Featured Product

    EBA Issues Standards to Determine Indirect Exposures from Derivatives

    February 19, 2021

    EBA published the final draft regulatory technical standards that present a methodology for the calculation of indirect exposures for different categories of derivative contracts and credit derivative contracts with a single underlying debt or equity instrument. Specifically, the standards cover the calculation of indirect exposures for options on debt and equity instruments, credit derivative contracts, and other derivatives that have a debt or equity as the underlying instrument. The draft regulatory standards were issued in line with the revised Capital Requirements Regulation (CRR2) and are intended to facilitate consistency through different pieces of the regulatory framework for calculation of large exposures.

    The regulatory standards provide a separate methodology for the calculation of exposures stemming from contracts with multiple underlying reference names. The proposed methodologies are expected to be easy to implement and applicable by all institutions in a standardized manner. The final draft standards have been developed in a way to ensure that they are compatible with the jump-to-default (JTD) approach under the Fundamental Review of the Trading Book (FRTB) and the CRR and the corresponding draft regulatory standards on JTD that the EBA is developing. The basis of both draft regulatory technical standards is the variation in price that would stem from the default of an issuer. Post a three-month EBA consultation on the draft regulatory standards, EBA clarified the treatment of derivatives and credit derivatives allocated to the trading book or non-trading book. Furthermore, the draft regulatory standards have been amended to align the proposed rules applicable to multi-underlying derivatives with a structure (that is, an index and collective investment undertakings) or without a structure, as well as the introduction of a partial look-though approach for this type of derivatives.

    For large exposures purposes, under the CRR, an institution shall calculate the exposures to a client or group of connected clients by adding the direct and indirect exposures in the trading book and in the nontrading book. The indirect exposure to the issuer of the underlying instrument of a derivative contract shall be calculated as the loss that would result from the default of the issuer itself. The draft regulatory technical standards propose a methodology for the calculation of such exposures. The draft regulatory standards thus build on the BCBS framework on large exposures with the intention of being 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 regulatory technical standards are part of the EBA roadmap on risk-reduction measures package that was published in November 2019. The final draft technical standards will be submitted to EC for adoption. Following submission, the technical standards will be subject to scrutiny by the European Parliament and the Council before being published in the Official Journal of the European Union.

     

    Related Links

    Keywords: Europe, EU, Banking, Indirect Exposures, Derivatives, Large Exposures, CRR2, Basel, Regulatory Technical Standards, Credit Risk, Market Risk, Concentration Risk, EBA

    Featured Experts
    Related Articles
    News

    BIS Examines Use of Big Data and Machine Learning at Central Banks

    BIS published a paper that provides an overview on the use of big data and machine learning in the central bank community.

    March 04, 2021 WebPage Regulatory News
    News

    APRA Finalizes Reporting Standard for Operational Risk Requirements

    APRA finalized the reporting standard ARS 115.0 on capital adequacy with respect to the standardized measurement approach to operational risk for authorized deposit-taking institutions in Australia.

    March 03, 2021 WebPage Regulatory News
    News

    ECB Publishes Guide for Determining Penalties for Regulatory Breaches

    ECB published a guide that outlines the principles and methods for calculating the penalties for regulatory breaches of prudential requirements by banks.

    March 02, 2021 WebPage Regulatory News
    News

    MAS Sets Out Good Practices to Manage Operational Risks Amid COVID

    MAS and The Association of Banks in Singapore (ABS) jointly issued a paper that sets out good practices for the management of operational and other risks stemming from new work arrangements adopted by financial institutions amid the COVID-19 pandemic.

    March 02, 2021 WebPage Regulatory News
    News

    ACPR Announces New Data Collection Application for Banks and Insurers

    ACPR announced that a new data collection application, called DLPP (Datalake for Prudential), for collecting banking and insurance prudential data will go into production on April 12, 2021.

    March 02, 2021 WebPage Regulatory News
    News

    BCB Maintains CCyB at 0%, Initiates First Cycle of Regulatory Sandbox

    BCB announced that the Financial Stability Committee decided to maintain the countercyclical capital buffer (CCyB) for Brazil at 0%, at least until the end of 2021.

    March 02, 2021 WebPage Regulatory News
    News

    EIOPA Launches Study on Non-Life Underwriting Risk in Internal Models

    EIOPA has launched a European-wide comparative study on non-life underwriting risk in internal models, also kicking-off of the data collection phase.

    March 01, 2021 WebPage Regulatory News
    News

    SRB Publishes Overview of Resolution Tools Available in Banking Union

    SRB published an overview of the resolution tools available in the Banking Union and their impact on a bank’s ability to maintain continuity of access to financial market infrastructure services in resolution.

    March 01, 2021 WebPage Regulatory News
    News

    EBA Consults on Pillar 3 Disclosure Standards for ESG Risks Under CRR

    EBA is consulting on the implementing technical standards for Pillar 3 disclosures on environmental, social, and governance (ESG) risks, as set out in requirements under Article 449a of the Capital Requirements Regulation (CRR).

    March 01, 2021 WebPage Regulatory News
    News

    ESAs Issue Advice on KPIs on Sustainability for Nonfinancial Reporting

    ESAs Issue Advice on KPIs on Sustainability for Nonfinancial Reporting

    March 01, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6655