- Question ID
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2015_2491
- Legal act
- Regulation (EU) No 575/2013 (CRR)
- Topic
- Leverage ratio
- Article
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429d
- Paragraph
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3
- COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
- Delegated Regulation (EU) 2015/62 - DR with regard to the leverage ratio
- Article/Paragraph
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429a (5)
- Type of submitter
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Individual
- Subject matter
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Written Credit Derivatives Add-On MR/NR Netting
- Question
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Under Article 429d(3) of the Regulation (EU) No 575/2013 (CRR), is it allowable to reduce the Add-On exposure of a written credit derivative (CDS) which has a Modified-Restructuring clause by a purchased credit derivative (CDS) which has No-Restructuring clause (where both CDS contracts have the same maturity, seniority and underlying reference entity)?
- Background on the question
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Via pricing, many market participants assign the same probability of a credit event to a CDS with a Modified-Restructuring clause as to a CDS with No-Restructuring clause. Therefore, it may be considered that a CDS with No-Restructuring clause and a CDS with a Modified-Restructuring clause rank pari-passu.
- Submission date
- Final publishing date
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- Final answer
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The effective notional amount of a written credit derivative that commits to pay in a restructuring event should not be reduced by the effective notional amount of a purchase credit derivative that does not offer the same protection. In other words, the purchased credit derivative should always offer at least the same protection.Therefore, if a written credit derivative commits to pay in a number of credit events (e.g. restructuring), and with all other terms being the same, a purchased credit derivative should also cover at least the same credit events in order to be considered subject to the same or more conservative material terms
rankingpari passufor the purpose of Article429a(5)(a)429d(3)(b) CRR, as further described in. Article 429d(4) CRR.Conversely, if a written credit derivative does not commit to pay in a given credit event (e.g. restructuring) , and with all other terms being the same, a purchased credit derivative may (but does not need to) commit to pay in this given credit event to be considered subject to the same or more conservative material terms
rankingpari passufor the purpose of Article429a(5)(a)429d(3)(b) CRR. - 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 not yet been reviewed by the EBA in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).Update 28.10.2021: This Q&A has been amended in light of the change(s) in Part Seven to Regulation (EU) No 575/2013 (CRR), applicable from 28.06.2021.
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.