EBA · 2013_589 Final Q&A

Own funds requirements for commodities risk

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
359, para. 2
Topic
Market risk
Submitted by
Industry association
Submitted
2013-11-29
Answered
2014-04-30
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Article 359(2) of Regulation (EU) No. 575/2013 states: “Positions in the same commodity may be offset and assigned to the appropriate maturity bands on a net basis for the following: (a) positions in contracts maturing on the same date; (b) positions in contracts maturing within 10 days of each other if the contracts are traded on markets which have daily delivery dates.” A Fair Value Option is applied to the positions in the Banking Book. The positions are hedged “back-to-back” in terms of cash flows that are exactly offsetting each other and represent thus a perfect economic hedge. Due to discounting effects positions are not however perfectly netted in terms of market values, and thus in terms of net delta weighted equivalents. Does that still mean that the institution shall assign zero values to all the maturity bands in the Table 1 referring to the Maturity ladder approach, or must the netted cash deltas be assigned to each the maturity band instead?

Background

A Fair Value Option is applied to the positions in the Banking Book. The positions are hedged “back-to-back” in terms of cash flows that are exactly offsetting each other and represent thus a perfect economic hedge. Due to discounting effects positions are not however perfectly netted in terms of market values, and thus in terms of net delta weighted equivalents. We are not sure how we shall interpret the maturity ladder approach for the back-to-back hedged commodity positions.

Answer

In accordance with Article 359 of Regulation (EU) No. 575/2013, the institution shall assign netted cash deltas to each of the maturity bands.

Original source: European Banking Authority, Q&A ID 2013_589

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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