Response to discussion on the treatment of structural FX under Article 352(2) of the CRR
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Regarding the types of the position, it is very difficult to specify a type of a position. In our practical management, the FX position at the regulated group level is managed in its entirety. Therefore, we would not recommend specifying such types.
The coefficient of 10.5 % is composed of:
- total own fund minimum requirement of 8 %
- capital conservation buffer of 2.5 %
In theory, if other buffers were imposed on the group (Article 128 of CRD) or ICAAP add-ons (Article 104(1) (a)) those buffers and add-ons would be added to the coefficient.
If countercyclical buffers were imposed, those buffers would be added to the coefficient as well.
Note that the coefficient of 10.5 % is below the capital adequacy of the group. In a purely hypothetical situation of capital adequacy of the group below 10.5 %, it would seem correct to apply a coefficient lower than 10.5 %.
The structural FX position is considered when making any decisions about hedges of net assets value of foreign subsidiaries. The decisions are taken at the board of directors level.
However, there is a rationale to consider the positions on the level of the individual entities if capital requirements apply to those entities on individual level. In our view, an approach similar to hedge accounting may be applied; different structural FX positions can be identified on individual and group level. What matters is the stabilization of individual and consolidated capital adequacy ratios.
Question 1: What is your current practice regarding the treatment of FX non-monetary items held at the historic FX? In particular, do you include these items in the overall net foreign exchange position pursuant to Article 352 CRR? If you include them, what value (i.e. historic or last FX rate) do you use for the purpose of computing them? How do you manage such positions from an FX point of view?
FX non-monetary items held at the historic FX rate are included in the net foreign exchange position in the functional currency of the booking entity.Question 2: Do you share the EBA’s view that there is no clear risk justification for making the determination of the net FX position as well as of the structural FX exclusion dependent on the approach for the calculation of FX own funds requirements?
Our answer was consolidated into the answer submitted by the Czech Banking Association.Question 3: Do you consider that the ‘structural nature’ wording in the CRR would limit the application of the structural FX provision to those items held in the banking book? Do you agree with the EBA’s view that the potential exclusion should be acceptable only for long FX positions? If you consider that it should be allowed for short positions please provide rationale and examples.
Our answer was consolidated into the answer submitted by the Czech Banking Association.Question 4: How should firms/regulators identify positions that are deliberately taken in order to hedge the capital ratio? What types of positions would this include? Do you consider that foreign exchange positions stemming from subsidiaries with a different reporting currency can be seen (on a consolidated level) as ‘deliberately taken to hedge against the adverse effect of FX movements’? If yes, how do you argue that this is the case?
One of the ways how to identify positions that are deliberately taken in order to hedge the capital ratio might be a documentation of these position. The documentation can be done either directly in the strategies / policies of the entity or a specific documentation could be created. Logic of the specific documentation for structural positions could be similar to the logic of the hedge accounting documentation for the accounting purposes.Regarding the types of the position, it is very difficult to specify a type of a position. In our practical management, the FX position at the regulated group level is managed in its entirety. Therefore, we would not recommend specifying such types.
Question 5: Do you consider that the structural FX treatment could be applied to specific instruments instead of being understood as being applicable for ‘positions’? Taking into account the risk rationale of hedging the capital ratio, do you consider that it is acceptable to renounce to potential gains in order to protect the ratio from potential losses? Do you consider that both types of hedging (i.e. reducing the sensitivity of the ratio to movements of FX in both directions, or only if the movement produces losses) are acceptable from an economic perspective? If so, do you consider that both approaches would be acceptable under Article 352?
Our answer was consolidated into the answer submitted by the Czech Banking Association.Question 6: If ‘structural FX’ is used conceptually internally within your organisation (e.g. in risk policies, capital policies, risk appetite frameworks, etc.), how do you define the notion of ‘structural FX position’ and ‘structural hedge’? Please describe how any ratio-hedging strategies are mandated within your organisation. Are ratio-hedging strategies prescribed in risk policies approved by the board? How do you communicate structural FX risk and position taking to your external stakeholders (e.g. in Pillar 3 reports, or reporting to regulators, investors, etc.)?
The structural FX position in our regulated group arises due to the foreign subsidiaries which have their assets and liabilities denominated in their local currencies. The group attempts to stabilize the total capital ratio. The structural FX position in a currency is identified as 10.5 % of credit risk weighted assets denominated in the currency and booked in the foreign subsidiary. The amount of the structural FX position is capped by the net asset value of the foreign subsidiary.The coefficient of 10.5 % is composed of:
- total own fund minimum requirement of 8 %
- capital conservation buffer of 2.5 %
In theory, if other buffers were imposed on the group (Article 128 of CRD) or ICAAP add-ons (Article 104(1) (a)) those buffers and add-ons would be added to the coefficient.
If countercyclical buffers were imposed, those buffers would be added to the coefficient as well.
Note that the coefficient of 10.5 % is below the capital adequacy of the group. In a purely hypothetical situation of capital adequacy of the group below 10.5 %, it would seem correct to apply a coefficient lower than 10.5 %.
The structural FX position is considered when making any decisions about hedges of net assets value of foreign subsidiaries. The decisions are taken at the board of directors level.
Question 7: Do you share the EBA’s view that the maximum FX position that could be considered structural should be the position that would ideally neutralise the sensitivity of the capital ratio to FX movements? Alternatively, in the light of the reference to Article 92(1), do you consider that the size of the structural position should be limited by the minimum capital ratio levels? If this is the case, which one of the three levels established in Article 92(1) do you apply?
Our answer was consolidated into the answer submitted by the Czech Banking Association.Question 8: How do you assess the consolidated ratio? How does your treatment differ between subsidiaries and branches?
In our situation, we consider the positions only from the consolidated point of view because the foreign subsidiaries and the entities with the hedges are not subject to capital requirements on individual level.However, there is a rationale to consider the positions on the level of the individual entities if capital requirements apply to those entities on individual level. In our view, an approach similar to hedge accounting may be applied; different structural FX positions can be identified on individual and group level. What matters is the stabilization of individual and consolidated capital adequacy ratios.