EBA · 2013_360 Final Q&A

Eligibility of index CDS hedges in Advanced CVA charge

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
386, para. 1
Topic
Market risk
Submitted by
Investment firm
Submitted
2013-10-08
Answered
2014-02-21
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Please can you confirm whether Basel FAQ 2c7 published in December 2012 on page 19 of BCBS's FAQ ( http://www.bis.org/publ/bcbs237.pdf ) is applicable under CRR?

Background

Basel FAQ 2c7 ( http://www.bis.org/publ/bcbs237.pdf ) states that index CDS are only eligible A-CVA hedges for proxied counterparties, if the proxy is a constituent of the index. A literal application of this FAQ severely limits the amount of CVA hedging that can be performed and therefore discourages prudent risk management. It is also not clear why there should be different requirements for proxied counterparties, compared to counterparties which do have a traded CDS. Specifically, Basel FAQs do permit index CDS to be eligible hedges for counterparties with traded credit spreads, without any requirement for the counterparty to be an index constituent.

Answer

Index hedges are eligible hedges regardless of whether the counterparty (or proxy) they are hedging is an index constituent or not. However, under Article 386(1)(b) of Regulation (EU) No. 575/2013, index hedges are only eligible hedges if the basis between any individual counterparty spread and the spreads of index credit default swap hedges is reflected in the CVA-Value-at-Risk.

Original source: European Banking Authority, Q&A ID 2013_360

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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