Treatment of a loan signed well in advance of a contractually agreed utilisation date (forward starting loan)

If under the applicable accounting framework a forward starting loan, which has been granted by an institution and which can be drawn at any time after the contractually specified first utilisation date at discretion of the client, is considered as an off-balance sheet item until the credit facility is drawn in full, it will constitute a credit exposure within the scope of application of Article 111 CRR for institutions using the Standardised Approach (SA) and respectively Article 166 for institutions using the Internal Ratings Based (IRB) Approach. For the purpose of determining the appropriate conversion factor for the undrawn exposure, in accordance with Article 166(8) and the risk categories in Annex I of the CRR as referred to by Article 166(10), institutions should analyse the terms and conditions as well as internal procedures for possible cancellations. For this purpose it is necessary to separately assess the period during which the credit facility cannot be drawn and the period during which the credit facility can be drawn, as terms and revocability conditions may differ. However, the circumstance that a credit facility cannot yet be drawn is not directly relevant for the purpose of calculating the exposure value. Under the IRB approach, as clarified in Q&A 1263 , Q&A 2397 and Q&A 2663 , an institution shall calculate the exposure value of its undrawn exposures according to Article 166(8) to (10) CRR. When the terms of the facility and institutions’ policies allow the institution to cancel the facility unconditionally at any time without notice or effectively provide for automatic cancellation due to deterioration in the borrower’s credit worthiness before the date from which the committed amount can be drawn, such that the client does not have the discretion to draw down the facility at any time in the future, the following applies: - where the institution does not have permission to use own estimates of LGD and conversion factors, the conversion factors specified in Article 166(8) CRR apply; a conversion factor of 0% may apply if the conditions in Article 166(8)(a) CRR are met; - where the institution has permission to use own estimates of LGD and conversion factors for the product types mentioned in Article 166(8)(a)-(d) CRR, own estimates of conversion factors apply; - for all off-balance sheet items other than those mentioned in paragraphs (1) to (8) of Article 166 CRR, paragraph (10) of that Article applies; the off-balance sheet item may be assigned to the  low risk category if the conditions in point (4) of Annex I CRR are met.