify the prudential requirements for solo-regulated UK firms authorized under the Markets in Financial Instruments Directive (MiFID).
The European Supervisory Authorities (ESAs) have delivered to the European Commission (EC) the final report on the draft regulatory technical standards for disclosures under the Sustainable Finance Disclosure Regulation (SFDR).
The European Banking Authority (EBA) published an advice to the European Commission (EC) on funding in resolution and insolvency as part of the review of the crisis management and deposit insurance (CMDI) framework.
The Financial Stability Oversight Council (FSOC) released a report in response to the U.S. President's Executive Order on climate-related financial risk.
The Bank for International Settlements (BIS) published a paper that examines the business models and the associated risks posed by big technology firms foraying into financial services sector.
The Bank for International Settlements (BIS) announced the development of an Asian Green Bond Fund, in collaboration with the development financing community, to channel global central bank reserves to green projects in Asia Pacific.