- Question ID
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2016_2590
- Legal act
- Regulation (EU) No 575/2013 (CRR)
- Topic
- Market risk
- Article
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291
- Paragraph
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5
- Subparagraph
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(a)
- COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
- Not applicable
- Article/Paragraph
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-
- Type of submitter
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Consultancy firm
- Subject matter
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Netting set treatment for trades with Specific Wrong Way Risk
- Question
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For a netting set with three OTC derivative trades (trades A, B and C), Trade A is identified existing Specific Wrong-Way Risk. The underlying collateral was assigned in trade level, namely collateral 1, 2 and 3 allocated to trade A, B and C respectively. When removing trade A from the netting set and treated as a separate netting set, shall the underlying collateral be considered?
- Background on the question
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Article 291(5)(a) of Regulation (EU) No 575/2013 (CRR) suggested that "the instruments where Specific Wrong-Way risk exists shall not be included in the same netting set as other transactions with the counterparty, and shall each be treated as a separate netting set", where this Article does not explicitly describe the treatment if there is Credit Support Annex (CSA) under ISDA master netting agreement.
Therefore it is not clear whether Article 291(5)(a) of Regulation (EU) No 575/2013 (CRR) requires the Bank to consider the collateral effect of the netting. If required, we need clarity the correct treatment for considering the collateral effect for compliance.
- Submission date
- Final publishing date
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- Final answer
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Article 291(5)(a) of Regulation (EU) No 575/2013 (CRR) requires that trade A is separated from the remaining netting set of trade B and C, if Specific Wrong-Way risk has been identified and where there exists a legal connection between the counterparty and the issuer of the underlying of the OTC derivative. Note that Article 291 CRR only applies to the internal model method (IMM) for CCR. It has to be noted that for these kind of trades, special exposure treatment is required according to Article 291(5)(b)-(f) CRR. Article 291(5) CRR does not contain requirements regarding the assignment of collateral values to netting sets. Thus, the institution is free to assign collateral values 1, 2, and 3 to either the separated netting set containing trade A, the remaining netting set containing trades B and C or both netting sets.
- Status
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Final Q&A
- Answer prepared by
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Answer prepared by the EBA.
- Note to Q&A
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Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.
Disclaimer
The Q&A refers to the provisions in force on the day of their publication. The EBA does not systematically review published Q&As following the amendment of legislative acts. Users of the Q&A tool should therefore check the date of publication of the Q&A and whether the provisions referred to in the answer remain the same.