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    EC Publishes Regulation on Key Aspects of Implementation of SA-CCR

    June 10, 2021

    EC published the Delegated Regulation 2021/931, which supplements the Capital Requirements Regulation (CRR or Regulation 575/2013) with regard to the regulatory technical standards specifying the method for identifying derivative transactions with one or more than one material risk driver. Regulation 2021/931 also sets out the formula for calculating the supervisory delta of call and put options mapped to the interest rate risk category as well as the method for determining whether a transaction is a long or short position in the primary risk driver or in the most material risk driver in the given risk category for the purposes of Article 279a(3)(a) and (b) in the standardized approach for counterparty credit risk. Regulation 2021/931 shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

    The regulation states that for the purpose of identifying transactions with only one material risk driver and transactions with more than one material risk driver, institutions shall, at inception of each transaction, identify all the risk drivers of the transaction by determining the risk factors on which the cash flows of that transaction depend. The risk factors identified by the institutions shall be the risk drivers of the transaction. After the identification of all the risk drivers of a transaction, institutions shall, at inception of each transaction, identify transactions with only one material risk driver by applying the following:             

    • Where the cash flows of the transaction depend exclusively on one risk driver that belongs to one of the risk categories referred to in Article 277(1) of CRR, institutions shall identify that risk driver as the only material risk driver of that transaction
    • Where the cash flows of the transaction depend on more than one risk driver and where institutions have identified only one risk driver of that transaction as material in accordance with either the method laid down in Article 4(3) or the method laid down in Article 4(4) of Regulation 2021/931, institutions shall identify that risk driver as the only material risk driver of that transaction.

    The regulation further mentions that institutions shall determine whether a transaction is a long or short position in the primary risk driver or in the most material risk driver in a given risk category by applying either of the following methods:

    • They shall calculate the delta risk sensitivities of those risk drivers in accordance with Article 325r of CRR and identify the transaction as a long position in a risk driver where the corresponding delta risk sensitivity is positive or as a short position where the corresponding delta risk sensitivity is negative.
    • They shall assess the dependence of the structure of cash flows of the transactions on that risk driver or the hedging purpose of the transaction with respect to that risk driver and identify the transaction as either long or short position on the basis of that assessment.

     

    Related Link: Regulation 2021/931

    Effective Date: June 30, 2021

    Keywords: Europe, EU, Banking, SA-CCR, CRR, Basel, Credit Risk, Counterparty Credit Risk, Material Risk Driver, Interest Rate Risk, Regulatory Capital, EC

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