09 February 2017
The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) specifying the procedures for excluding transactions with non-financial counterparties (NFCs) established in a third country from the capital requirement for credit valuation adjustment (CVA) risk. The proposed RTS aim at harmonising the treatment of NFCs established in a third country across EU Member States.
These draft RTS align the treatment of NFCs established in a third country with the treatment of EU NFCs as recommended in the EBA CVA Report
, published on 25 February 2015. However, as NFCs established in a third country are not directly subject to EU regulation, these RTS clarify that it is for institutions to verify that a counterparty established in a third country qualifies as a NFC and, if that is the case, that the NFC does not exceed the clearing threshold set out in the European Market Infrastructure Regulation (EMIR).
Since in some cases verifying the status of NFCs established in a third country at the inception of each trade could be disproportionate for institutions, the EBA proposes that institutions have the option of carrying out such verification at trade inception or on a periodic basis.
Legal basis and background
These draft RTS have been developed according to Article 382(5) of Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR), which mandates the EBA, in cooperation with the European Securities and Markets Authority (ESMA), to specify the procedures for excluding transactions with non-financial counterparties established in a third country from the own funds requirement for CVA risk.
Article 382(4)(a) of the Capital Requirements Regulation (CRR) excludes from the capital requirements for CVA risk an institution's transactions with non-financial counterparties (NFCs), regardless of whether these NFCs are established in the EU or in a third country, where those transactions do not exceed the EMIR clearing threshold. As NFCs established in a third country are not covered by the EMIR Regulation, it is necessary to define procedures for excluding transactions with NFCs established in a third country from the CVA risk charge.