Maturity of instruments subject to a cash flow schedule

Institutions that have received the permission of the competent authority to use own estimates of LGDs and own conversion factors for exposures to corporates, institutions or central governments and central banks or institutions that have received a permission as referred to in the second subparagraph of Article 162(1) of Regulation (EU) No 575/2013 (CRR) shall specify M in accordance with  point (a) of Article 162(2) CRR where an instrument is subject to a cash flow schedule. Article 162(1)(a) CRR does not include any further limitations whether the cash flow schedule is linked to instruments with fixed or variable interest rates are introduced. As a consequence, the formula referred to in Article 162(2)(a) CRR shall be applied for instruments subject to a cash flow plan regardless whether the underlying interest rates are fixed or variable. However, the formula in point (a) of Article 162(2) CRR requires, as an input, for all periods t the cash flows contractually payable by the obligor in period t. Consequently, in order to be in a position to calculate M as set out in point (a) of Article 162(2) CRR, institutions  should calculate the amount and timing of these cash flows. In the particular cases of cash flows where the interest rate is based on an index rate, institutions should use  the reference rate referenced in the underlying contract at the last reporting date as the applicable reference rate for future periods for the purposes of determining cash flows in accordance with point (a) of Article 162(2) CRR.   This clarification only applies to changes in variable interest rates resulting from the fluctuation of a reference rate. Changes in the variable interest rates, resulting from a change in other inputs to the calculation  of variable interest rates should however be reflected accordingly in the calculation of future cash flows.