Commission Delegated Regulation (EU) No 1187/2014 – with regards to RTS for determining the overall exposure to a client or a group of connected clients in respect of transactions with underlying asset; defines the methodologies to identify the overall exposure to a particular obligor that results from the institution’s exposures to a transaction with underlying assets. 

Article 6 of that Regulation sets out the procedure for determining the contribution of underlying exposures to overall exposures. For each credit risk exposure underlying the transaction for which an institution has not identified the obligor, or where an institution is unable to confirm that an underlying exposure is not a credit risk exposure, the institution shall verify the conditions stipulated in letters (a) to (c) of Article 6. 

Article 6(2)(a) sets out that in cases where the exposure value does not exceed 0.25 % of the institution’s Tier 1 capital, the underlying exposure shall be assigned to the transaction as a separate client. Furthermore, Article 6(2)(c) sets out that in cases where the institution has not identified the obligor of an underlying credit risk exposure being equal or exceeding 0.25% of its Tier 1 capital, and cannot ensure, by means of the transaction’s mandate, that the underlying exposures of the transaction are not connected with any other exposures in its portfolio, the respective exposure shall be assigned to the unknown client (an artificial client towards which all such exposures from all transactions with underlying assets shall be attributed). Q&A 2021_5746 provides with a generic example of how these procedures should be applied.

In the provided example, which slightly differs from the generic one envisaged in Q&A 2021_5746, as institution A is unable to identify any of the obligors of the underlying exposures and cannot ensure that the underlying exposures of the transaction are not connected with any other exposures in its portfolio, institution A shall assign: 

• Those underlying assets exceeding individually 0.25% of the institution’s Tier 1 capital to the unknown client in accordance with Article 6(2)(c) of the Commission Delegated Regulation (EU) No 1187/2014; and

• The remaining underlying assets that individually do not exceed 0.25% of the institution’s Tier 1 capital to the transaction itself as a separate client.

The transaction as a separate client as well as the artificially created unknown client shall at all times comply with the large exposure limits. If in an exceptional case, the sum of all exposures assigned to the transaction or the unknown client would lead to a breach of the limits set out in Article 395(1) of Regulation (EU) No 575/2013, the first subparagraph of Article 396(1) of Regulation (EU) No 575/2013 requires the institution to report the value of the exposure without delay to the competent authority. The competent authority shall assess the exceptional case of the breach and set the time and measures to return to compliance pursuant to Article 396(3) of Regulation (EU) No 575/2013 in line with the EBA/GL/2021/09.

The core aim of the large exposures regime is to act as a backstop to prevent an institution from incurring disproportionately large losses as a result of the failure of an individual client or group of connected clients. Thus, institutions shall always be in the position to prove to competent authorities that the provisions foreseen in Commission Delegated Regulation (EU) No 1187/2014 are not circumvented with the aim of any regulatory arbitrage (such as abstaining from the requirement to look through to circumvent a possible breach of the limits set out in Article 395(1) of Regulation (EU) No 575/2013).