Question ID:
2014_1327
Legal Act:
Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 – CRR2
Topic:
Supervisory reporting
Article:
99
COM Delegated or Implementing Acts/RTS/ITS/GLs:
Draft ITS on Supervisory Reporting of Institutions
Article/Paragraph:
Annexes VIII and IX, Large Exposures Template C 28.00 and C 29.00
Name of institution / submitter:
Central Bank of Ireland
Country of incorporation / residence:
Ireland
Type of submitter:
Competent authority
Subject Matter:
Large Exposures Reporting of Volatility Haircut applied to Exposure Value
Question:

The instructions for template C 28.00, column 300 and C 29.00, column 310 i.e. “(-) Funded credit protection other than substitution effect”, are currently unclear how volatility haircuts that are applied to the exposure value under CRM are reported.
Some vendors have suggested that the CRM volatility haircut applied to the exposure value should be included as a positive value (+), while the volatility haircut applied to the collateral should be included as a negative value (-) within template C 28.00, column 300 and template C 29.00, column 310.
This is the only way to satisfy the following validation rules:
v0653_m
{c330} = {c210} + {c240} + {c250} + {c260} + {c270} + {c280} + {c290} + {c300} + {c310} + {c320}
v1683_m
{c340} = {c220} + {c250} + {c260} + {c270} + {c280} + {c290} + {c300} + {c310} + {c320} + {c330}
The current text used for “(-) Funded credit protection other than substitution effect”, in templates C 28.00 and C 29.00 simply states that "the institution shall report the amounts of funded credit protection, as defined in Article 4(58) of Regulation (EU) No 575/2013, that are deducted from the exposure value due to the application of Article 401 of Regulation (EU) No 575/2013". There is no reference to the volatility haircut applied to the exposure value under CRM. Therefore, can we suggest that the instructions to template C 28.00, column 300 and template C 29.00, column 310 are amended to provide clarification on how the volatility haircut applied to the exposure value under CRM is incorporated into the large exposures templates C 28.00 and C 29.00

Background on the question:

Some vendors have noted the lack of clarification provided in the ITS Instructions on Large Exposures in terms of where the volatility haircut applied to the exposure value (i.e. the haircut that increases the exposure value) under CRM is incorporated into the large exposures templates C 28.00 and C 29.00. A solution proposed by some vendors is that the CRM volatility haircut applied to the exposure value should be included as a positive value (+), while the volatility haircut applied to the collateral should be included as a negative value (-) within template C 28.00, column 300 and template C 29.00, column 310. This proposed solution could also impact validation rules v2058_s {C 28.00} <= 0 and v2059_s {C 29.00} <= 0 if the haircut applied to the exposure value is greater than the adjusted value of the collateral (Cvam)

Date of submission:
27/06/2014
Published as Final Q&A:
04/10/2019
EBA Answer:

The instructions on c300 of template C 28.00 and c310 of template C 29.00 (i.e. ‘(-) Funded credit protection other than substitution effect’) in Annex IX of Regulation (EU) No 680/2014 (ITS on Supervisory Reporting) in their current version do not explicitly specify how volatility haircuts applied to the exposure value have to be incorporated into the large exposure templates.

Under CRM techniques – depending on the method chosen – both the value of the exposure as well as the value of the collateral may have to be adjusted in order to take account of price volatility. Haircuts applied to the collateral reduce the value of the collateral while haircuts applied to the exposure value increase the exposure value.

Volatility adjustments applied to the exposure value shall be included in the respective cell (column 300 of C 28.00 respectively column 310 of C 29.00) as an increase in the exposure value.

In order to clarify how these haircuts have to be reported within the large exposure regime, the instructions for template C 28.00, column 300 and template C 29.00, column 310 will be amended accordingly.

The validation rules
v0653_m
{c330} = {c210} + {c240} + {c250} + {c260} + {c270} + {c280} + {c290} + {c300} + {c310} + {c320}  and
v1683_m
{c340} = {c220} + {c250} + {c260} + {c270} + {c280} + {c290} + {c300} + {c310} + {c320} + {c330}
can remain unchanged.

As regards the concern that column 300 of C 28.00 respectively column 310 of C 29.00 may turn positive, it should be noted that, in accordance with Article 401 (1) of Regulation (EU) No 575/2013 (CRR), institutions may, but do not have to use the ‘fully adjusted exposure value’ as calculated under Part Three, Title II, Chapter 4 taking into account the credit risk mitigation, volatility adjustments, and any maturity mismatch (E*). In analogy to the principle laid down in Article 193 (1) CRR, institutions are not obliged to take into account credit risk mitigation which would, for the purposes of Part Four of the CRR, produce a fully adjusted exposure value which would be higher than the exposure value of an otherwise identical exposure in respect of which an institution has no credit risk mitigation. In any case, validation rules v2058_s and v2059_s have been deactivated.

Status:
Final Q&A