EBA · 2016_2695 Final Q&A

Liquid assets valuation in case of hedging with collateralized derivatives.

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
418, para. 1
Topic
Liquidity risk
Submitted by
Credit institution
Submitted
2016-04-01
Answered
2016-09-23
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Should the potential close-out of hedges of securities included within the liquidity buffer be taken into account when hedging is performed through collateralized derivatives?

Background

The institution hedges with collateralized derivatives some of the bonds eligible for being included within the buffer (HQLA) in the context of LCR reporting. Collateral is made of cash or other L1 assets. It is not clear if the fair value of those deals are to be deducted from the valuation of hedged instruments.

Answer

According to Article 8(5)(b) of the Commission Delegated Regulation (EU) No 2015/61 the net liquidity outflows and inflows of the potential close-out of hedges of securities should be assessed and included (if any) in the valuation of the relevant assets according to Article 9 of the Commission Delegated Regulation. Institutions shall consider the net flow (either outflow or inflow) that would arise if the hedge was to be closed out at the relevant date. The net flow should also reflect the effect of collateral to be received/posted in derivative transactions that qualifies as liquid assets as per paragraph 3 of Article 21.

Original source: European Banking Authority, Q&A ID 2016_2695

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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