- Question ID
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2015_1975
- Legal act
- Regulation (EU) No 575/2013 (CRR)
- Topic
- Market risk
- Article
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382
- Paragraph
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1
- COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
- Not applicable
- Article/Paragraph
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Not applicable
- Type of submitter
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Industry association
- Subject matter
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CVA Risk Charge Calculation for derivatives in the banking book with local GAAP
- Question
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Do institutions that use local GAAP for accounting purposes and do not mark-to-market derivatives in the banking book have to calculate a CVA Risk Charge for derivatives in the banking book?
- Background on the question
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CRR indicates that institutions must calculate a CVA Risk Charge for derivatives. However, the scope and dependence on the respective accounting framework are not clear from the text of the CRR and requires interpretations. CRR per Article 24(1) basically acknowledges, that the valuation of all assets will be based on the applicable accounting framework. CRR Article 24(1) stipulates: "The valuation of assets and off-balance sheet items shall be effected in accordance with the applicable accounting framework." Given that according to (German) local GAAP derivatives in the banking book must not be marked-to-market and hence do not generate P&L nor CVA-P&L, for the purposes of the CRR the value of banking book derivatives then is zero. In Article 381 the CRR again defines Credit Valuation Adjustment as an adjustment to the mid-market valuation accounting for the current market value of credit risk. In doing so the CRR acknowledges that CVA is a market value and therefore subject to the provision of CRR Article 24(1). CRR Article 381 (Meaning of Credit Valuation Adjustment) stipulates: "For the purposes of this Title and Chapter 6 of Title II, 'Credit Valuation Adjustmen' or 'CVA' means an adjustment to the mid-market valuation of the portfolio of transactions with a counterparty." That adjustment reflects the current market value of the credit risk of the counterparty to the institution, but does not reflect the current market value of the credit risk of the institution to the counterparty. Under German local GAAP institutions do not account a market value of credit risk for their banking book derivatives positions. Therefore, the valuation of institutions’ banking book derivatives positions under local GAAP are not subject to fluctuations of market factors such as interest rates or credit spreads, i.e. there is no fluctuation in the valuation of these positions and hence no "risk". The CRR proceeds in Article 382(1) to define the scope of the application of the CVA risk requirements, referring to "all OTC derivatives instruments" (a specification on the type of the derivative, i.e. "OTC") and "all business activities" (a specification on the matrix of customers and markets). CRR Article 382 (1) (Scope) stipulates: "An institution shall calculate the own funds requirements for CVA risk in accordance with this Title for all OTC derivative instruments in respect of all of its business activities, other than credit derivatives recognised to reduce risk-weighted exposure amounts for credit risk." Note how the CRR does not re-define or even invalidate the requirements stipulated in Article 24 (1) with respect to the accounting framework. However, the wording in Article 382 (1) has puzzled some market participants as to the precise interpretation and coherence of the aforementioned articles of the CRR. The question that arises is: Must institutions that use local GAAP for Accounting purposes calculate a CVA Risk Charge for derivatives in the banking book?
- Submission date
- Final publishing date
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- Final answer
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According to Article 382(1) of Regulation (EU) No 575/2013 (CRR), "an institution shall calculate own funds requirements for CVA risk in accordance with this Title for all OTC derivative instruments in respect of all its business activities, other than credit derivatives recognised to reduce risk-weighted exposure amounts for credit risk".
Therefore, derivatives in the banking book other than credit derivatives recognised to mitigate credit risk and which are not exempted under paragraphs 3 and 4 of Article 382, are included within the scope of the CVA charge, even though they are not marked-to-market.
- 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.