EBA · 2016_2701 Archive

Counterparty Credit Risk, Credit Default Swaps

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
299, para. 2
Topic
Market risk
Submitted by
Industry association
Submitted
2016-04-07
Answer provided by
ESAs (EBA, ESMA, EIOPA)
Browse ECB SSM Register → More Q&As on this regulation →

Question

Can the potential future credit exposure (PFE) for short position CDS (see background) be capped to the sum of the outstanding premiums?

Background

This question refers to credit default swaps (CDS) in the trading book, - which can be closed-out in case of insolvency of the counterparty, even though the underlying has not defaulted (for example when the CDS is part of a contractual netting agreement), - which is a short position in the underlying from the view of the reporting institute. According to Article 299(2)(a) CRR, the nominal value of such CDS shall be multiplied by 5% or 10% in order to calculate the potential future credit exposure (PFE). The PFE accounts for the potential risk from future market price raises of derivatives. CDS have an asymmetrical risk profile. The market price of a short position CDS cannot be higher than the (capitalized) outstanding premiums in any case. Thus, if the PFE is capped at the sum of the outstanding premiums, it would be adequately risk-averse.

Answer

Article 299(2)(a) of the regulation EU 575/2013 (CRR) states that under the mark-to-market method for the calculation of counterparty credit risk, the potential future exposure is determined by multiplying the notional amount by 5% or 10%. No reference is made to any situation where the above amount should be capped. Therefore, the PFE cannot be capped at the sum of the outstanding premiums for short position CDS. When arguing that this calculation method is not risk sensitive past a certain point, it should be noted that it is a simple method, which is therefore meant to be conservative.

Original source: European Banking Authority, Q&A ID 2016_2701

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.

Similar Q&As

Capital charge for credit derivatives in the banking book in the position of protection seller

Answered 2013-11-08

Recognition of credit derivatives for protection buyer

Answered 2014-09-12

Definition of short position

Answered 2022-04-01

Counterparty Credit Risk

Answered 2014-03-28

Alternative calculation of own funds requirement for exposures to a Qualifying Central Counterparty (QCCP)

Answered 2014-04-16

More Q&As on this topic

Application of Article 207(2) of the CRR to financial collateral under the counterparty credit risk framework

Answered 2026-05-29

SPV repack transactions

Answered 2026-05-29

Exclusion of back-to-back positions from RRAO

Answered 2025-10-31

Sources for external classification that is commonly used in the market for grouping issuers by sector, for the purpose of CRR Article 325ah.

Answered 2025-10-17

Multilateral development banks classification for the purpose of article 325ah

Answered 2025-06-27

📋 Track EU financial regulation continuously

Forseti monitors EU financial regulation and delivers personalised alerts anchored to verified official sources.

Start free trial → Learn more

14-day free trial. No credit card required.