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

    CFPB Finalizes Rule on Small Business Lending Data Collection

    The Consumer Financial Protection Bureau (CFPB) published a final rule that sets out data collection requirements on small business lending, under section 1071 of the Dodd-Frank Act.

    March 30, 2023 WebPage Regulatory News
    News

    BCBS to Consult on Pillar 3 Climate Risk Disclosures by End of 2023

    The Bank for International Settlements (BIS) published a summary of the recent Basel Committee (BCBS) meetings.

    March 23, 2023 WebPage Regulatory News
    News

    FINMA Approves Merger of Credit Suisse and UBS

    The Swiss Financial Market Supervisory Authority (FINMA) has approved the takeover of Credit Suisse by UBS.

    March 21, 2023 WebPage Regulatory News
    News

    BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks

    The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.

    March 13, 2023 WebPage Regulatory News
    News

    US Congress Report Examines Data Privacy and Cybersecurity Regulations

    The U.S. Congressional Research Service published a report on banking, data privacy, and cybersecurity regulation.

    March 13, 2023 WebPage Regulatory News
    News

    OSFI Finalizes on Climate Risk Guideline, Issues Other Updates

    The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.

    March 12, 2023 WebPage Regulatory News
    News

    EU to Conduct One-Off Scenario Analysis to Assess Transition Risk

    The European authorities recently made multiple announcements that impact the banking sector.

    March 10, 2023 WebPage Regulatory News
    News

    APRA Assesses Macro-Prudential Policy Settings, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) published an information paper that assesses its macro-prudential policy settings aimed at promoting stability at a systemic level.

    March 07, 2023 WebPage Regulatory News
    News

    BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending

    BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.

    March 03, 2023 WebPage Regulatory News
    News

    HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks

    The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.

    March 02, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8810