EBA Guidelines on Treatment of Structural Foreign Exchange Under CRR

The guidelines are deemed to set objective criteria that competent authorities should consider for assessing whether the conditions set out in Article 352(2) of CRR for receiving the permission to exclude a foreign-exchange position from the net open position in the foreign currency are met. To harmonize such practices among EU jurisdictions, several technical details have been included as part of these guidelines, which:

• Provide some clarifications about the structural foreign exchange provision. It is clarified that institutions computing the own funds requirements for foreign exchange risk both using the standardized approach and using the internal model approach may apply for the waiver. The waiver should be sought only for currencies that are relevant to the institution
• Discuss the concepts of positions "deliberately taken to hedge the capital ratio" and positions of "a non-trading or structural nature." The guidelines set out that only banking book positions may be subject to the waiver (on meeting other conditions) and that the position for which the exemption is sought should be long on a net basis.
• Lay down the governance requirements and the requirements related to the risk management strategy of the institution with respect to the structural foreign-exchange positions.
• Deal with the treatment of items held at historical cost. EBA clarified that such items should be considered part of the foreign-exchange open position.
• Deal with the calculation of the maximum open position that can be excluded from the net open position. In line with the FRTB standards, EBA clarifies that the exemption should be limited in size by the open position for which the capital ratio is non-sensitive to the exchange rate.
• Clarify certain aspects of 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.
• Provide clarifications about the approval process and how competent authorities should react to possible changes in the risk management strategy of structural foreign exchange positions.

The two annexes to the guidelines further clarify certain technical details discussed in the guidelines and provide examples on application of the structural foreign-exchange provision. These guidelines are based on a consultation paper that EBA had published on October 16, 2019. Twenty-one respondents provided feedback on the consultation paper. However, only six of the responses were non-confidential and were published on the EBA website. A summary of the non-confidential responses, along with EBA analyses of those responses, has been included in the guidelines. EBA considered the feedback provided by all respondents in developing the final guidelines.

Related Links

• Press Release
• Guidelines (PDF)

Effective Date: January 01, 2022

Keywords: Europe, EU, Banking, CRR, CRR2, Structural Foreign Exchange, FRTB, Market Risk, Regulatory Capital, Basel, EBA