Clarification is sought on the treatment of defined benefit pension funds for the purposes of determining market risk RWA

Article 41(1) or Regulation (EU) No 575/2013 (CRR) and EBA Q&A 2014_1567 clarify that with respect to credit risk RWA, only the assets according to Article 41(1)(b), i.e. the assets for which the institution has an unrestricted ability to use and that have been use to reduce the CET1 deduction amount, must be captured for credit risk RWA purposes. We would like to reconfirm that the same treatment applies for market risk RWA, e.g. with respect to FX risk.

CRR Article 41(1) and EBA Q&A 2014_1567 clarify that with respect to credit risk RWA, only the assets according to Article 41(1)(b), i.e. the assets for which the institution has an unrestricted ability to use and that have been used to reduce the CET1 deduction amount, must be captured for credit risk RWA purposes. While CRR Article 41(1) explicitly refers to the “risk weight in accordance with Chapter 2 or 3 of Title II of Part Three, as applicable”, i.e. the Credit Risk Standardised Approach or the Internal Ratings Based Approach, there is no guidance for market risk. As the market risk own funds requirement for FX and commodities risk applies independently of the assignment of a position to the trading book or to the banking book, we think that the same assets that are subject to credit risk RWA should also be captured to determine market risk RWA. Accordingly the assets according to Article 41(1)(b), i.e. the assets that have been used to reduce the CET1 deduction amount – and only these assets - must be captured for market risk RWA purposes. In our view it would not be reasonable to establish a different scope for the capital requirements for market and credit risk in the context of defined benefit pension funds. Accordingly all assets of a defined benefit pension fund that are in scope of the capital requirement for credit risk should also be captured for market risk purposes. Equally, all assets (and liabilities) that are not in scope of the capital requirement for credit risk should also not be in scope of market risk.