Internal Model Method for counterparty credit risk: Determination of the effective expected exposure when the model captures the effect of margining (Article 285(1)(c))

Question

Article 285(1)(c) states that 'if the model captures the effects of margining when estimating EE, the institution may, subject to the permission of the competent authority, use the model's EE measure directly in the equation in Article 284(5).' Does the adverb 'directly' mean that institutions have to calculate their Effective Expected Exposure (EEE) as 1.) EffectiveEEtk = max{EffectiveEEtk-1 , EEtkmargined}, i.e. just insert margined EEs in the equation in Art. 284 (5) or 2.) EffectiveEEtk = EEtkmargined, i.e. substitute the monotony operator by the margined EEs?

European Banking Authority · Accepted Answer

If the model captures the effects of margining when estimating expected exposure (EE), the institution may, subject to the permission of the competent authority, calculate the Effective EE according to Article 284(5) of Regulation (EU) No 575/2013 (CRR) in the same way as if the netting sets were not subject to a margin agreement. The word 'directly' in Article 285(1) of the CRR hence has to be read as set out in variant 1 of the question.

Internal Model Method for counterparty credit risk: Determination of the effective expected exposure when the model captures the effect of margining (Article 285(1)(c))

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