Regulatory Add-on % for Inflations Swaps

Question

Should point 3 of Annex II (types of derivatives) have a title? Points 1 and 2 both have titles; it is inconsistent that point 3 has no title. Article 274 (3) makes reference to "contracts relating to commodities other than gold, referred to in point 3 of Annex II". What derivative types, as classified in table 1 in the article, does point 3 cover? This ambiguity leads me to ask should an Inflation swaps linked to RPI index, be treated as an 'Interest rate' contract or a 'Commodity' Contract? Given the current wording of point 3, Annex II suggests that Inflation swaps should be treated as Interest Rate contracts, they are of a similar nature to interest rate contracts.

European Banking Authority · Accepted Answer

An inflation swap linked to Retail Prices Index (RPI) is a swap which involves an exchange of interest calculated by reference to the RPI and another reference rate. This transaction can be considered an interest-rate contract because it involves the real interest rate (i.e. the interest rate net of inflation). Accordingly, an inflation swap has to be treated as an interest-rate contract for the determination of PFE with the Mark-to-Market method according to Article 274(2) of Regulation (EU) No. 575/2013.

Regulatory Add-on % for Inflations Swaps

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