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    EC Rule on Excluding Trades from Own Funds Requirement for CVA Risk

    May 18, 2018

    EC published the Commission Delegated Regulation (EU) 2018/728 with respect to regulatory technical standards for procedures for excluding transactions with non-financial counterparties established in a third country from the own funds requirement for credit valuation adjustment (CVA) risk. Regulation 2018/728 supplements Capital Requirements Regulation (CRR or EU Regulation No 575/2013). This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

    Article 1 of the Regulation 2018/728 specifies that institutions shall consider as non-financial counterparties established in a third country, counterparties that meet both of the following conditions:

    • They are established in a third country
    • They would qualify as a non-financial counterparty within the meaning of point (9) of Article 2 of Regulation (EU) No 648/2012 [European Market Infrastructure Regulation or EMIR] if they were established in the Union

    Institutions shall verify whether a counterparty is a non-financial counterparty established in a third country at trade inception when trading with a new counterparty; on an annual basis for existing counterparties; and where there is reason to believe that the counterparty is no longer a non-financial counterparty established in a third country. Institutions shall substantiate their opinion that an undertaking is a non-financial counterparty established in a third country.

    Article 2 stipulates that, for excluding transactions with a non-financial counterparty established in a third country from the own funds requirements for CVA risk in accordance with point (a) of Article 382(4) of CRR, institutions shall verify, for each class of OTC derivative contracts referred to in Article 11 of Delegated Regulation (EU) No 149/2013, that the gross notional value of the OTC derivative contracts of that non-financial counterparty within that class does not exceed the relevant clearing threshold referred to in Article 11 of that Regulation. Institutions shall substantiate their opinion that, for each class of OTC derivatives contracts referred to in Article 11 of Delegated Regulation (EU) No 149/2013, the gross notional value of the OTC derivative contracts of a non-financial counterparty established in a third country, for that class, does not exceed the corresponding clearing threshold referred to in that Article. This regulation is based on the draft regulatory technical standards developed in cooperation with ESMA and submitted by EBA to EC. EBA has conducted open public consultations on the draft regulatory technical standards on which this regulation is based.

     

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    Effective Date: June 07, 2018

    Keywords: Europe, EU, Banking, CRR, CVA Risk, OTC Derivatives, Regulatory Technical Standards, EC

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