EBA · 2014_1573 Archive

Interaction of Article 227 of the CRR (0% volatility adjustment under FCCM) and Article 401(3) (stress test of realisable value of collateral)

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
227, 401, para. 3
Topic
Large exposures
Submitted by
Credit institution
Submitted
2014-10-24
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Our question concerns the application of Article 227 of the CRR (0% volatility adjustment under FCCM) and the interaction with the collateral stress test described in Article 401(3). The latter requires collateral values to be stressed, and the impact on Article 395(1) to be determined. It follows that the own funds requirement for large exposures in the trading book (calculated under Article 397 of the CRR) is adjusted upwards to take account of the stressed collateral values. Where the criteria set out in Article 227 of the CRR are met and 0% volatility adjustment is applied to repo/reverse repo transactions, is this exposure value taken as the base case for comparison with the stressed collateral impact calculated under Article 401(3)? Or are these two articles to be read in the reverse order, such that 0% volatility haircuts per Article 227 are also applied in the collateral stress test (Article 401(3))?

Background

The logical ordering of these two articles is significant in the specific case where large amounts of high quality government securities are brought in under reverse repurchase agreements in order to meet liquidity buffer requirements. The operation of the Article 401(3) collateral stress can have a material effect on the own funds requirement for large exposures, given the quantity of government securities that are typically required for liquidity purposes.

Answer

Article 401(3) of Regulation (EU) No 575/2013 (CRR) requires collateral values, i.e. the realisable value of any collateral taken, to be periodically stressed. In this assessment, the criteria set out in Article 227 of the CRR are not relevant. When the periodic stress test indicates a lower realisable value of collateral taken than what would be permitted under the Financial Collateral Comprehensive Method, the value of collateral recognised in calculating the value of exposures for the purposes of Article 395(1) must be reduced accordingly (see subparagraph 4 of Article 401(3) of the CRR). Articles 224 to 227 of the CRR require institutions to apply volatility adjustments to the market value of collateral so as to take account of price volatility when valuing financial collateral under the Financial Collateral Comprehensive Method. Where the criteria set out in Article 227 of the CRR are met, the collateral in relation to the repo/reverse repo transactions qualifies for 0% volatility adjustment in calculating the value of exposures for the purposes of Article 395(1) of the CRR. This exposure value should be then used as the basis for the comparison with the stressed realisable value of collateral calculated under Article 401(3) of the CRR.

Original source: European Banking Authority, Q&A ID 2014_1573

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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