Should credit derivatives subject to the CRR Article 273(3) which have zero exposure value for counterparty credit risk purposes also be treated as having zero value for the Leverage ratio exposure measure under CRR Article 429a(1)?
Article 273(3) of Regulation (EU) No 575/2013 states that when an institution purchases protection through a credit derivative against a non-trading book exposure or against a counterparty risk exposure shall apply zero exposure value for CCR purposes to those credit derivatives.
Article 429a(1) of the CRR (as amended by Commission Delegated Regulation (EU) 2015/62) does not refer explicitly to use of Article 273(3). For this reason, it is unclear if that zero exposure value can also be applied to the same credit derivatives for the purpose of Part Seven (Leverage) of the same regulation.
For purchased credit derivative that have a zero exposure value under Article 273(3) of Regulation (EU) No 575/2013 (CRR), this zero exposure value cannot be applied for the purposes of the calculation of leverage ratio exposures under Article 429a (1) of Delegated Regulation (EU) 2015/62 (DR).
Article 429a(1) of the DR states that exposure measure for derivatives (on 13 and off- balance sheet) should be calculated according to Articles 274 and 299(2)(a) of CRR. Article 274 CRR sets out the Mark-to-Market approach to calculate exposures (RC + PFE) on derivative transactions and Article 299(2) CRR sets out the PFE calculation for total return swap and CDS. None of these articles contains a reference to Article 273(3) CRR.
The leverage ratio framework is very specific on the treatment of credit derivatives where needed. Article 429a(5) of the DR expressly allows the notional amount (as part of the exposure value) of written credit derivatives to be reduced by the notional amount of a purchased credit derivatives on the same reference name if certain conditions are met. The DR does instead not contain any provisions allowing reducing the exposure measure of purchased credit derivatives.
In conclusion, the zero exposure value treatment specified in Article 273(3) CRR cannot be applied to calculate the leverage ratio exposure measure for purchased credit derivatives.