EBA · 2015_1812 Final Q&A

Treatment of equity, equity index and commodity futures/forward contracts under Part three, Title IV of Regulation (EU) No 575/2013 (CRR)

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
327, para. 1
Topic
Market risk
Submitted by
Competent authority
Submitted
2015-02-10
Answered
2015-11-20
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Shall equity, equity index and commodity futures/forward contracts be treated as exposure in an underlying instrument or should they be treated as combination of long and short position (holding of the underlying and borrowing maturing on the delivery date of the futures/forward contract)?

Background

Treatment of equity, equity index and commodity futures/forward contracts is not described in Article 327(1) of CRR, although treatment of the other derivative categories is described (Articles 328-330). Taking into account the rationale of the Basel provisions set out in the footnote to the article 718 (xii) of Basel II document ( http://www.bis.org/publ/bcbs128.pdf ), which inclines that "Where equities are part of a forward contract, a future or an option (quantity of equities to be received or to be delivered), any interest rate or foreign currency exposure from the other leg of the contract should be reported as set out in paragraphs 709 to 718(xviii) and 718(xxx) to 718(xLii)" (and footnote to article 718(xLv) in case of commodities), and lack of such explicit treatment set out in the CRR, it is not clear how they should be treated. The clarification of this issue is needed as it may have a significant impact on the value of capital requirements for general interest rate risk and foreign exchange risk.

Answer

For the purposes of own funds requirements for market risk in the standardized approaches according to Part three, Title IV, Chapters 1, 2, 3 and 4 of Regulation (EU) No 575/2013 (CRR) financial equity, equity index and commodity futures/forward contracts should be treated as a combination of long and short positions. In the case of a long futures/forward position, this consists of the holding of the underlying and borrowing (in the relevant currency) which matures on the delivery date of the futures/forward contract. In the case of a short futures/forward position, this consists of the selling of the underlying and lending which matures on the delivery date of the futures or forward contract. Additional information: Article 358 CRR specifies the own funds requirements for commodities risk only, thus it does not contradict the treatment for the interest rate risk component of commodity futures and forwards. Interest rate risk inherent in futures and forwards gives rise to own funds requirements. This is clarified via Q&A 1356 for FX derivatives.

Original source: European Banking Authority, Q&A ID 2015_1812

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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