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  1. Home
  2. Single Rulebook Q&A
  3. 2023_6757 QUALIFICATION OF INTERNAL TRANSACTIONS AS "STRUCTURAL"
Question ID
2023_6757
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Market risk
Article
352
Paragraph
2
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
EBA/GL/2020/09 - Guidelines on the treatment of structural FX under Article 352(2) of CRR
Article/Paragraph
EXAMPLE 10
Type of submitter
Credit institution
Subject matter
QUALIFICATION OF INTERNAL TRANSACTIONS AS "STRUCTURAL"
Question

When considering internal financing in currencies between the Bank’s prudential banking book (“BB”) and the trading book (“TB”), aiming at balancing the balance sheet of both BB and TB, we would be keen to know whether the “banking book leg” of such refinancing could be eligible to the exemption pursuant to art. 352(2) CRR?

  • In particular, could such positions be assumed to hedge/incentivize the CET1 ratio against changes in FX rates while they stem from internal financings between the BB and the TB of the same entity?
  • Could such positions be assumed to be structural?
Background on the question

The example 10 page 100 (and following) of the Guidelines on the treatment of structural FX under Article 352(2) of Regulation (EU) No 575/2013 (CRR) provides the following example for the subsidiary at solo level reporting in USD:

Value in EUR

Value in EUR

Assets in USD BB

300

Liabilities in USD BB

200

Assets in USD TB

100

Assets in GBP BB

20

Assets in DKK BB

30

Liabilities in DKK BB

10

CET1 in USD

240

This balance sheet does not mention the internal refinancing transaction that may exist between the BB (prudential banking book) and the TB (prudential trading book).

Indeed, the Bank’s internal management of TB and BB positions relies on the principle that both the balance sheet of the BB and the balance sheet of the TB must be balanced (i.e. BB assets must equal BB liabilities and, similarly, TB assets must equal TB liabilities). To ensure this equality, internal refinancing transactions are conducted between the BB and the TB.

This typically happens when there are not enough TB liabilities to fund TB assets. In such a case, the TB will request an internal refinancing to the BB; conversely, the BB will grant an internal loan to the TB of the same amount.

Operationally speaking, the process can be summarized as follows:

  • First, the trading desk notifies its need for financing to the group treasury which is located in the BB;
  • Second, the group treasury provides the liquidity to the trading desk via an internal transaction BB à TB;
  • Third, the group treasury refinances itself (i.e. borrows the same amount of liquidity subject to the internal liquidity framework) via an external transaction with the market.

This principle, within the Group, applies at the level of each entity having a prudential trading book.

As regards example 10 page 100 of the EBA GL, the following balance sheet, including an internal funding transaction between the BB and the TB – so that both the balance sheet of the BB and the balance sheet of the TB are balanced – is also representative of the subsidiary at solo level:

Value in EUR

Value in EUR

Assets in USD BB

300

Liabilities in USD BB

200

Internal Loan in USD BB

100

Assets in USD TB

100

Internal refinancing in USD TB

100

Assets in GBP BB

20

Assets in DKK BB

30

Liabilities in DKK BB

10

CET1 in USD

240

In that case, calculation detailed in page 103 that reads as:

“the position in USD for which the exemption is sought would be 300 – 40 – 10 – 200 = 50.”

should be read as:

“the position in USD for which the exemption is sought would be 300 + 100 – 40 – 10 – 200 = 150.”

Please note that this position would remain at 150 whatever may be the value of the “Assets in USD TB”.

For example, should a trading desk enter into a new position that would require an additional 150 of financings in USD, it would request this amount of liquidity to the central treasury and the “Assets in USD TB” would now equal 250 instead of 100. Then:

  • internal Loan in USD BB (asset) = 250;
  • internal refinancing in USD TB (liability) = 250;
  • liabilities in USD BB = 350. This increase results from the group treasury refinancing itself via external transactions with the market; and
  • the position in USD for which the exemption is sought would remain unchanged at “300 + 250 – 40 – 10 – 350 = 150” with the proposed method;
  • the current formula detailed in page 103 would give a result with a negative value: “300 – 40 – 10 – 350 = -100”.

Submission date
22/03/2023
Rejected publishing date
13/04/2023
Rationale for rejection

This question has been rejected because the issue it raises is beyond the remit of the Q&A process and as such it cannot be addressed via a Q&A. 

The Single Rule Book Q&A tool has been established to provide explanations and non-binding interpretations on questions relating to the practical application or implementation of the provisions of legislative acts referred to in Article 1(2) of the EBA’s founding Regulation, as well as associated delegated and implementing acts, and guidelines and recommendations, adopted under these legislative acts. The Q&A process cannot, for example, consider issues which would require changes to the regulatory framework.

For further information on the purpose of this tool and on how to submit questions, please see “Additional background and guidance for asking questions”.

Status
Rejected question

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