Featured Product

    EBA Consults on Guidelines for Application of S-FX Provision Under CRR

    October 16, 2019

    EBA is consulting on the guidelines on application of the structural foreign exchange, or S-FX, provision under Article 352(2) of the Capital Requirements Regulation (CRR). The guidelines aim to set a regulatory framework on structural foreign exchange to address the observed diversity in its application across EU. The guidelines identify criteria to assist competent authorities in their assessment of the structural nature of a foreign-exchange position and whether such a position has been deliberately taken for hedging the capital ratio. The consultation period ends on January 17, 2020.

    This consultation paper sets out objective criteria that competent authorities should consider for assessing whether the conditions set out in article 352(2) of the CRR for receiving the permission to exclude a foreign-exchange position from the net open position in the foreign currency are met. The guidelines introduce, for the first time, a detailed regulatory framework for the structural foreign-exchange provision and several questions have been included as part of the consultation process to gather feedback on the proposed provisions. The consultation paper:

    • Provides clarifications on the structural foreign-exchange provision, clarifying, among others, that institutions computing the own funds requirements for foreign-exchange risk with the standardized approach and with the internal model approach may apply for the waiver and the waiver should be sought only for currencies that are material for the institution.
    • Discusses the concepts of positions ‘deliberately taken to hedge the capital ratio and positions of "a non-trading or structural nature." EBA proposes that only banking book positions may be subject to the waiver and that the position for which the exemption is sought should be long on a net basis.
    • Sets the governance requirements and the requirements related to the risk-management strategy of the institution with respect to its structural foreign-exchange positions.
    • Clarifies that items held at historical cost should be considered as part of the foreign-exchange open position.
    • Deals with the calculation of the maximum open position that can be excluded from the net open position. In line with the Fundamental Review of the Trading Book (FRTB) standards, the EBA proposes that the exemption should be limited in size by the open position for which the capital ratio is non-sensitive to the exchange rate.
    • Clarifies some aspects with respect to 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.
    • Provides clarifications on the approval process and how competent authorities should react to possible changes in the risk-management strategy of the structural foreign-exchange positions.

    Furthermore, the annexes to the consultation paper further clarify technical details discussed in the paper and provide examples on the application of the structural foreign-exchange provision. The concept and application of the structural foreign-exchange provision, as laid down in the CRR, appears to be subject to several interpretations, across both supervisory authorities and institutions. This is particularly relevant, as over the last few years banks appear to have become increasingly interested in the application of the structural foreign-exchange exclusion. Moreover, the implementation of this provision seems to be quite uneven across jurisdictions and there is a lack of clarity about what constitutes a structural position for the purposes of Article 352(2). Finally, the treatment of the structural foreign-exchange has been modified in the recently published FRTB. Therefore, the application of this provision can have a significant impact on capital requirements. Accordingly, EBA believes that a more harmonized application and enforcement of this provision is necessary and can be achieved with these guidelines.


    Related Links

    Comment Due Date: January 17, 2020

    Keywords: Europe, EU, Banking, CRR, Guidelines, S-FX, Structural Foreign Exchange, FRTB, Market Risk, Regulatory Capital, Basel III

    Featured Experts
    Related Articles

    ISSB Sustainability Standards Expected to Become Global Baseline

    The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.

    September 18, 2023 WebPage Regulatory News

    IOSCO, BIS, and FSB to Intensify Focus on Decentralized Finance

    Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.

    September 18, 2023 WebPage Regulatory News

    BCBS Assesses NSFR and Large Exposures Rules in US

    The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.

    September 14, 2023 WebPage Regulatory News

    Global Agencies Focus on ESG Data, Climate Litigation and Nature Risks

    At the global level, supervisory efforts are increasingly focused on addressing climate risks via better quality data and innovative use of technologies such as generative artificial intelligence (AI) and blockchain.

    September 14, 2023 WebPage Regulatory News

    ISSB Standards Shine Spotlight on Comparability of ESG Disclosures

    The finalization of the IFRS sustainability disclosure standards in late June 2023 has brought to the forefront the themes of the harmonization of sustainability disclosures

    August 22, 2023 WebPage Regulatory News

    EBA Issues Several Regulatory and Reporting Updates for Banks

    The European Banking Authority (EBA) recently issued several regulatory publications impacting the banking sector.

    August 10, 2023 WebPage Regulatory News

    BCBS Proposes to Revise Core Principles for Banking Supervision

    The Basel Committee on Banking Supervision (BCBS) launched a consultation on revisions to the core principles for effective banking supervision, with the comment period ending on October 06, 2023.

    August 04, 2023 WebPage Regulatory News

    US Proposes Final Basel Rules, Transition Period to Start in July 2025

    The U.S. banking agencies (FDIC, FED, and OCC) recently proposed rules implementing the final Basel III reforms, also known as the Basel III Endgame.

    August 04, 2023 WebPage Regulatory News

    FSB Report Outlines Next Steps for Climate Risk Roadmap

    The Financial Stability Board (FSB) recently published the second annual progress report on the July 2021 roadmap to address climate-related financial risks.

    August 04, 2023 WebPage Regulatory News

    EBA Plans on Ad-hoc ESG Data Collection and Climate Scenario Exercise

    The recognition of climate change as a systemic risk to the global economy has further intensified regulatory and supervisory focus on monitoring of the environmental, social, and governance (ESG) risks.

    July 31, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8931