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.
Comment Due Date: January 17, 2020
Keywords: Europe, EU, Banking, CRR, Guidelines, S-FX, Structural Foreign Exchange, FRTB, Market Risk, Regulatory Capital, Basel III
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.