Is new Article 254(2) CRR applicable to derivatives positions to hedge market risk?
Article 254(2) CRR2 states that in case the SEC-IRBA is not applicable, and if the conditions (a) (b) or (c) of art 254(2) are fulfilled the SEC-ERBA shall be used instead of the SEC-SA for “rated positions or positions in respect of which an inferred rating may be used”.
If the application of this article is clear for securitisation tranches, it is less clear for derivatives exposures to hedge market risks since Article 263(8) indicates that the determination of the risk weight of a derivative is made by an “inferred risk weight” and not an “inferred rating”, while other securitisation exposures (tranches) use an “inferred rating” under the methodology described in Article 263(7).
Taking as an illustrative example a securitisation backed by a pool of auto loans where there is a rated senior note (as reference position) and an interest rate swap which is super senior to the rated senior note. In such situation: the rated senior note would be assigned with a RW determined in accordance with SEC-ERBA (Article 254(2));
However, from a literal application of Article 261(3) shall we assign to the interest rate swap position an inferred risk weight to be calculated in accordance with SEC-SA, which would therefore generate, a difference between the approach used to assign the risk weight to the reference position i.e. : the rated senior note (SEC-ERBA) and the one used to determine the inferred risk weight of the derivative to hedge market risk (SEC-SA)?
According to Articles 259(8), 261(3) and 263(8) CRR2, respectively, where an institution has a securitisation position in the form of a derivative to hedge market risks, the institution may attribute to that derivative an inferred risk weight equivalent to the risk weight of the reference position calculated in accordance with Article 259 (SEC-IRBA), Article 261 (SEC-SA) or Article 263 (SEC-ERBA), respectively. The latter risk weight of the reference position should already be based on the approach following the hierarchy described in Article 254, including paragraphs 2 to 5.
Therefore, as a first step, the method to be used (e.g. Article 259, 261 or 263) for the reference position must be determined according to Article 254, including paragraphs 2 to 5.
As a second step, a securitisation position in the form of a derivative to hedge market risks may be attributed an inferred risk weight equivalent to the risk weight of the reference position calculated in accordance with Article 259, 261 or 263, respectively.
With respect to the illustrative example provided in the background section, the risk weight for the senior note (reference position) is to be calculated in accordance with the SEC-ERBA and the derivative to hedge market risks may therefore be attributed an inferred risk weight equivalent to the risk weight of the reference position calculated in accordance with the SEC-ERBA.