EBA · 2015_2533 Final Q&A

Market Risk Netting Under Article 331 (2)

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
331, para. 1, 2
Topic
Market risk
Submitted by
Other
Submitted
2015-12-18
Answered
2016-10-28
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Does Article 331(2) apply to both notional positions produced from a futures contract as per Articles 328 or just to the positions created in the underlying instrument, or just to the position created in a notional instrument that matures on the delivery date of the futures contract? For example a bond future produces both a notional position in a deliverable bond and a notional position for the cash movement at the future expiry.a) Does Article 331(2) apply to both of these notional positions, or just to the notional position created in the deliverable bond, or just to the notional position created for the cash movement at the future expiry?b) Please confirm if the notional position created in the deliverable bond should be included in a net bond position calculation under Article 327(1), and excluded from netting under Article 331(2), while the notional position created for the cash movement should be excluded from Article 327(1) and included in Article 331(2) netting with only other cash movement notional positions.

Background

Article 331(2) is presented as an alternative to Article 331(1), in which the internal model described applies to both notional positions created from a derivative. This would suggest that Article 331(2) applies to both positions. However Article 331(2) is also very similar in wording and function to FSA-era Basel II rules, which allowed netting under identical terms for only one of the two notional positions created from a derivative position, the one representing the future commitment of cash.

Answer

As stated in Articles 328 to 330 of the Regulation (EU) No 575/2013 (CRR), the general principle for the calculation of own funds requirements for positon risk requires that derivatives instruments should be converted into positions in the relevant underlying. These positions become subject to general market risk charges and where applicable to the specific risk charges for interest rate risk. The amounts reported should be the market value of the principal amount of the underlying or the notional underlying. For the example mentioned by the submitter this means: The bond future has to be decomposed into two different legs- Position in the asset (`bond leg´)- Position in the borrowing (`future cash leg´). The bond leg can only be netted if the strict requirements of Article 327(1) CRR are met (referencing the same debt position, i.e. same ISIN). Only the future cash leg can be netted if the requirements of Article 331(2) CRR are fulfilled - Article 331(2)(b) and (c) CRR do not require identical positions, because acceptable ranges for the reference rate and the next fixing date/residual maturity are explicitly specified.

Original source: European Banking Authority, Q&A ID 2015_2533

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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